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STOWARZYSZENIE
EKONOMISTÓW
I AGROBIZNESU
Land fragmentation
in Bulgaria: anROLNICTWA
obstacle for land
market development
Roczniki Naukowe ● tom VIII
●
zeszyt 6
37
Violeta Dirimanova
Humboldt University of Berlin, Germany
LAND FRAGMENTATION IN BULGARIA: AN OBSTACLE FOR
LAND MARKET DEVELOPMENT
ROZDROBNIENIE ZIEMI W BU£GARII: TRUDNOŒCI W ROZWOJU
RYNKU ZIEMI ROLNICZEJ
Key words: land, fragmentation, land market, Bulgaria
Key words: ziemia, rozdrobnienie, rynek ziemi rolniczej, Bu³garia
Abstract. The purpose of the paper is to analyze how fragmented landownership rights impact land market
development in Bulgaria. The main objectives of the paper are: to investigate how landownership rights
influence economic outcomes, to analyze land transactions of private fragmented plots in land market, and to
explain different contract choices between buyers/renters and landowners. The new institutional approach is
employed. The article is a result of case studies focused on different degree of land fragmentation conducted in
two regions of Bulgaria.
Introduction
Between 1990 and 2005, Bulgaria has experienced extremel changes. Agricultural reform and
restitution process has led to a severe land fragmentation. The country chose a restitution model
for its land reform. The purpose of the land reform was to return the land to the people that had
owned it before collectivization. The land, however, was highly fragmented in the past and the
restitution process further deepened this problem. The possibility for the exchange of rights
between landowners and land users has increased after restricted land market was liberalized.
However, this exchange is hindered by passive landowners and heirs who have not obtained
deeds of ownership and have been uninterested in their property. Therefore, both the unwillingness of landowners to participate in land market and highly fragmented plots create difficulties
for land users to contract with landowners.
The purpose of the study is to understand the economic effects of land fragmentation in the
land market development. The objectives of the paper are: to clarify how land property rights affect
the economic outcomes, to analyze land transactions in land market, and to explain the different
contract choices between landowners and potential buyers/renters. By using instructional approach, two regions with different degree of land fragmentation are compered.
Land fragmentation results from agricultural reform
Agriculural reform for all Central and Eastern European Countries (CEEC) has been directed at
the privatization of property rights and transformation of collective and state farms. The land
privatization in CEEC had to do with the transfer of the property rights with legal ownership rights.
Privatization concerns allocation of both rights to individuals. Different methods of privatization
can be combined by payment at sales, such as vouchers and cash in all CEEC. In Bulgaria the
agriculture land was restituted. The choice was to distribute property rights to their „legitimate”
owners. During the collectivization landowners never lost their ownership right, only the rights to
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V. Dirimanova
use their land. The property rights were fully restored such as the use, sale, rent, alienation and
inheritance rights. The transformation, in particular, the de-collectivization refers to the restructuring of the collective farms into „new” farm units compatible in land market. This process was a
sensitive issue for most of the CEEC. The main issues, which have been discussed in those
countries, weare: who would be the „new” private owner of agricultural assets and what kind of
units should replace the „old” farm structures. The agricultural reform has led to different farm
structure in CEEC and the level of fragmentation in term of assets ownership and asset use
[Swinnen 1997].The agrarian reform, in Bulgaria, resulted in the most serious land fragmentation
problem, compared to other CEEC. Half of the land is used in units smaller than 2 ha and there are
almost 1.8 million landowners [Kopeva 2000].
Post-reform in Bulgaria started with land reform at the beginning of 1990. Land reform was
initiated in the beginning of 1991, when the Law for Agricultural Ownership and Land Use (LAOLU) was approved by the parliament. The goal of the LAOLU was to return the land to those who
owned it prior to collectivization. Also, the rules of LAOLU for implementation specified the
mechanisms for the liquidation of cooperatives and the reallocation of agricultural land to individual owners. In Bulgaria land was never nationalized. Therefore, the land reform was an act of
restitution from a legal point of view. In Bulgaria, the property rights to land plots was restored to
the previous owners or their heirs, within the actual or comparable boundaries that existed before
the collectivization in the 1946. Pre-collectivization land ownership was highly fragmented and the
restitution process further intensified this problem in Bulgaria. Since 1946 many landowners had
grown too old to farm, some had passed away. A great number of them had several heirs with little
or no experience in agriculture and no desire to return to farming. The agricultural reform was
driven by „considerations of social justice”, not by „efficiency considerations”, therefore, all heirs
had the right to participate in the restitution process [Hanisch 2003].
