Crop Choice, Farm Income, and Political Control in Myanmar # This version: 14 September 2007 (Previous version: July 2007) Takashi Kurosaki *

Transcription

1 Crop Choice, Farm Income, and Political Control in Myanmar # This version: 14 September 2007 (Previous version: July 2007) Takashi Kurosaki * Abstract Myanmar s agricultural economy has been under transition from a planned to a market system since the late 1980s and has experienced a substantial increase in production. However, little research is available on the impact of economic policies in this country on agricultural production decisions and rural incomes. Therefore, this paper investigates the impact using a micro dataset collected in 2001 and covering more than 500 households in eight villages with diverse agro-ecological environments. Regression analyses focusing on within-village variations in cropping patterns show that the acreage share under non-lucrative paddy crops was higher for farmers who were under tighter control of the local administration due to their political vulnerability. Simulation results based on the regression estimates show that the loss in rural incomes due to farmers being forced to grow too much paddy was not negligible. Keywords: reform, rice policy, transitional economies, Myanmar. # The author is grateful to an anonymous referee, Ikuko Okamoto, Yujiro Hayami, Shigeru Ishikawa, Konosuke Odaka, Kei Otsuka, Tetsushi Sonobe, and Naohito Abe for their useful comments on earlier versions of this paper. * The Institute of Economic Research, Hitotsubashi University, 2-1 Naka, Kunitachi, Tokyo Japan. Phone: ; Fax.: kurosaki@ier.hitu.ac.jp.

2 Introduction The agricultural economy of Myanmar (formerly Burma) has been under transition from a planned to a market system since the late 1980s. A literature survey by Rozelle and Swinnen (2004) shows that such a transition is often associated with a productivity gain in agriculture and such productivity gains were largest in East Asia, where the gain also resulted in higher agricultural output. Although Rozelle and Swinnen do not discuss Myanmar in their text, they include it in their tables in the group of successful East Asian countries and their numbers show a substantial increase in agricultural output in Myanmar (Rozelle and Swinnen 2004: tables 1 and 2). However, due to a lack of data, they do not provide evidence on the productivity/income gain in Myanmar. Even though the country was the world s largest exporter of rice in the pre-world War II period and remains one of the world s largest producers of rice today, little research on Myanmar s rural economy is available and the effects of agricultural policies on production and rural incomes are not well documented. A few studies, by the International Rice Research Institute (Garcia et al. 2000), by Japanese economists (Takahashi 2000; Okamoto 2004; 2005; Fujita and Okamoto 2000; Fujita 2003), and by social scientists from Myanmar (Thawnghmung 2004; Dolly Kyaw 2006), do exist, but compared with the amount of research conducted on other East Asian countries, the case of Myanmar remains relatively unexamined. This study tries to partly fill the gap by using a primary dataset that is more recent, provides more detailed information, and covers more diverse regions than previous studies. The broad objective of this paper is, therefore, to attempt to widen our understanding of the impact of economic policies in transitional economies through an examination of the case of Myanmar in the early 2000s. Descriptive analysis of the dataset reveals that income levels were lower in villages under the tight control of the central authorities than in other villages, and farmers and villages that emphasized a paddy-based, irrigated cropping system had lower 1

3 farming incomes than farmers and villages that did not. This suggests a possibility that when farmers were under tight political control, they allocated a higher share of their resources to non-lucrative rice than would otherwise be the case. The specific aim of this paper is to test this thesis econometrically. For this aim, this paper focuses on the fact that the level of enforcement of government crop planning varied not only across villages but also within villages across farmers. Regression results focusing on the within-village variation of crop choices are consistent with the theoretical prediction that the share of non-lucrative paddy should be higher for farmers who are under tighter control of the local authorities. The paper is organized as follows. Section 2 describes the background and the dataset, showing a negative relation between paddy acreage shares and per-acre farm incomes. To explain this situation, Section 3 develops a theoretical model of crop choice where the extent to which the local administration controls each farmer plays a key role. A prediction of the theoretical model to be tested empirically is also derived in this section. Section 4 provides the estimation results. Simulation results to quantify the impact of policy distortions on household income are also presented. Section 5 concludes the paper. Background and Data 1 Myanmar s Economy and Agricultural Policies Myanmar, whose population is close to 50 million, is in transition from a planned to a market economy. The military government that has been in power since 1988 has deregulated various economic activities. Industrial development is under process, but the agricultural sector still remains dominant in the national economy (Table 1). 2 The estimated income level is among 1 See Myat Thein (2004) and Thawnghmung (2004) for more background information on recent economic developments in Myanmar. 2 Table 1 is based on the official data, which are regarded by several authors as overestimates of the actual agricultural production (see, e.g., Thawnghmung 2004: ). 2

