Global Food Security ∎ (∎∎∎∎) ∎∎∎–∎∎∎

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Global Food Security

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Growing advantage of large farms in Asia and its implications for

global food security
Keijiro Otsuka a,n, Yanyan Liu b, Futoshi Yamauchi c
a
National Graduate Institute for Policy Studies, Tokyo, Japan
b
International Food Policy Research Institute, Washington, DC, United States of America
c
World Bank, Washington, DC, USA

art ic l e i nf o a b s t r a c t

Article history: When the wage rate is low, a labour-intensive production method is chosen. Since it is costly to monitor
Received 5 November 2015 hired labourers in agriculture, small-scale farms dependent on family labour are more efficient than large
Accepted 6 March 2016 farms relying on hired labour. This leads to the inverse relationship between farm size and productivity, if
land markets do not reallocate land. When the wage rate increases, labour-saving and machine-using
production methods become efficient. If machinery and land are complementary and machines are in-
divisible to some extent, large-scale mechanized farms become more efficient, which tends to weaken
the inverse farm size-productivity relationship. This article argues that if small-scale farms continue to
dominate in the face of the increasing wage rate in Asia, many countries in this region will lose their
comparative advantage in agriculture.
& 2016 Elsevier B.V. All rights reserved.

1. Introduction observed (Otsuka, 2007).

Since first observed in Russian agriculture (Chayanov, 1926/
1986), the inverse relationship between farm size and productivity
has been widely observed in developing countries (for example,
Bardhan, 1973; Sen, 1975; Heltberg, 1998; Lipton, 2009; Hayami,
2001, 2009). Such observations point to small farms' higher pro-
duction efficiency compared with large farms, which is caused by
intensification of farming systems and the low cost of family la-
bour. Recently, such a relationship seems to have emerged in sub-
Saharan Africa, with the gradual intensification of farming systems
(Barrett et al., 2010; Carletto et al. 2013; Larson et al., 2014).
In order to operate large farms, hired labour must be employed,
whereas small farms mainly rely on family labour. Thus, the lower
production efficiency of large-scale farms in Asia can be attributed
to the high monitoring cost of hired workers in spatially dispersed
agricultural environments (Feder, 1985; Hayami and Otsuka, 1993).
However, the higher production efficiency of small farms does not
necessarily imply the existence of the inverse relationship because
land markets, if functioning effectively, will reallocate land from
large inefficient farms to small efficient farms, so that the in-
efficiency associated with farm size will be eliminated. Indeed,
land rental markets generally function effectively in Southeast
Asian countries because of the absence of distortive land reform
programs, so that the inverse relationship has seldom been
Although small farms in Asia achieved higher productivity than
their larger counterparts in the past, they are facing more and
more challenges as structural transformation has been occurring
in most developing countries in Asia. In these countries, the rapid
growth of the non-farm sector has created more lucrative em-
ployment opportunities, which has resulted in a higher real wage
in both farm and nonfarm sectors. Coupled with technological
advances in manufacturing industries, the price ratio of labour to
machine use is increasing, which renders the substitution of la-
bour by machine profitable. The rapidly growing machine rental
markets in China and Vietnam represent a response to such trends
in recent decades (Liu et al., 2013; Zhang et al., 2011). As farming
systems gradually change from labour-intensive to capital-in-
tensive systems, the advantage of small farms relying on family
labour is declining, while large farms' advantages are enhanced by
the use of farm machinery. Indeed, large farms were more pro-
ductive than small farms in agriculturally advanced regions of
India, such as Punjab and Haryana, by the early 1980s (Jha and
Rhodes, 1999; Jha et al., 2000). A more recent study by Foster and
Rosenzweig (2010) also finds that large farms have become more
productive than small farms in India with the introduction of farm
machinery as a response to rising labour costs. Cross-country

n
Corresponding author.

http://dx.doi.org/10.1016/j.gfs.2016.03.001
2211-9124/& 2016 Elsevier B.V. All rights reserved.

