You're the Economist

Concepts

• institutions
• capital
• economic growth
• property rights
• investment
• opportunity cost

National Voluntary Content Standards in Economics

This activity addresses parts of the following content standards in economics. Note that the lesson, in and of itself, is not sufficient to guarantee student proficiency in the identified standards.

Standard 4: People respond predictably to positive and negative incentives.

• Responses to incentives are predictable because people usually pursue their self-interest.
• Changes in incentives cause people to change their behavior in predictable ways.
• Incentives can be monetary or non-monetary.

Standard 10: Institutions evolve in market economies to help individuals and groups accomplish their goals. . . . A different kind of institution, clearly defined and well enforced property rights, is essential to a market economy.

• Property rights . . . affect incentives for people to produce and exchange goods and services.

Standard 15: Investment in factories, machinery, new technology, and the health, education, and training of people can raise future standards of living.

• Economic growth is a sustained rise in a nation's production of goods and services. It results from investments in human and physical capital, research and development, technological change, and improved institutional arrangements and incentives.
• Historically, economic growth has been the primary vehicle for alleviating poverty and raising standards of living.
• The rate of productivity increase in an economy is strongly affected by the incentives that reward successful innovation and investments (in research and development, and in physical and human capital).

Standard 16: There is an economic role for government to play in a market economy whenever the benefits of a government policy outweigh its costs. Governments often provide for national defense, address environmental concerns, define and protect property rights, and attempt to make markets more competitive. Most government policies also redistribute income.

• An important role for government in the economy is to define, establish, and enforce property rights. A property right to a good or service includes the right to exclude others from using the good or service and the right to transfer the ownership or use of the resource to others.

Introduction

"You're the Economist," provides students the unique opportunity to analyze actual data collected by field researchers. Ricardo Tarifa, a doctoral candidate in economics, was hired in the early 1990s by economics professors Lee Alston, Gary Libecap, and Bernardo Mueller to collect data from frontier settlers in the Amazonian state of Pará, Brazil. The purpose of the research was to see whether holding clear title made a difference in farmers' willingness to invest in capital improvements that would increase the productivity of their land.

The chaotic state of land ownership in the Brazilian Amazon traces its roots to a tangled tale of military rule, bureaucratic corruption and inefficiency, and the historical practice of "invasion" by poor farmers. "Invasion" in Brazil is similar to "squatting" on the 19th century American frontier. Invaders simply claim land by occupying it. Commonly, the first wave of invaders harvested the wood. They then "sold" the cleared land to others who came to the frontier hoping to aquire land to farm. If the farmer got a receipt, it might be his only claim to the land. The receipts were only one form of property rights in a very confused picture of title and ownership. Ricardo found that the farmers' claims to their land ran the gamut from clear title registered with the local or state government authority; to provisional title granted by military authorities; to receipts (of varying degrees of authenticity) from sellers (who may or may not have been valid owners); to word of mouth or common knowledge among neighbors.

During the 1990s, when this economic field study took place, frontier farmers did have the opportunity to sort out their vague claims and establish clear title recognized by the Brazilian government. However, the costs of doing so were extremely high. Dealing with INCRA (the federal land agency) and ITERPA (the state land agency) was a cumbersome process, often involving the lobbying of officials and confusing paperwork. Most burdensome, however, was the time and travel to register the necessary paperwork in the appropriate government office. The distance to government centers, the lack of a telephone system, and the abysmal state of the few existing roads added to the opportunity cost of time away from work on their land that landholders had to bear in order to secure title.

Armed with Tarifa's surveys and sophisticated statistical analysis, the researchers concluded that the possession of title clearly affected whether or not poor farmers made the investments in capital that would help to pull them out of poverty. Titles, Conflict, and Land Use - The Development of Property Rights and Land Reform on the Brazilian Amazon Frontier, published in 1999, described the Amazon research project and concluded that clearly defined property rights, in the form of land title, did have an impact on the economic growth of the Pará frontier. Specifically, the economists concluded that:

• Amazonian farmers knew that possessing a title meant their land was more valuable (for future sale).
  
  
• In those locations in which the benefits of securing title were much greater than the costs, farmers were more likely to bear the costs of securing title.
  
  
  • In general, the value of title decreased the farther the land was located from a settlement of significant size. Thus, farmers living farther from a town or on very poor roads were less likely to bear the costs of securing title.
    