4 the lowest in the world. Rice is the staple food in Myanmar, accounting for more than 20% of consumption expenditure of the nation during the late 1990s (CSO various issues). The government has given high priority to the expansion of paddy production, because it believes that a stable supply of rice is a prerequisite for political stability. To achieve this expansion, the government has been promoting the expansion of paddy areas through irrigation investment. Throughout the 1990s, numerous dams were constructed in some areas, while private investment in small scale diesel pumps was promoted in others, in order to increase paddy cultivation in the dry season. As a result, both the area under cultivation and paddy production in Myanmar rose remarkably in the early 1990s (Garcia et al. 2000; Fujita 2003). Various reforms in agricultural marketing since the late 1980s have also contributed to the increase in paddy production. Among the reforms, the most important one was the change in the paddy procurement policy in the late 1980s --- the government reduced the amount of paddy procurement and allowed farmers to sell the surplus freely in private markets. Since paddy prices in the market during the late 1980s and early 1990s were usually much higher than the government-fixed procurement price, the reform initially gave a substantial incentive to produce a surplus. Because of this impact, Okamoto (2005) calls these reforms the first phase of marketing liberalization. The second phase of marketing liberalization began in fiscal year 2003/04, in which the abandonment of paddy procurement and the opening up of rice export to private traders were announced (Okamoto 2005). However, at the time of this writing, the private rice export remains very restricted and the government s (partial) enforcement of crop planning continues under the new regime without the paddy procurement. Because of the uncertainty in the current policies, this paper analyzes the situation before the second phase only. Note that the primary dataset for this paper was collected in In 2001, there were three elements comprising the paddy policy in rural Myanmar. 3

5 First, the farmland belonged to the state and farmers were given the tillage right only. 3 Farmers did not have the official right to exchange, transfer, lease, inherit, or mortgage their land, although children were usually given the right to cultivate their parents land and unofficial transfers of tillage rights were not uncommon (Takahashi 2000). The state had a discretionary power to revoke the tillage right of a farmer. 4 Second, the procurement quota for paddy was set as a fixed quantity per acre of land designated as paddy field. Each farmer was obliged to deliver the designated quantity of paddy to procurement centers run by a state-owned marketing enterprise. In the main paddy-growing areas, the quota was approximately 20% of gross produce, while it was lower in other areas. Since the quota was set irrespective of the actual acreage devoted to paddy or the actual output of paddy, this may seem to be a non-distortionary implicit tax. In reality, however, the system adversely affected paddy production in Myanmar because of the incentive effects it created. The first of these is a disincentive effect on the quality of rice that was supplied to the state, which was so low that it was not accepted in foreign markets. The second effect regards the incentives that influenced farmers crop choice (see next section). Third, the government made plans on cropping patterns that were only indicative 3 This is a system inherited from previous periods. Before General Ne Win s military government overthrew the elected government in 1962, the 1948 Constitution stipulated that: (i) The State is the ultimate owner of all lands, (ii) The State will have the right to regulate, alter or abolish land tenures or resume possession of any land and distribute the same for collective or cooperative farming or to agricultural tenants, (iii) There can be no large land holdings on any basis whatsoever. Under General Ne Win s Burmese Socialism, a tenancy law was enacted, by which the rights of tenancy was vested solely in the State in the form of Agrarian Committees, and another law was enacted to protect the cultivators rights so that no one could confiscate or seize any of the farmer s means of production such as land, livestock, farm implements, and agricultural produce as payments for debts. The 1974 Constitution then confirmed the fact that all lands belong to the state. Although the present regime suspended both constitutions of 1948 and 1974, it continued to follow the land policies adopted in both constitutions. Therefore, under the land policies during our survey period and at the time of this writing, paddy land cannot be sold or rented or mortgaged or transferred or exchanged, although land use rights for plantations, orchards, and non-paddy can be sold or leased or transferred. The author is grateful to the anonymous referee for this historical information. 4 In addition to those farmers with the tillage right, a large pool of landless, non-farm households exist in rural Myanmar, who do not have the tillage right. The share of landless, non-farm households in villages typically ranges from 20 to 50%. The majority of landless households depend on income earned as agricultural wages and their wealth level tends to be lower than that of landed households. 4