Please cite this article as: Otsuka, K., et al., Growing advantage of large farms in Asia and its implications for global food security. Global
Food Security (2016), http://dx.doi.org/10.1016/j.gfs.2016.03.001i
2 K. Otsuka et al. / Global Food Security ∎ (∎∎∎∎) ∎∎∎–∎∎∎
4 2. Factors affecting optimum farm size
Average operational farm size (ha)
3
2 this case, land-labour ratios will be equalized among farms in all
1 members of labour-abundant and land-scarce households will
0
1970 1980 1990
Year
China
Bangladesh
Indonesia
Thailand
Fig. 1. Change in operational farm size in selected countries in Asia.
panel-data analyses of the impacts of farm size on productivity by
Otsuka et al. (2013) also indicate the growing efficiency of large
farms, where real wages are high. Thus, it seems reasonable to
hypothesize that larger farms are currently more efficient than
smaller farms in some parts of Asia.1
This article undertakes a comprehensive literature review in
order to identify factors that explain the changing relative ad-
vantage of small vs. large farms. It is shown that the existing
studies pay attention primarily to static effects of soil quality dif-
ferences, measurement errors, and factor market imperfection.
Unlike our previous study which reports the changing relationship
between farm size and crop yield in selected countries in Asia
(Otsuka et al., 2016), this study emphasizes institutional changes
responding to the increasing wage rate and growing advantage of
larger farms, (e.g., development of machinery service markets and
consolidation of small farms by county governments in China).
Obviously, whether farm size increases in Asia is a serious is-
sue. Fig. 1 shows changing operational farm size in seven selected
Asian countries: Bangladesh, India, Indonesia, Philippines, Thai-
land, China, and Japan. The average operational farm size was al-
ready small in the 1970s, ranging from one hectare in Indonesia
and Japan to three or four hectares in the Philippines and Thailand.
It has declined in subsequent periods in all these countries except
in Japan, because of rapid population growth in rural areas. Farm
size increased in Japan but it is far below the average farm size in
high-income economies in Europe and North America where
farms of more than 100 ha are common. If small farms continue to
dominate and become a major constraint on large-scale mechan-
ization in high-wage Asian economies, the continent could be-
come a gigantic importer of food grains. This has already hap-
pened in high-income economies in Asia, such as Japan, Taiwan,
and South Korea (Otsuka, 2013).2
The next section reviews theoretical studies that explain the
small farm advantage and identifies critical conditions under
which small farms can be more efficient than large farms. In
Section 3, we review recent evidence on the increasing efficiency
of large farms, mainly reported from Asian countries. In Section 4,
we conclude by drawing policy implications.
1
Large-scale corporate farms have emerged in land-abundant countries in
Latin America, Eastern Europe, and Central Asia, where scale economies prevail
(Deininger and Byerlee, 2012).
2
Other compelling reasons that contributed to the change observed in the self-
sufficiency ratio of cereals in Japan include the massive appreciation of the yen and
the dietary diversification.
Please cite this article as: Otsuka, K., et al., Growing advantage of large farms in Asia and its implications for global food security. Global
Food Security (2016), http://dx.doi.org/10.1016/j.gfs.2016.03.001i
If one of three markets – land rental, land sale, or labour – is
perfectly competitive, an equally efficient allocation of resources
among farming households can be achieved in equilibrium.3 In
three cases (Kevane, 1996). For instance, if labour markets work,
work for land-abundant households. In contrast, if either land
sales or land rental markets work, labour-abundant households
will either purchase or rent in land from land-abundant house-
2000 2010 holds. In practice, however, it is likely that labour and land sales
markets do not function efficiently.
Japan Large farmers employ hired labour because of the limited en-
India
dowment of family labour relative to owned land. According to
Philippines
Feder (1985) and Eswaran and Kotwal (1986), hired wage la-
bourers do not work diligently without incurring high supervision
costs by landowners, because fixed daily wages do not give strong
work incentives to hired labourers. While piece-rate labour con-
tracts (for example, based on area ploughed and amount of pro-
ducts harvested) are common, they may induce quality shirking, as
the quality of work is not amenable to easy supervision in spatially
dispersed agricultural environments. This is the case particularly
for the tasks that require care and judgment, such as land pre-
paration, fertilizer application, and water and pest control (Hayami
and Otsuka, 1993). Furthermore, the supervision cost of hired la-
bour contracts is expected to increase more than proportionally
with farm size. Imperfect supervision leads to inefficiency of large-
scale farm operations dependent on hired labour employment. To
avoid the high monitoring cost of hired labour, some landowners
may adopt labour-saving and machine-using production methods.