    
• The level of investment in capital improvements to the land was greater among landholders with title than among those without.

In this activity, students work with the researchers' hypotheses, excerpts from Ricardo's journal, and data from one of the survey sites. Small group discussion guides lead them through analysis of the data.

Note: Teachers are encouraged to review Appendix 1 of the Lesson 2 Outline for additional background and a more detailed description of the 1990s' Amazon Basin research project.

Materials

• calculators - 1 per group
• overhead transparencies of visuals #1 - #7 (pages 16-22)
• copies of student handouts #1 - #3 (1 per student) (pages 8-12)
• copies of handout #4 (1 per students or 1 per group) (pages 13-15)

Time Required

2 class periods

Procedures

1. Display Visual 1 ("Key Concepts," p. 16) to provide direct instruction or review of the economic concepts students must understand in order to complete the analysis.
   Key concepts include: institutions, capital, property rights, economic growth
   
   
2. Use Visuals 2 ("The Double Life of Capital," p. 17) and 3 ("What's the Same? What's Different?," p. 18 ) to introduce students to the importance of capital investment in economic growth, and to the connection between property rights and capital investment.
   
   Select student volunteers to role play the conversation with the loan officer when Mary goes to her local bank. Then, select student volunteers to role play the conversation between José and the bank loan officer in the city closest to José's frontier home.
   
   (If students are new to the idea of capital and investment, read through the deSoto visual before assigning the role play demonstrations below. If students are more practiced in economic analysis, start with the role play scenarios. Afterwards, read the deSoto quote and discuss whether the role plays were consistent with deSoto's analysis.)
   
   
3. Distribute handout 1, "You're the Economist." Assign as homework or allow class time for students to read the handout silently. Answer students' questions about the nature of the task.
   
   (Take this opportunity to emphasize that the student activity, although somewhat simplified, is a very realistic simulation of the work of research economists. Also explain to students that the handout contains only a small portion of the data collected during the Amazon Basin study. To make the analysis manageable in a short classroom activity, the size of the data sample was greatly reduced. However, the data chosen for inclusion and the conclusions the data point to are consistent with and confirmed by the larger study. See p.18 of the Lesson 2 Outline and the Alston entries on p. 27 of the Lesson 2 Outline source list.)
   
   
4. Display Visuals #2 ("Focusing the Research") and #3 ("Overview of Research Project") to familiarize students with the research question and the Brazilian field study.
   
   
5. Distribute handouts 2 & 3 ("Communications from Ricardo Tarifa" and "Data from the Altamira Survey"). Use Visual 4 ("Reading the Altamira Data") to explain the data chart. Explain to students that the chart includes only part of the data from the research project. The full project surveyed 4 settlement areas, most much larger than Altamira. In addition, because of problems with roads during the rainy season, the data for some of the 79 Altamira settlers was incomplete. For those reasons and to make the analysis task manageable in the classroom, the chart contains only a representative sample of the Altamira data.
   
   
6. Allow time for students to read the journal and data chart.
   
   
7. When the class has completed the reading, form discussion groups of 3-5 students. Distribute "Small Group - Directions for Analyzing Ricardo's Survey Data" (handout 4) and allow students time to complete the tasks. Remind each group to appoint a discussion leader, a recorder, and a spokesperson.
   
   
8. Reconvene the class. Allow groups to report on their analysis of the data and to share their conclusions. (See teacher guide to handout 4, pages 22-24, below.)
   
   
9. Debrief:
   Large Group Discussion Questions
   • In 1999, the Brazilian GDP per capita was $6100. The Amazon squatters in the 1992-93 study clearly had incomes well below that average. To make improvements to their land, they had to borrow from banks. Name three settlers who would have had an easier time obtaining credit, and explain why you believe they would have experienced less difficulty than many of their neighbors.
     
     Three possible answers would be Bene Venuto, José Ribomar, and Tenilson. They all have title to their land, which could thus be used as collateral. Additionally, they have improvements to the land that increase its value as collateral. Any landholders with clear title would be more likely to obtain loans than those without title.
     
     
   • Some settlers have provisional (temporary) title rather than definitive (permanent) title. Suppose that the American researchers help the provisional landholders register their titles so that their property rights are no longer in question and are enforceable in court. Predict the changes Ricardo Tarifa might see if he returned in 5 years to take his survey again.
     