6 according to the official policy. 5 In reality, however, farmers faced the threat of seeing their tillage rights revoked if they deviated too much from the government crop plans, especially with respect to paddy. To retain their tillage right for paddy fields, farmers thus felt pressure from the local administration to grow paddy crops on their paddy fields according to the government crop plans. 6 According to the official statistics, the national rice output increased by a half during the period from 1990/91 to 2000/01, of which more than two-thirds can be attributed to the area expansion. 7 The macro review of Myanmar s economy and agricultural policies thus suggests a possibility that cropping patterns forced by the local authorities were responsible for the agricultural output growth, at the cost of farmers income. To investigate this possibility, we turn to micro data. Characteristics of Sample Villages and Households As a result of the country s isolationist foreign policy, the availability of micro data on Myanmar s rural economy is limited. We therefore conducted a survey of sample households belonging to eight selected villages 8 in June-October 2001 (Figure 1). 9 The characteristics of the villages are shown in Table 2. The first two villages (DELTA1 and DELTA 2) were located in the delta regions of lower Myanmar and DRY1 was located in the Mandalay Basin, which is one of Myanmar s centers of commercial crop production due to its long history of canal irrigation dating back to Burma s dynastic period. In contrast, DRY2 and DRY3 were villages relying on rainfed agriculture. DRY2 was more typical 5 The government crop plans were enforced on farmers strictly during the Burmese Socialism period by force. The system was changed into indicative planning in At the time of this writing, the government crop plans still prevail in rural Myanmar. 7 Data are three year moving averages of rice statistics reported in CSO (various issues). We use the decomposition: Output t+1 = Output t + (Area t+1 - Area t ) Yield t + Area t (Yield t+1 - Yield t ) + (Area t+1 - Area t )(Yield t+1 - Yield t ), where the second term in the right hand side shows area effect, the third shows yield effect, and the fourth shows interaction effect. 8 The smallest administrative unit in Myanmar is the village tract, which usually consists of several hamlets or natural villages. While Table 2 refers to village tracts, in the text and the following tables, they are simply referred to as villages for brevity. 5

7 of a dry zone village since only rainfed crops and no paddy crops were grown here. HILL1 and HILL2 were villages relying on vegetable-based development in hilly regions. Both villages sold their vegetables to major consumption centers such as Yangon and Mandalay, while their paddy cultivation was oriented toward subsistence. The last village of the study, COAST, was located in the coastal region of southern Myanmar, where tropical agro-forestry (rubber, fruits, cashew nuts, etc.) prevailed. Peasant farmers ran both small-scale rubber estates and paddy farms. Among the eight villages studied, COAST had the most active non-farm sector, which included general shops, cycle taxis, and fish processing. The eight villages chosen were thus quite representative of the diverse agro-ecosystems found in Myanmar. The specific villages were carefully chosen to ensure that they were representative of each region in terms of cropping patterns and land distribution. The sample households were drawn from a complete list of households in each of the villages studied, making a representative sample in terms of the distribution of farmland and primary jobs in each village. A total of 521 households were surveyed in the eight villages and their distribution is shown in Table 3: the 341 households denoted as Farm were households with land tillage rights, while the 180 households denoted as Non-farm had no tillage rights. Since the sampling probability differed from village to village and between Farm and Non-farm households, we correct for the difference by weighted regressions below. A structured questionnaire was used for all households to establish household characteristics, household assets, income, consumption, and debt and credit. The sample households included 2,850 persons, implying that the average household size was 5.5 persons. This part of the dataset provides the individual characteristics that are used in the analysis of factors that affect crop choice. If households operated farmland, they were asked to fill in an additional questionnaire on farm management. This part of the dataset provides household 9 The dataset used in this paper is available on request for verification. 6

8 level information on agricultural input, output, and disposal/marketing. Household heads or other relevant persons were interviewed by local research assistants and the information was cross-checked on the spot by the author to ensure internal consistency and data quality. Household Income, Cropping Patterns, and Farm Productivity Table 4 reports the asset and income of the sample households. The average land holding size among the sample households was 5.6 acres, which is large by South-East Asian standards. Ownership of modern assets, in contrast, compares poorly: no households owned four-wheel tractors; and motorcycles and four-wheel vehicles for transportation were very rare. Livestock were the most common and important assets. The average incomes were 184,000 Kyats per household and 36,000 Kyats per person per year. If these figures are converted at the market exchange rate of 650 Kyats/US$ prevailing during the study period, they are equivalent to $283 per household and $55 per person per year. Incomes in the sample villages thus were indeed low, but not that different from the average village in rural Myanmar. If these incomes are converted using the price of rice in the Yangon market (56 Kyats/kg) prevailing during the study period, they are equivalent to 3,300 kg of rice per household and 640 kg per person per year. The composition of income differed across villages (Table 4). The share of agricultural self-employment income in total household income was highest in villages HILL2 and DRY1 and lowest in COAST. The table shows that villages with higher agricultural self-employment incomes and higher non-agricultural incomes had higher per capita incomes overall. As one of the key factors in explaining the disparity in household income, this paper further investigates the disparity in agricultural self-employment income. 10 Since crop income accounted for about 99% of agricultural self-employment income 10 Preliminary analysis of the determinants of non-agricultural income using a probit regression model reveals that household members were more likely to work in non-agricultural jobs when they were more 7

