Economists Lee Alston, Gary Libecap, and Robert Schneider studied the relationship between property rights and capital investment by surveying small landholders living in frontier areas of the Amazon basin in Brazil in the 1990s.

Description of the Research Area

• The 1992 survey of 249 frontier households in the state of Pará found that the property rights ran the gamut from legally secure, enforceable title to informal “squatting,” in which the landholder’s presence on the land was the basis of his claim. 
  • 56% of the land holders had title.
  • 12% had a sales receipt showing that they had paid cash to another squatter.
  • 32% had no documentation of ownership.
• The survey also confirmed that most of the landholders were very poor and had little education. They had been squatters before, making minor improvements (such as clearing trees and brush or building a dwelling) and then selling to incoming settlers before moving farther into the frontier. 
  • The average age of landholders was 43.
  • The landholders’ average education was 2 years.
  • The average time on the currently held plot of land was 8 years.
  • The average number of migrations was 3 (meaning that most had been squatters in other locations before moving to this particular frontier area).
• Land Title as a Source of Wealth on the Frontier
  • Despite their lack of formal education, the landholders clearly understood the market for frontier land and the value of having secure property rights. 
    • The surveyor, Brazilian Ricardo Tarifa, asked members of one frontier community, “How much is your land worth now?” and “How much would it be worth if you had a definitive title?” On average, the settlers surveyed perceived that having a definitive title (rather than, for example, a provisional military title, a sales receipt, or nothing) would increase the value of their land by 36%. (Titles, Conflict, and Land Use 111-12)
    • Settlers were aware that investors in Sao Paulo and Rio de Janeiro would only buy titled land. Those squatters who speculated that the value of land would increase as settlement increased invested in their land largely by pursuing clear title.
    • Not all frontiersmen pursued title, however, and the varying level of landholder efforts to gain title reflected their comparison of the costs and benefits of doing so:
      • The closer the land was to a town or market center, the more its value was increased by possession of formal title, and the more willing the landholder to bear the cost (in lost production time on the farm) of pursuing title.
        • Title increased land values at the population centers by ~189%.
        • Title increased market value for land 40 km from market centers by 72%.
        • Title increased market value for land 140 km from market by 45%.
• The assertion that the landholders understood the value of title is reinforced by looking at the time and energy they spent in activities they believed would strengthen their property rights and/or set them up to make a future title claim.
  • Tarifa asked settlers what efforts they undertook regularly to protect and maintain possession of their property. Settlers reported the following:
    1. Keeping the boundaries clear. This was the most frequent response; 71 reported that they did so and spent approximately 6 days a year in this activity.
    2. 8 settlers with sales receipts got them notarized.
    3. 1 settler paid land taxes so that he would have a government record of his claim to the land. (Paying land taxes is required but very rare, even for people with definitive title.)
    4. Some settlers hired a topographer to provide a map of their borders.
    5. Some settlers built markers on their boundaries.
    6. Many settlers went to offices of INCRA, the government agency responsible for titling, to petition for title. These trips cost at least a day from work.
    7. In the colony of Nova Allianca the settlers paid for an emissary to travel to Belem, the capital of the state of Pará, and to Brasilia, the federal capital, to petition the government to hasten the titling process.
• Prof. Alston explains: “The settlers’ efforts represent investments. Valuing their time at U.S. $2/day, we estimated the dollar value . . . of the efforts to secure titles of seven settlers in Tucuma. Collectively they expended U.S. $188 to make their property rights more secure. If they had succeeded in getting title, the perceived collective increase in land value was U.S. $10,800. Even if it takes years to get a title, which it often does, the payoff is large” (Titles 5).

Title and Investment in Capital Improvements

The second part of the Pará study also has implications for the role of property rights in reducing poverty. Knowing that economic growth leads to reductions in poverty, and that capital investment is key to economic growth, the researchers wanted to know whether settlers’ willingness to make capital investments was affected by the degree to which property rights are secure.

• Hypothesis:  The researchers hypothesized that in the Pará survey area, there would be a greater level of investment in capital improvements by those landholders with title than by those without.
• Background conditions: 
  • The landholders in the 5 survey areas of Pará were subsistence farmers, raising crops and small numbers of farm animals. 
  • At the time of the study, the comparative advantage of the Brazilian Amazon frontier, and thus the avenue out of subsistence poverty, was in 3 activities: mahogany, tree crops like bananas, coffee, and cacao beans (chocolate); and raising cattle. 
    • Land with mahogany trees could be cleared and the timber sold – once. 
    • After clearing, the land could be profitably used for tree crops, or — of particular importance in the Pará study — converted to pasture for grazing cattle.
• Measurement:
  • The researchers identified as “investment in capital improvements” any landholder activities that made the land more productive for growing tree crops or grazing cattle.
    • For the poor farmers in the area, capital investment meant spending time, effort, and money now to improve the productivity of their land in the future.
      • For poor people without savings, using their resources in this way meant reducing current consumption. (For example, a landholder who planted tree crops could not expect to harvest a crop for several years, and at the same time was giving up the annual crops he could have planted in that area and harvested each fall.)
• To measure investment in capital improvements, Tarifa collected the following data from each landholder:
  • the amount of land the landholder had cleared – a necessary first step for both crops and pasture;
  • the amount of land the landholder had planted in perennial crops; and
  • the meters of fencing the landholder had installed.

Results:

• Using statistical analysis that controlled for a host of individual characteristics, Alston et al. were able to show that farmers with title made considerably greater investment in their land than did the farmers without title. 
• In Altamira (see table below), investment by farmers with title resulted in 55% of their land being pasture or permanent crops. Farmers without title did not invest as much, and only 26% of their land was devoted to pasture or permanent crops.

• The differing level of investment by titled and untitled landholders reflects in part the inability of those without title to obtain credit – a necessary instrument for poor farmers wishing to invest in capital (tree stock and fencing) improvements.
  • Among those farmers who did invest in fencing, the average amount was 1,181 meters, representing an investment of about $550 U.S. (The average farmer’s labor was valued at $2/day.)
• The difference also reflects that settlers with title had to spend less time and effort enforcing their claims to land. This freed them for more productive activities and gave them an incentive to invest in future production because they felt relatively certain that they would reap the future rewards.