This often involves machines that are not divisible into smaller
scales, which tend to entail scale economies. However, such
technology choice is obviously costly in low-wage economies
where labour is relatively cheap. Therefore, the high enforcement
cost of hired labour will lead to the lower production efficiency of
large farms.4
It is well known that land sales markets are inactive in many
places. Binswanger and Rosenzweig (1986) argue that since land
can be used as collateral for obtaining credit, the price of land
exceeds the present value of future agricultural profits accrued to
land by the amount of benefit accrued from the collateral value.
Thus, buyers of land cannot cover the cost of land purchases solely
from future agricultural profits. In order for land transactions to
take place, buyers must have sufficient funds to purchase land.
Land prices may be also higher than justified by their agricultural
returns if people expect land values to rise because of increasing
nonagricultural land demand and subsidy policies (Robison et al.,
1985; Brandao and Rezende, 1992; Gunjal et al., 1996). Moreover,
some farmers regard their land as a family heirloom; something to
be kept in the family and not traded.
Thus, in practice, land rental through tenancy contracts is the
most common way of adjusting the allocation of land among rural
households with different factor endowments, given the relatively
less efficient functioning of land sales and labour market trans-
actions (Skoufias, 1995). However, land rental also entails trans-
action costs associated with the search for contracting partners,
negotiation of the terms and conditions, their monitoring, and
sanctions against breach of contractual agreements. The transac-
tion costs are substantially higher with the existence of insecure
land tenure, because there is no assurance that rented land will be
3
To be strict, we need the assumption that the production function is subject
to constant returns to scale.
4
Production on large farms is technically and allocatively inefficient due to
high monitoring costs and socially excessive use of agricultural machineries.
 K. Otsuka et al. / Global Food Security ∎ (∎∎∎∎) ∎∎∎–∎∎∎
returned to landowners (Holden et al., 2013). Some land reform
laws, such as land-to-the-tiller programs in which the owned land
in excess of a ceiling is supposed to be transferred from the
landowners to the tenants, suppress land rental transactions.
Consequently, Asian agriculture is dominated by owner-cultivated
family farms operating alongside relatively small areas of rented
land (Hayami and Otsuka, 1993). Feder (1985) and Eswaran and
Kotwal (1986) also attribute the prevalence of self-sufficient
owner-cultivated farms, that neither rent in nor rent out land, to
the inefficiency of credit markets in which poor but potentially
productive tenants cannot obtain sufficient funds to pay for pur-
chased inputs for rented land.5
We implicitly assume that there is no information asymmetry
about the quality and safety of products. In the case of high-value
agricultural products, such as vegetables, fruits, and livestock
products, retailers and consumers may not be able to identify their
quality and safety easily. In such cases, contract farming is often
adopted, which is designed to guarantee the quality and safety of
products by the provision of inputs and technical services by the
contractor. Since the transaction cost is lower for the buyer to
contract with a small number of large farms than a large numbers
of small farms, large farms would have advantage over small-scale
farms. This article, however, focuses on the production of food
grains, whose quality variations are relatively small and so spot-
market transactions are common.6
When the wage is sufficiently low, the labour-intensive and
family labour-based cultivation method is more efficient. Thus, the
inverse relationship between farm size and productivity will be
observed where efficient small-scale farms and inefficient large
farms coexist. When the wage rate increases substantially relative
to machine rental, however, the efficient production method
changes from the labour-intensive to the labour-saving method by
substituting labour by machines. However, it is uneconomical for
small farms to introduce large machinery, which is most likely
indivisible and, therefore, cannot be used efficiently on small
farms. Large farms can also have easier access to credit and savings
and therefore enjoy lower costs of funds for purchasing and/or
leasing machinery (Feder, 1985). As a result, small farms face
higher costs of mechanization due to credit market imperfections.7
As labour becomes more costly, small farms' advantage of effi-
ciently using family labour declines and large farmers' advantage
arising from scale economies due to machine use increases. Con-
sequently, the inverse relationship is weakened or may even be
reversed as the optimum farm size becomes larger.