9 and farm size is pre-determined in the short run, the focus below is on the determinants of crop income per acre. The cropping patterns are shown in Table 5. Of the major crop groups, paddy occupied more than 60% in DELTA1, DELTA2, and DRY1. Among these villages, DELTA1 had the least diversified cropping pattern: monsoon paddy followed by summer paddy. In contrast, in DELTA2 and DRY1, not all of the paddy fields were cropped with summer paddy but some fields were cropped with pulses (DELTA2) and vegetables (DRY1). The other five villages had a more diversified agriculture. Among these five villages, DRY3 and COAST had higher paddy shares than the other three. There were no paddy fields in DRY2. Table 6 relates the cropping patterns with per-acre crop income. Crop income per acre was highest in DRY1 and HILL2, followed by DRY2, and lowest in DRY3, followed by DELTA2, and DELTA1. A comparison of the first two columns in Table 6 suggests that farm income per acre was lower in villages where paddy cropping was more dominant than in other villages because per-acre income was lowest for paddy and highest for vegetables. This negative relation between the paddy share and per-acre crop income was observed within villages as well. Table 6 also shows the intra-village correlation coefficients between the crop income per acre of a farm and cropping patterns (the acreage share of each crop group in the gross cropped area). In all villages, the correlation coefficient between the per-acre crop income and the paddy share was negative. It was statistically significant in DELTA2, DRY1, DRY3, HILL2, and COAST. In DELTA2, the correlation coefficient between the per-acre crop income and the pulses share was In DRY1, the correlation coefficient between the per-acre crop income and the vegetables share was Therefore, in DELTA2 and DRY1, villages located in the major paddy growing regions, farmers who did not grow much paddy on paddy fields during the summer season but grew more commercial crops instead were better off. This indicates that the policy of maximizing paddy output placed a educated. 8

10 heavy burden on farmers in the major paddy-growing regions. In the other five villages, where agriculture was more diversified, each village had non-paddy crops whose acreage share was positively correlated with the per-acre crop income. In these villages, it was not always the case that these non-paddy crops directly competed with paddy for land, because these crops were usually grown on farmland not designated as paddy fields. Even then, the allocation of labor and efforts expended on non-paddy crops should have been affected adversely when the paddy acreage was increased. It thus seems that the farmers grew too much paddy in the sense that its cultivation replaced more lucrative crops, resulting in lower crop income than the highest level achievable from the same farmland. 11 Differences in the enforcement of the government crop plans could have been responsible for this situation. It was observed in the field that enforcement along procedures inherited from the socialist period was attempted in the three villages located in the core regions of paddy-based agriculture (DELTA1, DELTA2, DRY1), with the strictest enforcement in DELTA1; similar procedures were being extended to the other two villages in the dry zone (DRY2, DRY3); and the other three villages (HILL1, HILL2, COAST) were subject to the weakest enforcement of the government crop plans. Similar differences could have existed within villages. The next section formalizes this idea and derives testable predictions. Analytical Framework A Theoretical Model of Farmers Crop Choice To explain the situation described above, a simple model of a farmer s crop choice is 11 The negative relation within villages between the paddy crop share and the farm income was observed even after controlling for other factors. See Table 10 for the multivariate analysis results. Whether the negative relation across villages existed even after controlling for other village-level factors cannot be assessed using the current dataset since the small number of sample villages precludes multivariate analysis at the village level. This is the reason why village fixed effects are included in regression models below. 9

11 presented first. Since paddy is the backbone of Myanmar s economy, it is treated as the numeraire. The farmer has a fixed acreage x 0 of farmland that can be allocated to either a paddy or a non-paddy crop. Let x denote the paddy acreage. The allocation x results in farm income net of production costs, which is denoted by a function f(x). This function reflects the farming technology available to the farmer and the resource constraints he faces. The function is assumed to be continuous, differentiable, and single-peaked. Thus, in the absence of procurement and land policies, a profit-maximizing farmer chooses x * that maximizes f(x). Under the policies prevailing in Myanmar during the survey period, however, the farmer was required to deliver to the government a fixed quantity of paddy proportional to z (the planned acreage under paddy). To reflect the paddy output maximization policy adopted by the state, it is assumed that x * < z. 12 The total procurement quota is bqz, where b is the procurement ratio and q is the average yield of paddy per acre. As explained in the previous section, the government procurement price of paddy was below its market price, resulting in implicit taxation on paddy farmers. The implicit tax amount is denoted by tqz, where t is equal to b times the price disparity. The government fixes z, b, and t. Although the farmer is expected to allocate z acres of his farmland to paddy, this may not be enforceable, i.e., x may deviate from z. However, when the deviation is large and detected by the local administration, the administration may threaten the farmer with revoking the farmland. The expected welfare cost of this threat is assumed to be a quadratic function, A(z-x) 2, where A is a non-negative parameter characterizing the political control exercised by the local administration with respect to the farmer. Given these assumptions, the payoff of the farmer is expressed as 12 This relation holds when the model is extended into an agency model with the local administration as the principal, who determines the level of z (see endnote 13). Furthermore, among the 301 sample farm households for which the information on z is available, only four cultivated paddy crops in excess of z. Villagers we interviewed during the field work expressed their opinion that the government s planned acreage for paddy is much larger than the acreage they want to grow in the absence of the government s pressure. 10