There are several reasons for land fragmentation in Bulgaria. First, since the agrarian reform
returned the land to its original owners, it restores the past land relations. Second, most of the
original landowners have several heirs and since the Bulgarian legislation grants equal shares to
each of them this further deepened the problem. Third, the government policy for providing land
to landless families involved in agriculture additionally aggraiated the problem. Fourth, the low
income level prevents the purchase of large plots and therefore, the process of fragmentation
continues [Yanakieva 2001].
Theoretical approach
Land market can work efficiently even without the formal definition of property rights and
without formal registration of transfers when strong social capital or trust-enforcement mechanisms exist. When these conditions are absent, formalizing the legal definition of property rights and
introducing institutions make land markets to work efficiently. The property rights over land are
necessary to facilitate its efficient use. Property rights can be formalized by land titling and registration in order for rental and sales markets to perform efficiently [Janvry et al. 2002]. The benefit
of private property rights is the land market development. But private property rights can have
negative result by establishing land fragmentation. When the degree of land fragmentation increases, the transactions become more costly. In the world of costly transactions, a market without
any cooperation between individuals is impossible. The task of individuals with bounded rational
behavior in the real world with positive transaction costs is to find suitable partners for exchange
of their rights. One suitable place is the land market.
The neoclassical economic view of comparative market mainly focuses on the price mechanism
and assumes zero transaction costs. However, in the world with positive transaction costs, the
new institutional approach becomes useful. In new institutional economics market is explored as
the governance structure of transactions [Willliamson 1996]. The market as an organization has
the purpose to organize exchange efficiently, in other words, to facilitate market transactions
[Furubotn, Richter 1997]. Several theories of the new institutional approach can be useful for the
analysis of land fragmentation in Bulgaria: the transaction costs theory, theory of property rights
and theory of agricultural contracting. The importance of these theories is defined below.
Land fragmentation in Bulgaria: an obstacle for land market development
39
The transaction costs approach explains how costs of exchange can affect the contract choice.
The main transaction costs, such as costs of searching, information costs, bargaining and decision costs, and also policing and enforcement costs, can be defined as ex ante (i.e. drafting,
negotiation) and ex post (after the contracts are signed, i.e. safeguarding the agreement). Market
can be used as one of appropriate forms to govern these costs of exchange. Also, the land
transactions should be organized in such a way that influence of: bounded rationality, opportunism and asset specificity, can be minimized [Williamson 1996].
The property rights approach is used to illustrate the allocation of resources. The property rights
of a physical asset give the landowners opportunity to use this asset, to extract income and to have
power over its management. The ownership gives individuals discretionary power over the resource
and provides a basis for a competitive market. When there are conditions of full private ownership,
the holder of property rights has the choice of utilizing the asset himself, leasing the asset, or selling
it to someone else. Therefore, the ownership over the scarce resources and the bundle of rights
attributed to the ownership influence the economic outcome [Furubotn, Richter 1997].
The theory of agricultural contracting tries to explain the different contract choices of the
owner of the land and land user, endowed with different human capital, in the same institutional
and technological environment [Hayami, Otsuka 1993]. A land transaction occurs when the landowner, who has a bundle of rights to the land, exchanges this land or certain rights to use the
land, to a land user/tenant. When the transaction is a ‘sale’, the transfer of private property rights
are defined by government regulations and laws governing how property rights are to be transferred within the sale contract. The landowner has to transfer fully his bundle of property rights to the
new individual under the sale contract. However, when the property rights from one landowner are
not fully transferred, but only partially to another individual, in that case, the transaction of the
land between both parties can be described as a tenancy contract. The rental contract specifies the
rules to which both parties must adhere. Describing above new institutional theories assume that
land market development is not constrained only by price mechanism but by informal and formal
institutions in continuous changed society. Those institutions limits implementation of property
rights, create high costs of exchange in land market and make contract choice complex for contractual parties. I assume that existing of land fragmentation may increase transaction costs and
constrains land market development. Therefore, the idea of this research to differentiate transaction cost components and to analysis how far costs caused by land fragmentation really matter
with regards to contract choice and in turn, land market development in Bulgaria.
Methodology and analyzed regions
By using comparative design, it would be evaluated, how the phenomenon of land fragmentation impacts the land market development. This method is a comparison of two contrasting cases.
Also, the comparative analysis gives possibility to understand the social problem of different
prospective views. Therefore, by competitive situation, it will enable the establishment of relations
among the cases and link them to the theory.
Using landownership data two regions were selected with different degrees of land fragmentation. The region with low degree of land fragmentation is Dobrich Bulgaria a with the average plot
size of 2.03 ha. With a high degree of land fragmentation, the region is Plovdiv in the South-Central
Bulgaria with the average plot size of 0.53 ha. In Plovdiv region, the crops, which are grown, are
high-value crops (vegetables and fruits) while in Dobrich region, low-value crops dominate. The
main crops grown in the Dobrich are the cereals, which account for 90% of the cultivated land. In
Plovdiv area, main crops are vegetables and perennial plants, while the share of the cereals is
about 42% of the cultivated land.