Recently, we also observed an evolution of machine service
providers as an institutional response to reduce the user cost of
machine use. For example, in China (Yang et al., 2013), small farms
can contract with the provider to use machine services, rather
than renting in or purchasing machines, in order to save on labour
costs. By contracting with a large number of small farms, the
provider can enjoy scale economies, provided that the transaction
cost of machine service provision is sufficiently low. If it is high,
small farms cannot save labour as much as large farms.
It is still also possible that farmland consolidation can be fa-
cilitated by market transactions as well as institutional arrange-
ments. Historically, consolidation was largely achieved through
market transactions in many of the Organisation for Economic Co-
operation and Development (OECD) countries. Recently in China
where land transactions are seriously constrained by the in-
security in farmers' individual land rights, farm land rental
5
However, landlords often provide credit to their tenants, particularly under
share tenancy (Otsuka et al., 1992).
6
See Otsuka et al. (2016a) for a recent literature review of contract farming.
7
A similar argument holds in the discussion of industrial duality observed
between large and small firms.
Please cite this article as: Otsuka, K., et al., Growing advantage of large farms in Asia and its implications for global food security. Global
Food Security (2016), http://dx.doi.org/10.1016/j.gfs.2016.03.001i
3
arrangements are facilitated online by county governments in
some provinces such as Chongqing. In some areas, land banks are
also established to facilitate borrowing and lending (renting-in
and renting-out) of farmland. In this way, farm size expansion is
taking place in China (Huang and Ding, 2015).
In sum, when the real wage rate is low, the optimum farm size
is small and the inverse correlation between farm size and pro-
ductivity tends to emerge. When the wage rate increases, me-
chanization will take place to save labour. If machines and land are
complementary and machines are indivisible to some extent, the
optimum farm size tends to increase. If farm size adjustments take
place smoothly through market transactions and institutional ar-
rangements, only efficient large farms survive. In practice, land
markets may not function smoothly, so a positive relationship can
arise between farm size and productivity in high-wage economies.
3. Emerging advantage of large farms in Asia
This section examines the validity of our arguments developed
in the previous section by drawing on recent empirical evidence
mainly available from Asian countries. They include case studies in
Indonesia (Yamauchi, 2016), Vietnam (Liu et al., 2013), India
(Deininger et al., 2014), and China (Wang et al., 2014a). These re-
cent studies explicitly look at the impact of rising real wages on
land and machine service transactions and the dynamically
changing advantage of small farms (or the emerging advantage of
large farms). This is a major departure from the earlier literature
that assessed factors that were considered to explain the inverse
relationship between farm size and productivity observed in cross-
sectional data.
The existing empirical tests on the inverse relationship are
grouped into several types. The first type investigates whether the
advantage of small farms can be attributed to imperfect factor
markets, particularly labour market. Our primary hypothesis is
related to this. The second test inquires whether unobserved fac-
tors such as soil quality can explain the inverse relationship if such
factors are unevenly distributed between small and large farms
(Benjamin, 1995). The third is concerned with the impact of
measurement errors of farm size on the inverse correlation be-
tween farm size and productivity (Lamb, 2003).
Classical studies basically support the first hypothesis. For ex-
ample, Carter (1984) found the inverse relationship in Haryana in
1969/70–1971–72 using household data, even after controlling for
village fixed effects and possible selection bias. Deolalikar (1981)
also observed the inverse relationship between yields and farm
size using district level data in India 1969/70–1971–72, particularly
in districts without the adoption of new green revolution tech-
nology. Barrett et al. (2010) simultaneously tested two hypotheses:
the imperfection of the labour market and unobserved soil quality
using rice production data from Madagascar. Employing precise
soil quality measurements and including hired labour as a control
variable in their production function specifications, their empirical
results show that only a small portion of the inverse productivity-
size relationship is explained by labour market imperfections and
none of it seems attributable to the omission of soil quality mea-
surements. Carletto et al. (2013) used geospatial and self-reported
data on plot size to identify the magnitude of measurement error
attenuation bias related to farm size. Their results show that such
bias alone is not significant enough to generate the inverse re-
lationship. By using a precise measurement of plot size, the inverse
relationship becomes even more robust in their study. Note that
both studies use data from Africa, where measurement error is
likely be large and tasks carried out by hired labourers are rela-
tively simple.