12 2 y = f(x) - tqz - A(z-x). (1) The first order necessary condition for the optimal solution is given by f (x) = - 2A(z-x). (2) Let x ** be the optimal solution for the farmer that satisfies equation (2). When it is an interior solution, the following relations hold * ** x x < z, (3) x ** / A > 0, (4) x ** / z > 0. (5) Equation (4) shows the basic relation for the empirical analysis below. The government s objective function is increasing not only in tqz (the implicit tax revenue) but also in x, since the government is concerned with the total supply of paddy to the nation. Thus, the government attempts to affect x through its choice of z according to equation (5) when it fixes z, b, and t. When A=0 (the case where the local administration has no ability to force farmers to ** follow its directions regarding the planned acreage), x * = x holds. In this case, the procurement ** system does not affect farmers production decisions at all. When A>0, however, x * < x holds, so that the procurement quota becomes a distortionary implicit tax. As A approaches infinity, x ** also approaches z. The last case may characterize the situation in Myanmar during the Burmese Socialism period that ended in the late 1980s. Thus the divergence between the actual acreage and the income-maximizing acreage is an increasing function of parameter A. It is expected that A is higher for a farmer who has some political reason to please the local administration. Although it is possible that A may be higher This can be shown formally by an agency model with the local administration as the principal. An 11

13 for a farmer who derives greater moral satisfaction from following the rule or who is more averse to the risk of penalty, this possibility is not analyzed since such preferences are not directly observable. Instead, it is assumed that preferences do not systematically differ across individuals within villages. Although parameter A is higher for a farmer who lives in a village under tighter political control, this aspect is not analyzed directly but controlled indirectly by village fixed effects in the empirical analysis (see below). Although parameter A should be treated as endogenous in the long run, since it is determined as a result of strategic interactions of individual farmers with the local administration, it is treated as exogenous in the empirical analysis, because the focus of the analysis is on the short-run determinants of crop choice. Empirical Specification The share of paddy acreage in the gross cultivated area (see Table 5) is employed as the main dependent variable for regression analysis, as a proxy for x/x 0. As explanatory variables, household/individual characteristics and village dummies are included. Although villages differ with respect to their market conditions including local demand, transportation, and infrastructure, the strictness of enforcement of the government crop plans, production conditions such as technologies, soil quality, and environmental suitability of growing conditions for various kinds of crops, and other factors, it is impossible to identify the effects of these factors separately using the dataset adopted in this study. The number of sample villages is too small for such an analysis. Therefore, village fixed effects are included to control for these factors collectively and to enable us to concentrate on the intra-village variations in cropping patterns. The main prediction of the theoretical model to be tested empirically is the effect of A, the political control exercised by the local administration on each farmer. The focus of the example of such a model is available on request. 12

14 model on this parameter as a determinant of the amount of paddy a farmer grows makes it possible to examine an important aspect of crop choice that other models fail to address. For example, models emphasizing credit constraints (Feder et al. 1990), risk management (Kurosaki and Fafchamps 2002), and resource constraints (Gotsch et al. 1975) do not address the response of farmers crop choice to the political control. These models instead predict that human capital and household resource availability affect farmers crop choice. However, it is possible that, in a rural setting like Myanmar, farmers with a higher A are those with superior access to technology, resources, or markets. Therefore, even if it is found that a proxy variable for A is associated with a higher paddy share, this association could be the result of these indirect effects and not of the political mechanism modeled above. Furthermore, there are other endogenous variables that are chosen simultaneously with x/x 0, which were assumed away in the theoretical model for simplicity. The empirical specification should take into consideration that households simultaneously choose several variables (including x/x 0 ) to determine the level of each income source, including agricultural wage income and non-agricultural income. Therefore, the following four strategies are adopted to identify the effect of parameter A. First, a completely reduced-form approach is adopted. Although it is of interest to quantify the effects on crop choice of the level of non-agricultural income or agricultural wage income, valid instrumental variables were not found in the dataset to identify these effects. Second, to control for other factors that affect crop choice, human capital and household resource availability are included as explanatory variables. Human capital and household resource availability, such as education, household demography, land size, and other assets, may be important determinants of crop choice because they influence farmers access to markets, technology, and credit. Although these variables may include information on the political vulnerability of a farmer, this aspect is ignored to set a higher hurdle for the theoretical 13

