The Fable of Land Reform: Leases and Credit Markets in Occupied Japan

• DOI: http://doi.org/10.1111/jems.12110
• Date: 01 October 2015
• Author: J. Mark Ramseyer
• Published date: 01 October 2015

The Fable of Land Reform: Leases and Credit

Markets in Occupied Japan

J. MARK RAMSEYER

Harvard Law School

Cambridge, MA 02138

ramseyer@law.harvard.edu

Development officials and scholars routinely argue that land reform can raise productivity. It

may not always do so, they write, but it can—and during 1947–1950 in Japan it did. Land reform

may sometimes raise productivity, but it did not raise it in Japan. The claim that it did is a fable,

a tale people tell and re-tell only because they wish it were true. A lease is a credit transaction—a

way for local elites (tied to local information networks in ways that banks can never be) to extend

funds to farmers. Elites could lend money directly, but would need to create a security interest to

protect their loans. Doing so requires legal procedures, however, and most local elites in prewar

Japan lacked the university education necessary to manipulate those procedures. By contrast, a

lease lets local elites protect their funds simply by retaining the right to evict tenants who fail to

pay. As such, it represents a way for investors and farmers jointly to economize on credit market

costs. The Japanese land reform program effectively banned this transaction-cost economizing

credit-market strategy, expropriated the wealth of the investors who used it—and cut the rate of

growth in agricultural productivity.

1. Introduction

The end came in August. The war had been long and it had been brutal, but it came to an

abrupt close in the summer of 1945. To govern the now-defeated Japan, U.S. President

Harry Truman sent Army General Douglas MacArthur. Over the course of the next

several years, MacArthur’s staff (SCAP, for the Supreme Commander of Allied Powers)

would dictate the terms of a draconian “land reform” program. In 1941, Japanese farmers

had cultivated 5.81 million hectares (1 hectare =10,000 square meters, or 2.47 acres). Of

that amount, they had owned 3.13 million hectares (54%) and rented 2.68 million (Nochi,

1957, 647; Teruoka, 2003, 133). They had farmed 3.17 million hectares of irrigated rice

paddies. Of that, they had owned 1.48 million hectares (47%) and rented 1.69 million

(id.).

Through the Japanese government, MacArthur’s staff expropriated 1.76 million

hectares (66%) of the rented land from its owners and gave it to its renters. For obvious

rhetorical ends, they spoke of taking the land from the “feudal” and “parasitic” landlords

and giving it to their “immiserated” “peasants.” Of the rented paddies, they expropriated

996 thousand hectares (59%). Nominally,the Japanese government paid for the land and

The author gratefully acknowledges the generous financial support of the Harvard Law School, and the

helpful comments and suggestions of Penelope Francks, Sheldon Garon, Tom Ginsburg, Andrew Gordon,

John Haley, Todd Henderson, William Hubbard, Temple Jorden, Heiko Karle, Yoshiro Miwa, Carl Mosk,

Richard Smethurst, Frank Upham, David Weinstein, and participants in workshops at ETH Zurich, Harvard

Law School, the Japanese Law & Economic Association, Northwestern University, Tel Aviv University, the

University of Chicago, YaleUniversity, and the referees and editors of this journal.

C2015 Wiley Periodicals, Inc.

Journal of Economics & Management Strategy, Volume24, Number 4, Winter 2015, 934–957

The Fable of Land Reform 935

resold it to the renters. In truth, it paid so little that it effectively “took” the land. It

charged so little that it effectively gave it away.

Scholars immediately declared the program a “success,” and in the academic imag-

ination a success it has remained ever since. Six decades past, it continues to inspire de-

velopment scholars and officials at the WorldBank and United Nations. At the hands of

men like Robert Mugabe, “land reform” elsewhere has often lurched from blood bath to

famine. In the development literature, the Japanese program has stood guard to the faith

that it need not be so. Done right, land reform can indeed spur agricultural productivity.

In fact, the standard account of Japanese land reform is a fable—a tale people

apparently tell and re-tell only because they wish it were true. The Japanese program

did not speed productivity growth. Instead, it slowed it. In many areas, the leases had

served as the preferred mechanism by which investors extended credit to farmers. Land

reform blocked this mutually advantageous option for finance, expropriated the wealth

of the investors who had used it, and—in the process—slowed the rate of productivity

growth.

Farmers in pre-war Japan faced two potential sources of funds: local elites and

banks. Of these, the local elites had the informational advantage. They knew the potential

borrowers, the land, the weather, the agricultural technology. If they advanced money

directly as a loan, however, they needed to create a security interest in the land that the

farmer bought with it. Literate and numerate as these investors assuredly were, most

lacked the university education necessary to manipulate the legal procedures involved

in creating security interests. Banks had the university-trained officers who could create

the security interests, but they were not local. As outsiders, they lacked the informational

edge in the local credit market that the village elites enjoyed.

Leases gave local investors a simple but effective way to protect their funds. Rather

than lend farmers the money directly, they bought land with the funds and leased it.

If a farmer defaulted on the rent, they evicted him and moved on. The process was

easy to understand, and simple to enforce. Through it, the funds moved to the farmers

who presented the best projects, and farmers and investors jointly economized on the

transaction costs inherent in credit market arrangements anywhere.

Post-land-reform, farmers owned almost all the land, but lost their access to addi-

tional capital. Post reform, they were richer than they had been, but no longer had access

to the extra funds they needed to maintain their fields or adopt new technology. Cited

regularly as an example of the way redistribution can increase the rate of productivity

growth, the Japanese land reform program slashed it. That it did so need not imply that

a better-designed program might not raise productivity somewhere else. But in Japan,

land reform slowed the rate of productivity growth.

I begin by exploring the literature on the economics of agricultural land tenure

(Section 2). I describe the Japanese farming sector in the immediate pre-war period

(Section 3.1), and SCAP’s land reform program (Section 3.2). I recount the “fables” about

both pre-war land tenure and post-war land reform (Section 3.3). In Section 4, I turn

to the empirics.1If, as development officials insist, land reform increased incentives

to produce, then productivity gains should have been largest in the areas where the

government transferred the biggest fraction of land. Instead, they were smallest. I close

1. My data are prefecture (the equivalent to the states in the United States) level; for many variables, this

is the smallest unit available. Unfortunately, this prevents me from examining variation within prefectures,

and the small n precludes IV specifications.