Since the existing studies analyze the static effects of factor
4 K. Otsuka et al. / Global Food Security ∎ (∎∎∎∎) ∎∎∎–∎∎∎
market imperfections, soil quality, and measurement error, they do
not pay attention to possible changes in the relationship between
farm size and productivity over time. Most parts of Asia today are
experiencing rapidly rising real wages even in the rural areas due
to rural-urban migration and resultant labour shortages. Such a
dramatic change in the real wage in the region offers a quasi-
natural experiment to test our hypotheses that the wage rate plays
a pivotal role in the relationship between farm size and
productivity.
Some recent studies explicitly use a change in the real wage to
look at changes in land and machine inputs and the relationship
between farm size and productivity.8 Indonesia is an interesting
case for the purpose of our study due to the coexistence of small
farms in Java and relatively large farms in the outer islands. Ya-
mauchi (2016) examines the dynamically changing patterns of
land use, capital investments, and real wages by using farm
household panel data from seven provinces collected in 2007 and
2010. His regression analyses show that an increase in real agri-
cultural wages induced the substitution of labour by machines,
either through machine rentals or machine service providers,
notably among relatively large farmers. The total amount of pay-
ments for hired-in machines (and/or services) has increased sig-
nificantly in response to rising real agricultural wages, especially
among relatively large farms. They tend to increase the scale of
operation by renting in more land when real agricultural wages
increase. Furthermore, the effect of an increase in farm size on
crop productivity becomes positive among relatively large farms.9
Thus, the Indonesian case study clearly supports our hypothesis
that the efficiency of large farms increases with rising real agri-
cultural wage rates.
The case of Vietnam is similar to that of Indonesia. Liu et al.
(2013) use data from 1992 and 1998 Vietnam Living Standards
Surveys (VLSS) and from four rounds of Vietnam Household Living
Standards Surveys (VHLSS) between 2002 and 2008 to investigate
machine use and the farm size-productivity relationship from the
1990s to the 2000s. Descriptive analysis suggests that tractor
rental has become more common. In 2008 more than 60% of farms
rented in machines, whereas less than 20% did so in 1992. Rapid
increase in tractor use would be associated with an increase in the
relative advantage of large farms. Consistent with such an ex-
pectation, large farmers are more likely to use agricultural ma-
chines, pointing to the scale economies arising from machine use.
Interestingly, machine use is not responsive to the real agricultural
wage in 1992/98 but becomes significantly responsive in 2006/08,
suggesting the emergence of clear substitution effects between
machine and labour in recent years when the wage rate increases.
Such differences may be attributed to the development of machine
rental markets over time. The estimation results of the paddy yield
regression demonstrate that the inverse relationship between
farm size and land productivity has significantly lessened: when
farm size doubles, the expected paddy yield is estimated to have
decreased by 15.6% in the 1990s but only by 6.1% in the late 2000s.
Thus, the inverse relationship is lessened but not reversed. Yet,
another interesting finding is that the inverse relationship may be
reversed in areas where farm size is larger and the wage rate is
higher. This indicates that a positive relationship has emerged
between farm size and productivity in advanced areas where the
wage rate is higher. This result is also consistent with the ob-
servation of Estudillo and Otsuka (2016) that the average farm size
among their sample households increased from 1.0 ha in 1996 to
8
The rest of this section draws on Otsuka et al. (2016a).
9 10
Crop productivity is measured by the value of production of a mixture of
crops. Using the panel data, the estimated equation is first differenced, so that fixed
components are controlled for. The same approach is applied to the analysis in
China.
Please cite this article as: Otsuka, K., et al., Growing advantage of large farms in Asia and its implications for global food security. Global
Food Security (2016), http://dx.doi.org/10.1016/j.gfs.2016.03.001i
1.4 ha in 2009 in the Mekong Delta region.
Using data from three-rounds of nationally representative
household surveys in India, Deininger et al. (2014) examine the
change in the inverse relationship between farm size and land
productivity from 1982 to 2008. During this period, the real agri-
cultural wage rose from 20 rupees per day to 47 rupees per day.