15 model to pass the empirical test. Third, an attempt is made to search for variables to represent A that are not directly related to households access to markets and technologies. Based on the discussion with sample farmers during the field work, a variable representing expectations regarding future land inheritance from parents is chosen as the main proxy for A. As explained in Section 2, the land tillage right was not officially inheritable, but children were usually given the right to cultivate their parents land if the local administrator found no reason to deny such a transaction. This implies that a farmer who had parents with farmland and expected them to transfer the tillage right to him/her in the near future may have had an additional incentive to follow the directions of the local administration at the time of our survey so that the administration would not object to the transfer of the cultivation right. As the second proxy for A, a variable representing the early adoption of new agricultural technology during the pre-transition period is also chosen. During the pre-transition period, the local administration designated several villagers as contact farmers and implemented policies through them. The early adoption of new technology during the planned economy period could be an indicator for the status of a contact farmer because such adoption of new technology was not chosen by the farmer but ordered by the administration. However, it is still possible to argue that these variables capture not only the political control but also reflect unobservable characteristics of the farmer that enhance the efficiency of paddy production. A farmers expectation to inherit the parents paddy field 14 or having been directed in the past to try out a new technology may be linked to her/his unobservable ability to produce paddy more efficiently. If this is the case, these variables should not only be associated 14 Since expectations to inherit land from parents may also depend on a number of other factors (e.g., younger household heads are more likely to expect to inherit land from their parents), a set of demographic variables are included and retained in the regression even when they are not significant. The prerequisite to expect to inherit land from parents is that there should be parents with land, implying a potential selection problem if the proxy variable applies only to a subset of the population. However, all the sample farmers had parents with the cultivation right, suggesting that the selection bias is not 14

16 with a larger paddy acreage share but also higher paddy productivity, even after controlling for other observable characteristics that affect productivity. The fourth strategy of this paper is, therefore, to regress variables representing paddy productivity on the same set of variables adopted for the paddy acreage share. If it is found that the variables proxying for A are associated with a higher paddy acreage share but with no increase in paddy productivity, the argument in favor of the unobservable productivity superiority is not supported. As the second dependent variable, paddy value-added per acre is adopted. Estimation Results Determinants of Farmers Crop Choice Table 7 reports the definition and summary statistics of the empirical variables. 15 To avoid the reverse causality from crop choices to the asset formation, the asset variables corresponding to the values preceding the reference period of the survey are employed. The estimation results are shown in Table 8. They show that the dummy variable for the expectation of inheriting land (Future_inh) and the dummy variable for the early adoption of new technology in the past (Past_techn) are both positive and statistically significant predictors of the paddy acreage share (Paddy_gca). Table 8 also shows that larger lowland fields are associated with a higher paddy acreage share while larger upland fields are associated with a lower share. Most of the demographic and asset variables are not statistically significant, except for the thresher ownership. Farmers owning a paddy thresher tended to grow more paddy, which suggests that the rental market for thresher service in the study region did not work well. To investigate whether the positive correlation between the paddy acreage share and the two variables proxying for A is due to unobservable superiority in paddy production, paddy likely to be serious. 15 All empirical variables used in the analysis are available on request for verification. 15

17 value-added per acre (VA_paddy) is regressed on the same variables. The results in Table 8 show that both Future_inh and Past_techn have coefficients whose absolute values are small and whose standard errors are large so that the null hypothesis that the coefficient is zero is accepted. Thus, these variables do not enhance paddy productivity. Table 8 also shows that the education level of the household head does not affect paddy productivity. This seems to be against the view that education enhances farm productivity, a fact that has been demonstrated empirically for other developing countries (see, for example, Jamison and Lau 1982; Kurosaki and Khan 2006). It will be shown later that the positive effect of education on agricultural productivity does exist in Myanmar as well, at the farm level rather than at the crop level. To examine the robustness of the results reported in Table 8, different specifications are also tried. First, as the dependent variable for the crop choice regression, paddy acreage divided by the acreage of the net cultivated area (Paddy_nca) or by the planned acreage under paddy (Paddy_z) is adopted, and as the dependent variable for the paddy productivity, paddy output per acre (VQ_paddy) is adopted. Second, a different set of explanatory variables is employed, replacing the various wealth variables into a single variable of the total wealth value and replacing the household head education variable by two variables that represent the highest and the average education among the adult household members. Third, for the determinants of the paddy acreage share, tobit models are also attempted since the dependent variable is censored: Paddy_gca ranges from zero to one, Paddy_nca ranges from zero to two, and Paddy_z takes non-negative values. The main result remained qualitatively unchanged that Future_inh and Past_techn are positive predictors of the paddy acreage share but they are insignificant in predicting paddy productivity (Table 9). The result is thus highly robust. It can be concluded therefore that farmers who expected to inherit land or possessed past experience of adopting new technology grew more paddy crops although their paddy 16

