This paper provides evidence from one of the poorest countries of the world that the institutions of property rights, in particular related to land, are of crucial importance for investment and growth. In Ethiopia, with all land state-owned, the threat of land redistribution never appears far off the agenda. A constitutional reform in 1996 has promised long-term user rights, and land rental and leasing have been made legal, but land rights remain restricted and the perception of continuing tenure insecurity remains quite strong. Using a unique panel data set including data on land right perceptions over time, this study investigates whether land rights affect household investment decisions, focusing on land allocation to coffee trees and other perennial crops. The period of investigation covers a period of change in land right perceptions after a constitutional change, a large scale but unexpected land redistribution episode in one region and a start to land registration in another region, offering exogenous variation to study the impact of tenure insecurity. Exploiting heterogeneity in the impact of the policy turmoil, including linked to the local political economy of land redistribution, the panel data estimates suggest a robust, causal negative impact of transfer rights on long-term investment in Ethiopian agriculture, contributing to the low returns from land and perpetuating low growth and poverty.
CSAE WPS/2007-07, 33 pp.