You're the Economist

Teacher Guide to Small Group Discussion Handout

1. Based on Ricardo's journal and the description of Altamira (handout #2), what is the opportunity cost to a poor farmer of taking the steps to get title to his land? The time and effort it takes to get to town. This is time that he could have spent working on his land. As Ricardo's journal indicates, the condition of the roads and the lack of good transportation make this a considerable cost. Another cost students may recognize is that squatters protect their claim to land by their physical presence. Being gone may increase the chance of their possessions, and even their land, being taken by another "invader." This may be a good opportunity to introduce (or review) the concept of transaction costs with students.

   transaction cost: The cost of making an exchange. Common transaction costs are time and search costs. Transaction costs are "dead-weight" costs because they confer no benefit on either the buyer or the seller. (For example, a ticket seller gets the same benefit from selling a ticket whether the buyer waits in line 1 second or 1 hour.)

   What is the benefit?
   The most important benefit is the higher sale price for titled land. Students may also recognize that the security provided by having title is a benefit, although it may be relatively small in frontier areas where there are not yet many police around to protect property and apprehend criminals. Another benefit to point out to students is that titled land can be used as collateral for loans so that the landholder can improve the productivity of his holdings.

   In economic terms, farmers will pursue title when the benefits of doing so outweigh the costs. Translate the economic language so that it will apply to this situation. For the Altamira landholders, when will the benefits outweigh the costs?
   The benefits will outweigh the costs when the landholder believes that the potential return in sale price, or the ability to use his land for collateral to borrow money to increase his productivity, is worth the time it would take him to travel to town and deal with the bureaucracy. Help students to understand that as population grows in the area, the benefits increase, and as roads improve, the costs decrease.

2. Read and discuss the charts. Pay attention to similarities and differences in the data for title holders and the data for landholders without title.
   A. Individually, list 3 things you find interesting about the data or questions the data raise in your mind. Share your thoughts with your group. Students will make a variety of observations. The discussion will help them to focus on the specifics of the data and to look for patterns.
   
3. Recent research suggests that investment in land is one of the ways subsistence farmers can begin to improve their wealth and standard of living. Consider the following definitions:

   Investment: expenditures (of time, money, other resources, etc.) on capital in order to increase future production.
   Physical capital: machines, buildings, technology, and tools used in the production of goods and services.
   Human capital: the store of knowledge, skills, and abilities workers bring to the production of goods and services. Education, training, and experience improve human capital.

   Apply the definitions of capital to the Altamira data:

   1. Based on the overheads you've seen and the handouts you've read, describe the human capital of the Altamira settlers. The human capital of the Altamira settlers is very basic. They have little schooling (3 yrs. avg.) nor knowledge of technology (in addition to the fact that they have little access to technology). Their human capital consists of their ability to perform physical labor and use rudimentary tools.
   2. What are the Altamira landholders doing that improves their human capital? Why aren't they making other kinds of investments in their human capital? Any improvements to their human capital come from experience. Some have moved from one frontier to another. We can imagine that some have learned from relatives or neighbors, but living on the frontier, they have no schools and no communication equipment that would allow them to improve their knowledge and skills.
   3. Other than land, what physical capital do the settlers have? They have some buildings, fences, and trees that produce crops year after year. We can also assume, although we don't see it in the survey data, that they have some tools. Some may also have horses that they use for transportation and plowing. Note that cows, chickens, and pigs are not capital, especially in the small numbers that most settlers have them. If they have larger numbers and breed them, then they may be considered capital.
   4. Which of the following activities (from the columns on the survey data chart) are investments in physical capital? (Reminder: Ask yourself whether the activity in question is intended to increase the productivity of the land, making it more valuable in the future.)

   Activity	Is this an investment in land? Yes/No	Explanation
   Clearing Land	Yes	These investments of time and effort improve the farmer's ability to produce, and therefore help to increase his future income.
   Planting Permanent Crops	Yes
   Buying chickens	No	These are goods the farmer consumes. They do not improve the productivity of his land. Also note that if the farmer moves, he'll take his cows, pigs, chickens, and horses with him. They are not part of his productive land resource; they are wealth.
   Buying cattle	No
   Buying pigs	No
   Buying horses	sometimes	Horses trained to pull plows or pull wagons increase the ability to produce goods, and horses purchased for breeding may increase output, but horses kept as pets or as evidence of wealth are consumption items, not investments.
   Adding pasture	Yes	These investments also improve a farmer's ability to produce goods. Instead of just raising animals for his family to eat, he can increase his herds or flocks for sale to others.
   Fencing	Yes