18 productivity was not higher than that of other farmers. If crop choice were solely determined by the relative profitability of competing crops, this would be a puzzling result. But if we borrow the insights from the theoretical model in the previous section, the paradox can be resolved: farmers who were more susceptible to pressure from the local administration to follow the government crop plans grew more paddy crops even though paddy crops were less profitable than other crops. An alternative explanation could be farmer s risk aversion. If Future_inh and Past_techn capture a difference in risk preferences of farmers, independently of the paddy productivity, we expect the results reported here. But if the risk aversion factor is important in crop choice, wealth variables should also affect crop choice, which is not the case. Furthermore, as discussed in the theoretical section, the parameter of political susceptibility A is likely to be higher for a farmer who is more averse to the risk of penalty. Thus the alternative explanation based on risk aversion can be partly accommodated in the theoretical model of this paper. The Welfare Impact of Paddy Policies The regression results above suggest that the political vulnerability of a farmer affected the paddy acreage share and the correlation analysis (Table 6) shows that the paddy acreage share was negatively correlated with per-acre crop income. These findings raise the question: How large was the negative welfare impact of the paddy output maximization policies, functioning through parameter A? It should be noted that the income loss functioning through parameter A is likely to be a net loss to the economy since the farmer s production deviates from the efficient point due to the policy distortions. To simulate the impact, household income is regressed on the paddy acreage share (Paddy_gca) and other variables representing human capital and household resource availability. The dummy variables representing the expectation of inheriting land (Future_inh) 17

19 and the early adoption of new technology in the past (Past_techn) are deleted from the regression since they do not affect paddy productivity as shown in Table 8 and they do not affect other sources of household income, either. 16 Since the endogeneity test did not reject the statistical exogeneity of Paddy_gca in determining both crop and household income even at the 20% level, Table 10 reports the OLS estimates, which are more efficient than the instrumental variable estimates when the exogeneity condition is satisfied. 17 The estimation results in the table show that crop income increased with the size of farmland, the level of education, and the livestock asset value. The positive effect of education on crop income is either due to higher per-acre yields of non-paddy crops or due to the superiority of educated farmers in allocating land across crops, since education does not affect per-acre yields of paddy crops (Table 8). A model similar to the one reported in Table 8 was estimated with non-paddy output per acre as the dependent variable, yielding a very small and statistically insignificant coefficient on education. Thus the first route is unlikely. Instead, these results support the view that education enhances farm productivity mainly through improvement in the allocative efficiency in Myanmar, which is similar to the finding for Pakistan reported by Kurosaki and Khan (2006). The parameter of concern is the effect of the paddy acreage share (Paddy_gca) on income. The effect is significantly negative both on crop income and household income. An interesting finding is that the ill effect of Paddy_gca is much stronger on total household income than on crop income. This indicates that increasing the paddy acreage share reduces household income not only through the reduction of crop income due to a greater deviation 16 As a reduced-form approach, non-paddy agricultural self-employment income, agricultural wage income, and non-agricultural income were each regressed on the explanatory variables listed in Table 8. The two variables Future_inh and Past_techn were not statistically significant even at the 20% level in all of the three regressions. 17 In the specification tests, the variables Future_inh and Past_techn are used as the identifying instrumental variables for Paddy_gca. Since the two variables are significant predictors of Paddy_gca as shown in Table 8, the acceptance of exogeneity suggests that the error terms in the paddy acreage equation and in the household income equations are not significantly correlated. 18

20 from the crop income maximization point, but also through the reduction of income from other sources due to a decreased allocation of household efforts and resources to these sources. Based on the coefficients in Table 10, the loss of household income through the political control parameter A could be calculated as follows. When a farmer feels less pressure to satisfy the government crop plans due to a change in the household status with regard to the expectation of inheriting land (Future_inh is changed from one to zero), the paddy acreage share in gross cultivated areas decreases by 10.0 percentage points (see Table 8), resulting in an increase in crop income of 4,200 Kyats and an increase in household income of 9,800 Kyats. These values are 3.1% of the average crop income per household and 5.0% of the average household income respectively. When the local administration stops pressuring a farmer with past technology experiments to follow its crop plans (Past_techn is changed from one to zero), the paddy acreage share decreases by 13.9 percentage points (see Table 8), resulting in an increase in crop income of 4,900 Kyats (3.5% of the average crop income) and an increase in household income of 11,300 Kyats (5.8% of the average household income). Thus the welfare loss from forcing farmers to grow too much paddy is not negligible. 18 The loss simulated above can be compared with the amount of implicit taxation realized through the paddy procurement system. How much does a change in the procurement quota imposed affect household incomes? Its direct effect can be calculated by multiplying the difference between the market and procurement prices by the procurement quantity. 19 When the procurement quota is set at zero, paddy income increases by 8,600 Kyats (8.3% of the average 18 It should be noted, however, that these figures ignore market equilibrium effects. A decrease in paddy acreage should increase the market price of paddy while an increase in the production of non-paddy crops may decrease their market prices. Incorporating equilibrium effects is left for further analysis. 19 There are also indirect effects of the paddy procurement quota on rural incomes. A decrease in the quota should lead to an increase in crop income through the adjustment of the optimal paddy acreage described in the theoretical section. Unfortunately, this effect cannot be assessed using the current dataset because the procurement ratio within a village had very little variation so that the variable cannot be included as an explanatory variable in the paddy acreage share regressions. When the paddy acreage responds to the decrease in the quota, the market equilibrium effects discussed in the previous endnote may occur as well. 19