Their major finding is that the inverse farm size-productivity re-
lationship significantly weakened.10 Further analyses exploring
the mechanism underlying the changing relationship suggest that
increases in real wages cause farmers to use more machines and
employ less labour input. Similar to the cases of Indonesia and
Vietnam, larger farmers are more responsive to increases in wages
and actively substitute labour by machines.
Furthermore, the authors test for separation of labour supply
and labour demand decisions of farm households following Ben-
jamin (1992) and find that the labour market became more effi-
cient over time. They also examine the relative effectiveness of
family labour and hired labour. They find that while family labour
was more efficient than hired labour in the early period (1982–99),
the efficiency difference disappeared in the later period (1999–
2007). They attribute this to the ease of supervising hired labour in
mechanized farming systems. First, compared with a traditional
labour-intensive farming system, a capital-intensive farming sys-
tem likely requires a smaller number of skilled labourers, whose
task is to operate machines. Second, wage increases lower the ratio
of hired labour to family labour, which in turn leads to more ef-
fective supervision of hired labour.
In China, the economy has been rapidly growing over the last
three and a half decades, and the wage rate has been rising shar-
ply, particularly since 2003 (Zhang et al., 2011). Correspondingly,
the use of riding tractors and combine harvesters is increasing
(Yang et al., 2013). Yet the average farm size remained at 0.6 ha in
2010, increasing only by 0.05 ha per year since 2000, even though
land rental markets have become increasingly active (Kimura et al.,
2011; Huang et al., 2012). More recently, Huang and Ding (2015)
point out that farm size in China is somewhat underestimated.
Using farm household panel data from China, collected in six
provinces in 2000 and 2008, Wang et al. (2014a) analyze the dy-
namic changes in land transactions, machine investments, and the
use of machine services. Their study looks at the effects of non-
agricultural and agricultural wage growth, changes in the migra-
tion rate, and the proportion of non-agricultural income, all of
which are estimated at the village level, on changes in self-culti-
vated farm size, rented-in land areas, machine services used, and
machine investments. The regression results show that increases
in non-agricultural wages, the proportion of non-agricultural in-
come and the migration rate lead to the expansion of the opera-
tional farm size. Consistently, the demand for machine services
also increased along with increases in agricultural wages and
migration rates. This effect is larger for relatively large farms.
As shown in the Indonesia study, the regression results of crop
income equations support the hypothesis of complementarities
between rented-in land and machine services demanded, espe-
cially among relatively large landholders. In other words, the
possibility of renting in land and the availability of machine ser-
vice providers led to expansion of farm size to take advantage of
scale economies.
Wang et al. (2014b) used province-level crop-wise panel data
to investigate the substitutability between agricultural labour and
machine use. They provided evidence that supports the conjecture
that machines are increasingly used to substitute for agricultural
Yield refers to the total output value per hectare, which is deflated by the
output price index using 1999 as the base year. The output price index is generated
using a weighted average of prices of all types of outputs in the sample using the
quantities as weights.
 K. Otsuka et al. / Global Food Security ∎ (∎∎∎∎) ∎∎∎–∎∎∎
labour under the circumstances where the real wage has been
rapidly increasing. To know more about the relationship between
the availability of machine service providers and/or machine
rentals and the activation of land rental markets, Wang et al.
(2015) used the same household panel as in Wang et al. (2014a),
collected from six provinces. Interestingly, land rental markets
seem to be more active if machines, either from rental arrange-
ments or service providers, are available. Farmers' willingness to
rent in and out land is more responsive to actual demand and
supply conditions if machines are accessible. That is, the possibility
of renting in land and the availability of machine service providers
are jointly important to the possible realization of scale
economies.
Two recent movements deserve special attention. First, in
northeast China, machine service providers directly attempt to
consolidate farmland by renting in land from smallholders to
realize scale economies. However, such land rental contracts with
small farmers are mainly short term and often subject to annual
renewals, because small farmers feel insecure renting out their
land under long-term contracts due to the lack of private land
ownership. They also expect the land rent to increase over time
and thus hesitate to sign long-term contracts. Second, recently,
farmland rental arrangements are facilitated through the internet
by county governments in some provinces such as Chongqing. The
internet-based land rental platform seems to be increasingly in-
troduced in other provinces too. In all likelihood, these new in-
stitutional arrangements are induced by increasing the optimum
size of farm operation in China.
