SMALL FARMS AND THE ‘ECONOMICALLY VIABLE HOLDING’: IMPLICATIONS FOR POLICY

by Chandra Arulpragasam

Small Farm-Size and Productivity

The theory that the small farm would have higher yields than a larger farm was put forward for the first time by the author in 1961 in Ceylon. This was despite the fact that all economic theories and text books taught the opposite. In the 1980s and 1990s, a number of studies proved this inverse relationship between farm size and productivity to be correct beyond any doubt.¹ i.e. the smaller the farm, the higher the yield would be. Not only does the small farm make a better use of its resources, it has total factor productivity and higher yields than larger farms. The economic (theoretical) reasons for this inverse relationship between farm size and productivity are set out in other writings.

Although no systematic studies have been done on yield by farm size in Sri Lanka, available figures show that the small holdings of tea and rubber have higher yields than the larger holdings and the best managed estates in these crops. There is little doubt that studies on paddy and coconut lands would show the same – as shown in other countries.

Although small holdings make the best use of resources (especially of scarce land), it is obvious that a larger farm would bring the farmer greater total production and income. This article merely records the facts. First, small subdivided farms are the reality and growing in number in Sri Lanka and the developing world. Second, small farm yields and productivity are greater than that of larger farms and estates. Third, the small size of small farms prevents them from meeting all the income and food needs of the farm families. It is necessary, however, to clear certain misconceptions that currently confuse any informed discussion of policy on the subject: namely, the desirability and feasibility of an ‘economically viable holding’.

The Concept of an Economically Viable Holding

The above term was introduced in Sri Lanka by Dr. B.H. Farmer in his work ‘Pioneer Peasant Colonization in Ceylon’ (1957). In this he defined an economically viable holding as one which is capable of producing enough food and income for a farm family. The writer has questioned the logic as well as the economic validity of this definition in the past. Historically, it is seen that this concept was introduced from the west where there was a more favourable land:man ratio than in overcrowded Asia. There was more land per farm in Europe and America than in many developing countries, so that these countries could afford a farm size large enough to provide a decent income to a farm family.

It is now accepted that a farm is both economic and economically viable when it maximizes total factor productivity – which the small farm does best in a land-scarce, labour-surplus situation, as in Sri Lanka. Not only does the small farm make the best use of resources, but in practical terms it provides a higher yield per acre than a larger farm. The problem is not that a micro holding is uneconomic per se, but that it is not large enough to meet the full income and nutritional needs of a farm family.

The latter is a most important criterion, but it is a social criterion and not an economic one. Logically, it has nothing to do with the economics and the productivity of a farm. For what if a family doubles in size, or its members eat more? Does the economics of the farm change to become ‘uneconomic’ because they eat more? The economic viability of a farm is determined by the criterion of economic efficiency and not by a social/nutritional criterion – of whether it is capable of feeding a family. An example from the industrial sector would illustrate this point well. Let us say that in an urban industry today, only part-time employment is available to a particular worker. Would we say that the job in the factory is ‘uneconomic’ because the income that the job generates for this worker is not enough to feed his family? Would we go further to say that the whole industry providing that job is not ‘economically viable’ because the part-time wage it pays is not enough to feed his family? In fact, the firm may be economically viable and profitable only because it provides only part-time employment! Hence the whole concept of larger, ‘economically viable holdings’ in Sri Lanka’s circumstances is based on faulty logic and faulty economics.

Nor is this concept even practicable on a national scale in Sri Lanka. The Agricultural Census of 1982 showed that 25 per cent of households in the small holder sector had farms of less than half acre in extent. The Agricultural Census of 2002 showed that the situation had worsened further, leaving 45 per cent of all farms in the smallholder sector with less than one fpurth of an acre. It is true that the farmers’ try to ‘consolidate’ their operational holdings by renting in an adjoining parcel of land. On the other hand, it is known that farmers tend to scatter their holdings by renting or owning a higher piece of land or chena holding to even out their labour availability throughout the year.

According to the Agrarian Research and Training Institute (now re-named the Hector Kobbekaduwa Institute), two acres is the minimum size of an ‘economically viable holding’ in Sri Lanka. Assuming that the land available to the small farm sector is more or less constant, and assuming that each small farmer with only quarter acre would be given an ‘economically viable holding’ of two acres, this could only be achieved by the dispossession of seven other holders of quarter acre each, relegating them to complete landlessness. On a national scale, this would mean the dispossession of at least 50 per cent of our small farmers, especially in the highly populated Wet Zone, in order to provide a so-called ‘economically viable holding’ to a few. First, the question arises of what would we do with this large number of displaced farmers, given the absence of alternative employment? Secondly, such ‘consolidated’ larger farms would result in lower yields per acre than each of the quarter acre holdings cultivated separately.

Hence, such a policy of providing an ‘economically viable holding’ cannot be justified on either economic or social grounds. The yardstick of ‘economic viability’ is based on an impracticable model imported from western countries blessed with more land and capital than ours, and with opposite (different) factor proportions. It is a yardstick that has no basis in logic or in economics. It has served not only to confuse our concepts, economics and terminology, but also to adversely affect our policy response to the problems of the small farm and subdivided holdings.

In fact, in Japan, Korea and Taiwan in the 1960s-1970s, the family holdings were so small that part of the farm family’s income was obtained from rural non-farm employment. As early as 1988/89, the Household Survey of the Agricultural Sector in Sri Lanka showed that micro-holders of less than quarter acre earned only 38 per cent of their income from farming – which implies that 62 per cent of the farmers’ income came from off the farm. The situation is worse today because 45 per cent of our small holdings are less than quarter acre in extent. On the other hand, the frequency and intensity of non-farm work in the rural areas has multiplied through rural towns and market centres. This needs to be recognized by policy makers. Although we would all like all our farmers to have at least two acres each, this is not feasible in our fractured agrarian structure. This does not mean that we do not care about the small farmer, who is being increasingly impoverished by the grinding mill of subdivision. The problem is that our agricultural population on our limited land is increasing and not decreasing, leading to a mounting pressure on the land – and to a greater subdivision of already small holdings. Possible policy options are considered in the discussion that follows¹.

We need to recognize the fact that the absolute number of the agricultural population on our limited farm land has increased between the year 1982 and 2009: and this is despite all the land expansion, land reforms and colonization schemes carried out in the 70 years since our independence. So why should we, after 70 years of trying, now come up with the impractical theory in Sri Lanka that a farm should be large enough to support a farm family? This was certainly not the case in Japan, Taiwan or South Korea, which started with similar land scarcity before their transition to full industrialization. So why do we not follow what the small farmers have already demonstrated in Sri Lanka, namely, of obtaining the highest returns from their micro-holdings, while obtaining more than 60 per cent of their income from rural non-farm work? Why keep barking up the wrong tree of an ‘economically viable holding’ which we cannot have anyway, when we should be doubling our efforts to provide non-farm work in the rural areas that would hasten our path to full industrialization?

(The writer was a member of the former Ceylon Civil Service who worked in the provincial administration and Colombo before joining the FAO in Rome where he lived and worked for many years.)