Comparative analyses of land market in both regions
In both regions, the land market does not function properly. The main constraints are unclear
property rights, low value of farmland, landowners’ sentimental value to their family of land and
the expectation of the price increase after the EU accession. The land transactions are conducted
by relatives and make the situation more complicated for land users. Land users should find the
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V. Dirimanova
appropriate mechanisms to solve the problem of land fragmentation and ownership. The observed
process of exchanging land plots between land users, in both regions shows that the local actors
are searching and may have found a way to manage the exchange of land.
The similarity in both regions is that all land transactions are concentrated in the rental land
market. In the region with the low degree of land fragmentation, where the crop structure is mainly
low-value crops, the size of cultivated plots should be over 3 ha, otherwise, the production costs
would be not justified. The opposite case is the region with the high degree of land fragmentation
and high-value crop structure. The small size of the plots does not seem to be a huge problem.
Local landowners and small farmers mainly cultivate their backyards or plots close to villages. The
large land users cultivate the fields farther away from the village.
In both regions, most of the landowners have informal arrangements with land users (oral contracts). However, in order to claim subsidies from the government, the land users sign formal contracts for a part of the land they cultivate. The rest of the land is used with informal contractual
arrangements between both parties. The land users prefer informal arrangements with landowners
because of high transaction costs and opportunity costs. Furthermore, the procedure of formalizing
contractual arrangements between landowners and land users is complicated and expensive. At the
same time, the government does not have a clear policy how to handle the process with land subdivision between the new coming heirs and to facilitate contractual process. Still, there are many heirs
with unclear property rights because the legislate process is costly for obtaining an official title.
In Dobrich region, there are large leaseholders, who cultivate over 3000 ha (Tab. 1). They play
a significant role on the land market. In case, a landowner does not sign a contract and rent out his
land to one of the leaseholders and decides to cultivate the land alone, he has two options: to get
instead of his land a plot located at the end of the big tract or to negotiate for rent, and to obtain no
paymment from an influential user. The large leaseholders are strong, own machinery, and have
access to information. By using their relations with local authorities they can easily obtain information about landowner names, size of plots, location, and quality around their farmland. Land
users to insure their investments have long-term contract. The rent payment to owners is 30-35 %
of production. The local landowners can choose between both rents in cash or in kind, while the
landowners, who live in the cities receive, the rent payment in cash to their bank accounts. All
landowners receive the same rent, even if they rent out the land to different users. In practice, the
large farmers work together and offer the same rent to owners. They informally cooperate and at
the same time compete.The recent years land users have tried to formalize their informal agreements and also increase their farm size because of the future EU direct payments.
Table 1. Characteristics of investigated regions
Characteristic
Location in Bulgaria
Average plot size, ha
Number of plots
Level of LF
C rop structure
Land reform
Agricultural designers
Type of contracts
Rent
Arable land [ha]
Share of rented land [%]
Share of abandoned lan [%]
Share of land transactions in rental market
(formal) [%]
Number of leaseholders
Average size of rented land per landowne [ha]
Average price of the sold land [euro/ha]
Sold land (2003) [ha]
Source: own research.
Dobrich
Plovdiv
North-East
C entral-South
2.03
0.53
1-2
3-4
Low
High
Low-value crops
High-value crops
New real boundaries,
Partly in new and inold real
completed 1995
boundaries, completed 1998
Leaseholders, cooperatives,
Leaseholders,
Small farm producers
small subsistence farmers
Informal and formal contracts Informal contracts,share and
(share and cash rent contract)
cash rent contract
30-35% of production
12-20% of production
375 770
346 980
4.03
4.95
0.21
3.71
2.93
13.95
256
149
3.3
0.8
670
6 663
1 600
1 458
Land fragmentation in Bulgaria: an obstacle for land market development
41
In Plovdiv region, the agricultural producers have only few long-term contracts while most of
them are for short-term (Tab. 1). Most of the short-term contracts are informal. The main problems
for formalization of land transaction on the rental land market are the large number of landowners/
heirs, non-subdivided formally ownership rights between heirs and difficulties to find all landowners and to contract with them. It creates a problem for both, landowners and land users. The land
users have problems to sign formal contracts and to obtain the state subsidies. On the other hand,
landowners often do not receive the rent for their land. In the region, the share of rented land is
only 4.95% as the rent is mainly in kind with 12-20% of production.