In contrast to the conventional view of the small-farm ad-
vantage, the evidence shown above supports the hypothesis of
dynamic changes in the relative advantage between small and
large farms in Asia. That is, the inefficiency of small farms in-
creases with rising real wages, whereas large farms increase their
productivity by utilizing large-scale machines efficiently, saving
increasingly costly labour, and thereby realizing scale economies.
4. Concluding remarks
It is clear that, in Asia, responding to rising wages, labour has
been substituted by machines primarily through the machinery
rental market. This, in turn, stimulates farm size expansion,
usually through land rental markets. It is likely that these changes
have weakened the inverse relationship between farm size and
productivity, or even reversed it, especially on large farms, because
mechanization confers scale advantages. If the real wage rate
continues to increase in high-performing countries in Asia, as it
certainly will, eventually a clear positive relationship between
farm size and farming efficiency will emerge, as in the case of
Japan (Otsuka, 2013). This means that these countries need to
expand farm size in order to maintain competitiveness in
agriculture.
A major constraint on farm size expansion is land reform pro-
grams and land laws which tend to suppress functioning of land
markets (Hayami and Otsuka, 1993; Otsuka, 2007; Holden et al.,
2013). A good example is land-to-the-tiller programs implemented
in India, Nepal, and the Philippines, which are designed to transfer
land from large landowners to landless or near landless tenants.
Given the inverse relationship between farm size and productivity,
the transfer of land under a land-to-the-tiller program could en-
hance both efficiency and equity. But this program reduces in-
centives for a large number of small landowners to rent out land to
a small number of large farmers so as to facilitate land con-
solidation (Otsuka, 2007).
It is now time for policymakers in Asia to consider ways to
facilitate farm size expansion. This is a major challenge as it may
Please cite this article as: Otsuka, K., et al., Growing advantage of large farms in Asia and its implications for global food security. Global
Food Security (2016), http://dx.doi.org/10.1016/j.gfs.2016.03.001i
5
be politically difficult to justify the transfer of land from small-
holders to large farmers. In fact, the government of Japan at-
tempted to expand farm size without notable success (Hayami,
1988) and the result was loss of comparative advantage in agri-
culture due partly to policy induced market distortions. The self-
sufficiency ratio of cereals decreased from 70% to 80% to around
30% for the last several decades, even though cereal production
has been heavily protected (Otsuka, 2013). Ironically a series of
econometric studies on the production structure of Japanese
agriculture by Kuroda (1987, 1988a, 1988b, 1995) report the
emergence of significant scale economies.
In China, although land rental markets have developed sig-
nificantly, the remaining insecurity of land rights may deter farm
size expansion. The government has taken several measures to
facilitate land rental transactions, land consolidation, and farm
size expansion. Rada et al. (2015), however, point out that sub-
sidies for farm size expansion are distortive and do not lead to
efficiency gains at this stage. Land registration, titling and the es-
tablishment of rural land banks are two recent prominent mea-
sures. All rural land, including residential and collectively-owned
land, was registered and titled in Sichuan Province beginning in
2008, and the process appears to have contributed to higher land
security and increased land rental transactions (Deininger et al.,
2015). Rural land banks have been piloted in several provinces
since the late 2000s. They have the potential to improve land
market efficiency and increase operational farm size by con-
solidating fragmented land plots deposited by small farmers and
lending them to large farming or agricultural enterprises (Wang
et al., 2014).
Demand for agricultural products in high-performing countries
in Asia has been shifting from cereals to livestock products, which
require larger amounts of cereals for animal feeds. If farms size
expansion does not take place in these Asian countries, the supply
of cereals will fall short of demand. Thus, they are likely to become
major importers of cereals. Since China, India, and Indonesia are
gigantic countries, the absolute amount of imported cereals can be
huge. This in turn implies a significant imbalance of global food
demand and supply, which would result in large increases in
cereal prices, which will disproportionately affect the poor
throughout the world. In order to avoid or mitigate such an im-
balance, there is an urgent need to change land polices so as to
facilitate farm size expansion in Asia.
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