21 crop income or 4.7% of the average household income). The amount of implicit taxation is largest in DELTA1 where the paddy procurement puts the heaviest burden on farmers: 14,000 Kyats (16.9% of the average crop income or 10.4% of the average household income in the village). Although the amount is large, this income is not lost but appropriated by the state as implicit taxation. On the other hand, the income loss simulated by changing A quantifies a net loss and its amount relative to the average household income is comparable to the amount of implicit taxation. Conclusion Based on a sample household survey conducted in 2001 and covering diverse agroecological environments, this paper investigated the impact of agricultural policies on farm production decisions and rural incomes in Myanmar as a case study of low-income transitional economies in Asia. Since the enforcement of agricultural policies varied not only across villages but also within villages, a theoretical model focusing on the political control exercised by the local administration on each farmer was developed to derive implications for the empirical analysis of intra-village variations in cropping patterns. The theoretical model predicted that the acreage share of non-lucrative paddy should be higher for farmers who are under tighter control of the local authorities. It was found that the paddy acreage share was indeed higher for such farmers, approximated by their expectation of future land inheritance from their parents and by their previous experience in adopting new technology during the period of socialist planning. Since the inheritance expectation and the technology adoption variables were not found to increase paddy productivity, the argument that these variables reflect unobservable productivity superiority in paddy production was not supported. Therefore, the estimation results were consistent with the prediction of the theoretical model. The simulation results based on the regression estimates showed that the loss in rural 20

22 incomes due to farmers being forced to grow too much paddy was not negligible. The government policies that put too much production emphasis on paddy crops with an income per acre that was lower than that of other crops thus led to sub-optimal use of agricultural resources in Myanmar. This finding, therefore, suggests a possibility that agricultural output gains in Myanmar experienced since the late 1980s (Rozelle and Swinnen 2004: tables 1 and 2) were not accompanied by gains in agricultural productivity and rural incomes. Since this paper uses cross-section data, it cannot directly analyze the change in agricultural productivity or rural income. Investigating this possibility is thus left for further research. Finally, this paper found that, at the time the survey was conducted, there remained vast room for an expansion of agricultural output and rural incomes in Myanmar, even without innovation in technology or further investment in irrigation. All that was needed to tap this potential was to give farmers more freedom in land use and liberalize paddy/rice marketing. Regarding the clear and transparent land use policies, there are several examples from other transitional economies, from which Myanmar can learn. 20 Regarding the more liberalized agricultural marketing policies, the second phase of liberalization that began in 2003/04 seems to be a step in the right direction. A follow-up survey under this new regime is a task that remains for further investigations. 20 For instance, Asian Development Bank (1996) documents that Clear land-use and ownership rights, protected by a legal system, are essential for production and investment incentives and for the use of land as loan collateral. In the Kyrgyz Republic, land leases with a term of 49 years are available with the right to sell, exchange, transfer by inheritance and use as a security deposit. Vietnam, through the Land Law of 1993, extended land tenure rights to 20 to 50 years, depending on land use. Kazakhstan has gone the farthest with 99-year leases and introduction of private ownership for small garden plots (p.31). The author thanks the referee for this reference. 21

23 References Asian Development Bank (1996) Asian Development Bank Annual Report Manila: Asian Development Bank. Central Statistical Office [CSO] (various issues) Statistical Yearbook. Yangon: CSO, Government of Myanmar. Dolly Kyaw (2006) "Rural Poverty Analysis in Myanmar: A Micro Level Study in the Dry Zone", Ph.D. dissertation, School of Environment, Resources and Development, Asian Institute of Technology, Bangkok, Thailand. Feder, G., Lau, L., Lin, J., and Luo, X. (1990) "The Relationship between Credit and Productivity in Chinese Agriculture: A Microeconomic Model of Disequilibrium", American Journal of Agricultural Economics, 72: Fujita, K. (2003) "Policy-Initiated Expansion of Summer Rice under Constraints of Rural Credit in Myanmar in the 1990s: Perspectives from a Village Study in Ayeyarwaddy Division", Keizai Kenkyu, 54(4): (in Japanese). Fujita, K. and Okamoto, I. (2000) "An Economic Study on Irrigated Summer Rice Production in Myanmar: The Case of a Village near Yangon", Southeast Asian Studies, 38(1): (in Japanese). Garcia, Y.T., Garcia, A.G., Oo, M., and Hossain, M. (2000) "Income Distribution and Poverty in Irrigated and Rainfed Ecosystems: The Myanmar Case", Economic and Political Weekly, 35(52/53): Gotsch, C.H., Ahmed, B., Falcon, W.P., Naseem, M., and Yusuf, S. (1975) "Linear Programming and Agricultural Policy: Micro Studies of the Pakistan Punjab", Food Research Institute Studies, 14(1): Jamison, DT. and Lau, L.J. (1982) Farmer Education and Farm Efficiency, Baltimore: Johns 22