     The extension of permanent title would have increased the settlers' incentive to clear land, plant more permanent crops, increase the number of animals they raise, and/or build capital improvements, such as barns and fences. Ricardo would see evidence of these investments and he would see evidence - in the form of larger cattle herds, for example - of increased output as a result of the investments.
     
     
   • Based on the pattern of investment, predict whether each of the settlers below has title to his land. (Display visual 7, solicit student input, and then display visual 7a showing the correct answers.)
     
     

     Name	Title to Land	Hect cleared	Hect permanent crops added	Hect pasture added	Meters fenced
     Osdete			0	?	?
     Joao Golano		35	85	30	5500
     José Carlos		25	1	25	0
     Germano		18.5	44	0	0

     
     
   • In April, 1993, Ricardo tried to visit Osdete for the survey. In his journal, he noted that Osdete lived very far from Altamira on a bad road. "[L]ast time the car cracked the back of the engine in this road and we had to continue with the mountain bike, we lost 2 days to fix it. . . so probably it will be difficult to reach them.…"
     
     
   • Why is Osdete unlikely to try to gain title to his land? What is the biggest cost of securing title to a settler like Osdete?
     
     Osdete lives a great distance from the urban center. It is unlikely that anyone will want to buy his land or that anyone will challenge his use of it. Additionally, it will cost him a great deal of time to travel to the city to secure title. Because he and his family are the farm workers, time away from his land has a very high opportunity cost for him.
     
     
   • What changes over the next 5 years could make him more likely to seek clear title?
     If population grows rapidly in the area, Osdete's land may increase in value, increasing the benefit to him of securing title. Improvements in the road might also reduce the cost of securing title.
     
     
   • Many of you incorrectly predicted that Germano had title and José Carlos did not. Does the data on these 2 settlers undermine the validity of the conclusion that settlers with title are more likely to invest in their land?
     
     No, the conclusion is still valid because it applies to most of the settlers. A case like Germano's does remind us, however, that generalizations don't apply to every instance. To assume that they do is to commit the logical fallacy called "the fallacy of composition."
     
     
   • Do the cases of Germano and José Carlos support or undermine the statement that "individual counter examples don't negate generalizations"?
     
     The cases of Germano and José Carlos support the statement. The generalization - that those with title have higher rates of investment - is still true despite these two exceptions. Students should be aware of this important feature of statistical analysis, and understand that generalizations based on such analysis do not guarantee the accuracy of predictions about individual behavior. On the other hand, one counter-example does not disprove or invalidate the conclusion (as it would in a philosophy proof, for example).
     
     
   • A Brazilian government official, aware of the Amazon study, has asked for recommendations about policies that would help settlers like Marcelo, Octacilio, and Daniel increase their wealth. What step(s) could the Brazilian government take to
     
     
     1. increase opportunities for settlers to make themselves wealthier, and
     2. provide incentives for settlers to make decisions that would allow them to take advantage of those opportunities?
        
        
     A sound policy would be to set up a government program to help Amazonian settlers achieve clear title to their land. (For example, titling officials could travel to the farms rather than requiring that the farmers leave their fields to go to the city.) Having title would allow the farmers to participate in the land market and to take advantage of the higher prices for titled land, or it would provide them with collateral to borrow money for capital improvements. Title would give the settlers more assurance that they'd reap the rewards of their investments, so they would be more likely to make those investments.
     
     
10. (Optional) Assessment: What Have You LEARNED ?
    Read to students:
    The professors have asked their graduate students (you) to report briefly on the Altamira survey. Specifically, they want to know if there is strong enough evidence of a relationship between title and investment to justify continuing the survey.
    
    Write a 1 paragraph report entitled: What We've Learned from Altamira: Are Property Rights Good for the Poor? (You may include in your report anything we still want to know or any new questions the data brings to mind.)
    
    This assignment will help bring students' thinking back to the main focus of the unit - how capitalist institutions affect the lives of the poor. Students' essays should reflect their new knowledge of the importance of property rights in giving poor people a foundation upon which to begin to accumulate wealth. Without property, they cannot secure debt to invest in physical capital. With clear property rights, they have incentives to make investments that will improve the productivity of the resources they own.
    
    
11. (Optional) Hold a brief class discussion about any additions students want to make to the "What Have We LEARNED?" poster as a result of the activity.