   
   
4. The institution of property rights is the specific focus of this study. In the Altamira survey, "Yes" means that the settler has a clear title and can expect his/her property rights to be protected. "No" means either that the settler has no title at all, or has only some form of claim to ownership, such as a receipt, an unregistered title, or a provisional title. Those without clear title had no certainty that their ownership rights would be enforced.
   1. Compare the level of each of the investment activities for landholders with title and landholders without. Look for patterns of relationship between title and investment. Describe.
      Students should notice that, for the most part, those landholders with title seem to invest in improvements more than those without. The evidence seems to be worth further analysis. (Emphasize to students that sometimes differences are only apparent but not real, or that differences may exist and not be significant. Analysis of economic field research usually involves sophisticated statistical analysis - looking for patterns in the data is a good way to initiate that analysis.)
      
   2. Conduct a simple mathematical test of the data. Calculate the average investment for title holders and compare it to the average investment for those without title. Compare the investment in each of the 4 categories of investment measured in the survey.
      • Start by finding the average meters fenced by title-holding farmers. Add the number of meters for all the titled farmers and divide the total by the number of titled farmers. Repeat the process for the farmers with no title. Which average is greater?
      • Repeat this process for each of the other 3 investment categories.
      • Compare the averages for title-holders and non-title-holders.

      (Note: Look back at the chart you completed in question #3. You should have identified 4 investment activities. Ask your teacher to check your answers to question 3 before you transfer them to this chart and begin calculating the averages.)

      Average investment in Fencing (meters)		Average investment in hect. pasture added		Average investment in hect. perm. crops added		Average investment in hect. land cleared
      Title	No Title	Title	No Title	Title	No Title	Title	No Title
      1688.89	788.89	23.5	5.5	17.5	16.56	24.72	10.5

      
      
   3. Based on your preliminary analysis, what is the relationship between title and investment? (Note well: Finding averages is only the simplest indicator of a pattern to this data. Professors Alston, Libecap, and Mueller ran complex statistical analyses of the data. Your task is simply to find and compare the averages in order to determine whether a pattern exists and might merit further analysis.) Title is a positive incentive for investment. Those landholders with clear title are willing to forego current consumption and put some of their income into investment for the future.
      
   4. Ricardo Tarifa surveyed other sites similar to Altamira and the survey data revealed the same patterns. Knowing your interest in poverty, your professor asks you to explain the significance of this study. What does it suggest about the role property rights might play in reducing poverty in developing countries? Students' answers should display awareness of the importance of programs that secure title to land, so that poor landholders have both the incentive and the ability (collateral) to invest in improvements that will lead to increases in material well-being.

   Current Landholder's Name	Has Clear Title to Land?	Hect. Cleared	Hect. permanent crops added	Chickens	Cattle	Pigs	Horses	Hect. pasture added	Meters fenced
   José Cirilio	Yes	20	4	30	50	5	3	20	800
   José Vieira	Yes	5	12	13	7	0	2	0	500
   Bene Venuto	Yes	15	40	16	5	4	2	5	5000
   José Carlos	Yes	5	19	15	8	0	1	10	2000
   José Ribamar	Yes	100	18	20	200	0	2	85	2000
   Tenilson	Yes	25	29	75	22	0	1	45	3000
   Mirtes	Yes	20	20	50	8	2	1	18	1400
   Fransisca	Yes	12.5	10.5	100	0	0	0	16	0
   Amarildo	Yes	20	5	20	7	2	0	12.5	500
   		"Yes" avg. = 222.5/9 = 24.72	"Yes" avg. = 157.5/9 = 17.5					"Yes" avg. = 211.5/9 = 23.5	"Yes" avg. = 15200/9 = 1688.89
   Paulo	No	0	14	10	30	10	0	0	2000
   Vicente (1)	No	2	5	0	0	0	0	2.5	500
   Vicente (2)	No	12.5	14	100	27	3	3	12.5	1000
   Fco.	No	20	22	200	2	4	3	20	2600
   Marcelo	No	3	8.5	20	0	0	0	4	500
   Otacilio	No	15	26.5	35	0	0	0	9.5	500
   Daniel	No	6	13	15	0	0	0	0	0
   Fco. Pereira	No	26	31	30	0	0	0	0	0
   Raimundo	No	10	15	10	1	4	0	1	0
   		"No" avg. = 94.5/9 = 10.5	"No" avg. = 149/9 = 16.56					"No" avg. = 49.5/9 = 5.5	"No" avg. = 7100/9 = 788.89