Unit 5 The rules of the game: Who gets what and why

5.13 Application: A policy to redistribute the surplus and raise efficiency

In the Indian state of West Bengal, home to more people than Germany, many farmers work as sharecroppers (bargadars in the Bengali language), renting land from landowners in exchange for a share of the crop.

The traditional contractual arrangements throughout this vast state varied little from village to village, with virtually all bargadars giving half their crop to the landowner at harvest time. This had been the norm since the fourteenth century when Ibn Battuta, the Moroccan scholar and traveller in Unit 1, visited the area.

But, like Angela in Case 1, many thought this was unfair, because of the extreme levels of deprivation among the bargadars. In 1973, 73% of the rural population lived below what the Indian government defined as the ‘poverty line’—one of the highest poverty rates in India. In 1978, the newly elected Left Front government of West Bengal adopted new laws, called Operation Barga.

The new laws stated that bargadars:

• could keep up to three-quarters of their crop
• were protected from eviction by landowners, provided they paid them the 25% quota.

Both provisions of Operation Barga were advocated as a way of increasing output. There are certainly reasons to predict that the size of the pie would increase, as well as the incomes of the farmers:

• Bargadars had a greater incentive to work hard and well: Keeping a larger share meant that there was a greater reward if they grew more crops.
• Bargadars had an incentive to invest in improving the land: They were confident that they would farm the same plot of land in the future, so would be rewarded for their investment.

West Bengal enjoyed a subsequent dramatic increase in farm output per unit of land, as well as farming incomes. By comparing the output of farms before and after the implementation of Operation Barga, economists concluded that both improved work motivation and investment occurred. One study suggested that Operation Barga was responsible for around 28% of the regional growth in agricultural productivity from 1979 to 1993. The empowerment of the bargadars also had positive spillover effects, as local governments became more responsive to the needs of poor farmers.¹

Efficiency and fairness

Operation Barga was later cited by the World Bank as an example of good policy for economic development.²

The evidence that Operation Barga increased incomes indicates that the pie got larger, and the poorest people got a larger slice.

In principle, the increase in the size of the pie means there could be mutual gains from the reforms, with both farmers and landowners made better off.

However, the actual change in the allocation was not a Pareto improvement. The incomes of some landowners fell following the reduction in their share of the crop. Nevertheless, since it increased the income of the poorest people in West Bengal, we might judge that Operation Barga was fair. We can assume that many people in West Bengal thought so, because they continued to vote for the Left Front alliance. It stayed in power from 1977 until 2011.

We do not have detailed information for Operation Barga, but Figure 5.29 illustrates the effect of the land reform on the distribution of income in a hypothetical village with three sharecroppers and one landowner. The landowner works his own plot of land, and the sharecroppers farm their plots, which are identical to the landowner’s plot. The landowner’s income is higher than the sharecroppers’ for two reasons:

• First, at harvest time, the sharecroppers hand over a share of their crop to the landowner, while the landowner receives his entire harvest.
• Second, because the sharecroppers can keep only a fraction of what they produce, they have little incentive to work hard cultivating their crops, and as a result each produces less than the landowner.

To illustrate, suppose—as was the case in West Bengal before Operation Barga—the farmers pay a rent of half of their crop to the landowner. Assume that the farmers then work only half as hard as the landowner (because they receive only half of what they produce). This means that if the landowner produces one unit of output (say, a thousand kilograms of grain) then each farmer produces half of that amount.

The result is shown on the left-hand side of Figure 5.29. As in the previous section, the circles represent the individuals and show the income they receive. After the harvest and after the rent has been collected, the landowner has 1.75 units (thousand kilograms) of grain, and the farmers each have 0.25 units. This results in a Gini coefficient of 0.6.

Operation Barga raises each farmer’s crop share to 75%. The higher share motivates the farmers to work harder. We assume they now work three-quarters as hard as the landowner, so they produce 0.75 units (thousand kilograms) each. Each farmer transfers one quarter of their output to the landowner, resulting in incomes of 1.5625 units for the landowner, and 0.5625 for each farmer, as shown on the right of the figure.

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https://www.core-econ.org/microeconomics/05-the-rules-of-the-game-13-redistribute-surplus-raise-efficiency.html#figure-5-29

Figure 5.29 Bargaining in practice: how a land tenure reform in West Bengal reduced the Gini coefficient.

The numbers in Figure 5.29 show that Operation Barga reduced the difference in incomes between the landowner and the sharecroppers from 1.5 units to just one unit, and increased total output from 2.5 to 3.25 units, raising average income. The effect of both changes is to lower the Gini coefficient. By this measure, inequality in our hypothetical village has been cut in half.

The fact that, in West Bengal, both productivity and equality increased, highlights why this programme was considered to be such a success story.