By comparsing both regions, which are almost of the same size in terms of cultivated land, the
frequencies of land transactions within the region with a high degree of land fragmentation is
relatively higher than in the region with a low degree of land fragmentation. The land rental
transactions in both regions are mainly informal for short-time period while the long-term contracts
are often formal. Most of the large leaseholders and cooperatives use the support and services of
the local agricultural offices and administrative offices (mayor) for their land transactions (sales
and rentals), while the small subsistence farms rely on relatives, friends, and lawyers (in the case
of buying/selling land). Land transactions have increased over the time.
The situation in sales is different between regions. In Dobrich region, the leaseholders want to
buy land, but there are not many land transactions. In recent years, the landowners have stopped
selling their land because of expectations of the land price to increase after the EU accession. Now,
the average land price is 670 EUR/ha. The land market in the Plovdiv region is also weak. The land
price is higher compared to Dobrich region. The average land price varies between 1500-1700 EUR/
ha in Plovdiv. Important factors for the land price are the quality of land, access to irrigation
systems and the location of plots. The preferred land should be located near the populated places
or routes but such land is purchased mostly for the nonagricultural use.
Five years after the land restitution process was completed, the land users are still searching but
may have found a way to consolidate fragmented plots and to manage with unclear property rights.
The comparison between the regions with high and low degrees of land fragmentation shows that
Dobrich region had already found mechanisms to solve the problem with the land ownership fragmentation by dividing the land between land users, while in Plovdiv region this process just started.
The established informal rule of land use can be useful practice for land consolidation.
Conclusions
The agricultural reform in Bulgaria, resulted in the most severe land fragmentation, compared
to other CEEC. The land fragmentation is a serious problem in terms of ownership and use. The
land market data indicate that the process of fragmentation continues. The land fragmentation has
an impact on land market development. Some signs, however, suggest that a slow process of land
use consolidation have already started at a local level. In both cases it was apparent that rental
market prevails over sales.
In summary, land fragmentation in a country can be a barrier for sustainable development of
agriculture, farm efficiency and land transactions can be more complicated and more expensive in
land market. The land fragmentation in terms of ownership has a strong impact on economic
development and contractual choice between parties, while in terms of use affect farm efficiency.
Therefore, the role of the government is to support at least the rental market with clear legislative
regulations and to identify a mechanism to stimulate still not well functioning land sales.
Bibliography
Janvry A.G.G., Platteau J.-P., Sadoulet E. 2002: Access to land, rural poverty and public action. Oxford
University Press.
Furubotn E., Richter R. 1997: Institutions and Economic Theory. The Contribution of the New Institutional
Economics. Ann Arbor. The University of Michigan Press.
Hanisch M. 2003: Property Reform and Social Conflict. Shaker.
Hayami Y., Otsuka K. 1993: The economics of Contractual Choice. Oxford, Clarendon Press.
Kopeva D. 2002. Aspects of land consolidation in Bulgaria, FAO Comparative Study on Land Fragmentation in
Four CEEC. Bulgaria, Czech Republic, Hungary and Romania: 1-34.
Swinnen J.F.M. 1997: An explanation of land reform choices in Central and Eastern Europe: 1-32.
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V. Dirimanova
Williamson O. E. 1996: The mechanisms of governance. Oxford University Press.
Yanakieva I. 2001: The Agricultural Land Market in Bulgaria and the European Union Countries. Agricultural
Economics and Management, no 2, 31-37.
Streszczenie
Przedstawiono wp³yw grup praw w³asnoœci ziemi rolniczej na rozwój rynku ziemi rolniczej w Bu³garii. Przeanalizowano wp³yw ró¿nych grup praw w³asnoœci ziemi na rozwój gospodarki oraz transakcje wymiany sfragmentowanych dzia³ek ziemi, a tak¿e wybór poszczególnych typów kontaktów pomiêdzy sprzedaj¹cymi i kupuj¹cymi ziemiê. Rozwa¿ania prowadzono w perspektywie nowej instytucjonalnej ekonomii, w ramach której analizie
poddano transakcje zakupu, dzier¿awy b¹dŸ zamiany ziemi oraz podmioty transakcji. Dane empiryczne pochodz¹ z dwóch regionów administracyjnych Bu³garii o ró¿nych poziomach fragmentacji oraz ró¿nej strukturze
ziemi rolniczej. G³ównymi problemami, które s¹ nastêpstwami fragmentacji ziemi w badanych regionach s¹
zmiana specjalizacji produkcji, obni¿enie produktywnoœæ ziemi, problemy ze znalezieniem prawnych w³aœcicieli
ziemi, jak i mo¿liwoœci nielegalnego u¿ytkowania ziemi.
Address:
Dirimanova Violeta
Humboldt University Berlin, Faculty of Agriculture and Horticulture, Department of Agricultural
Economics and Social Sciences, Division of Resource Economics
Luisenstr. 56
10099 Berlin
Germany
Phone: +49 30 20 93 67 22
e-mail: [email protected]