Realizing Efficiency Gains

Proponents of LASLA never tire to claim efficiency gains of LASLA. They observe that agricultural productivity in LDCs is low and that land even lies idle, e.g. as it is simply out of reach for the underdeveloped cultivating methods prevalent in LDCs. Developed technology can help (1) to cultivate idle land and (2) to increase overall productive efficiency.

Even though fertile land in developing countries is often underused or fallow, it did not attract the investments required for cultivation. Often, the necessary incentives were missing since property rights to the land were poorly or not correctly defined. From a law and economics perspective, LASLA transform property rights. Given the often unclear

define property rights for the first time. In more concrete terms, local agencies transform the previously existing property rights system, conform to investor requirements (Cotula et al. 2009).

Having transformed local property rights, international investment law, which is prima facie the applicable jurisdiction, offers investor-oriented protection mechanisms. Such protection mechanisms are in most of the cases guaranteed through the existence of bilateral investment treaties (Griebel 2008). These treaties are interstate contracts that guarantee a special protection for foreign investors (Reinisch 2009b). The most important advantage is the minimization of political risks, namely discrimination, expropriation, access to the justices, and so on.

LASLA as an institution makes these investments into LDCs possible through a clear definition of property rights, the possibility to transfer property rights from one owner to another, and the protection of the investor through international investment law. One could argue that in fact the initial owners were the local smallholders in the host countries whereas the final owners are the investors.⁸ The definition of property rights is a desirable achievement of LASLA. It helps to achieve a re-allocation of economic factors towards more effective use and enables the market mechanism to produce more needed food and to increase world food security. But this is the theoretical part. Serious problems remain in practice.

Particularly problematic in the transformation process are the essential biasesin favor of the investors. They affect the socioeconomic environment for the local population, because this transformation process is apparently made ignoring the precedent system and existing structures (Cotula et al. 2009). Given the lack of of a formal title to the land, de facto owners often cannot defend themselves against a factual expropriation, simply because they cannot argue for a legal expropriation (Cotula et al. 2004, Gehne et al. 2011).

Smallholders’ rights are protected on the constitutional and international level: most of the African countries do recognize the traditional property right indigenous people have on the land they cultivate.⁹ But this constitutional protection does not find further application, since sometimes procedural norms are missing or it is almost impossible

8Even when land is not always sold, the fact that lease contracts are made for 99 years we assume that the short run generational effects are almost the same. See Cotula (2011) for a description of the investment contracts.

9Internationally, the right of indigenous people is regulated in a specific UN declaration on the Rights of Indigenous People. The declaration was adopted by a majority of 143 states in favor (most of sub-Saharan countries adopted the convention), four votes against (Australia, Canada, New Zealand, and the United States) and eleven abstentions (Azerbaijan, Bangladesh, Bhutan, Burundi, Colombia, Georgia, Kenya, Nigeria, Russian Federation, Samoa, and Ukraine).

protection is guaranteed at the constitutional level, this does not create incentives to protect local property rights: in cases of expropriation, compensation mechanisms are non existent or simply not applicable due to weak protection mechanisms of property rights (Deininger et al. 2011).

As mentioned, a significant achievement of LASLA is the protection of investors under investment law. This legal jurisdiction, however, does not allow the original owners (local smallholders) to sue either the state or the investor because of the violation of property rights.¹⁰ This effectively means that even when the existence of the investment is due to a wrongful act, it is not possible to reverse the action.

So far, the described problems amount to issues of compensation. It is well possible that even expropriated smallholders can be remunerated through the efficiency gains.

However, in the majority of cases there are no such gains when the projects have not been administered as the World Bank adds for consideration:

“In many cases the announced deals have never been implemented. Risks are often large. Plans are scaled back due to a variety of reasons including un-realistic objectives, price changes, and inadequate infrastructure, technology, and institutions. For example, we found that actual farming has so far only started on 21 percent of the announced deals. Moreover, case studies demon-strate that even some of the profitable projects do not generate satisfactory local benefits, while, of course, none of the unprofitable or nonoperational ones do” (Deininger et al. 2011: XIV).

Moreover, in many cases the investors are given not only fallow land but also the land that has already been cultivated by local smallholders and was their livelihood.¹¹ Such land is usually located on flood plains, close to water supplies, and with a higher soil quality. Thus, it needs less reclamation than other areas, where reclamation is only possible with developed technology and knowledge. In order to cultivate the land, local communities have to be displaced. These resettlements might be accompanied by human rights violations against the most vulnerable individuals, who will be inevitably worse off after the process (Matavel et al. 2011, The Oakland Institute 2011b, De Schutter 2011).

10This is because individuals are not considered as subject of international investment law. Even when in some cases tribunals accepted the participation of some organizations as amicus curiae, their relevance is questionable (Dolzer and Schreuer 2008, Reinisch 2009a).

11This effect is also stated by Deininger et al. (2011: XXXIII f.): “If investments generated profits, social impacts depended not only on the magnitude of benefits, but also on the mix of different types of benefits.

For example, entrepreneurial and skilled smallholders could gain from jobs created by an investment, while vulnerable groups or women lost access to livelihood resources without being compensated. This illustrates the importance of clearly addressing distributional issues upfront.”

gains are not as substantial as promised and expected. As it looks now, investors can expect to harvest profits today or speculate on future profits while the local smallholders’

wealth remains unaffected if it does not decline. This cannot be defended as fair from the standpoint of Varian. Nevertheless, a more detailed analysis of the distribution of efficiency gains is needed to conclusively evaluate LASLA from the perspective of Varian.