How much land should a government own?
Updated: Dec 30, 2022
Land, as one of the four main factors of production, is often a point of contentious debate between those on the economic right and economic left. The former claim that private property rights are the cornerstone of economic development, and incentivize investment while generating tax revenue for the government; [1] Meanwhile, the latter highlights socio-economic issues caused by the present private land market, such as excessively high prices leading to the holdout problem [2] as well as housing market crises contributing to a cost of living crisis throughout the world. [3] Both arguments have some degree of merit, and there are examples of nations with varying degrees of state land ownership with vibrant economies; it is important to analyse, therefore, whether this economic success is because of, or despite, a particular nation’s land ownership structure. [4]
Agriculture, at first glance, seems to be a prime example of the necessity of private land ownership. The Communist experiment of the previous century highlighted how collectivism and full government direction of agricultural land backfired spectacularly, leading to famine and decollectivization in a matter of decades for most Communist nations. [5] Today, secure access to land tenure and the granting of private property rights to farmers (who in many parts of the developing world encroach on public lands) is seen as one of the best ways to boost productivity, income, and overall welfare. [6] In Sri Lanka, high state land ownership (82.25% of total land area) [7] is seen as a major detriment to agricultural productivity and efficiency; the state attempts to control the amount of land area owned by a single individual (which prevents economies of scale and mechanisation from developing) [8], and even goes as far as to direct farmers on what type of crop they can grow and how they can grow it [9] - preventing a shift to higher margin crops and advanced agricultural techniques. Furthermore, individuals who farm on open-access regimes or on land to which they do not have tenure, are not incentivized to properly care for it and prevent degradation in the long run. This is the case in Sri Lanka, [10] particularly in the case of land under very short-term leases, and in Pakistan, where an informal institutional culture and large bureaucracy have undermined the strength of property rights and have contributed to degradation. [11] Despite all of this, it should be noted that there is a risk of the role of private property rights being overemphasised. In Ghana, for example, poor land tenure systems have traditionally been blamed for poor output; however, this overlooks social and environmental factors, such as the lack of female input in land-use decision-making despite heavy female involvement in the sector. [12] Furthermore, China, despite having 100% state-land ownership (land is distributed on long-term leases) has enjoyed dramatic growth in agricultural productivity; [13] this may be due to the prevalence of longer-term leases (which grants farmers an incentive to invest in future land development) but also due to high state investment in irrigation and new technologies, marketisation reforms, etc. [14]
The case of housing is one where a strong case for high government land ownership presents itself. The house price-to-earnings ratio in the United Kingdom has reached over 7.0 in 2021, up from about 3.5 in 1983; in London, it’s over a staggering 11.0 (up from 4.0 in 1983). [15] This stratospheric rise in housing prices (often attributed to ZIRP followed by many global Central Banks) [16] has made homeownership a pipe dream to many Millennials and Generation Zers. Some may point to the Japanese model, where strong national control of zoning regulations and pro-tenant legislation has kept rental prices relatively flat for decades; however, housing and land prices have been rising dramatically in Japan as well (who can forget that brief period in the 1980s when the Imperial Gardens in Tokyo were worth more than the entire state of California) [17] and the stagnation can be partially attributed to the declining Japanese population - something that is not replicable in most parts of the world. The superior solution, therefore, may lie in Singapore. Although Singapore’s development has followed a market-oriented strategy, it (like many of the other high-performing Asian economies) has involved a significant amount of government intervention and direction. This has included the significant acquisition of land - 90% of which is now state-owned and available for lease to businesses and individuals. [18] More significantly for the housing debate, this has allowed for public housing to be constructed en masse and sold to Singaporeans with a 99-year lease below market value; although the resale of those properties is restricted, it can occur after five years, which allows all Singaporeans to build wealth and have a stake in the nation’s development. [19] Contrary to much of the rest of the world, where public housing is seen as a measure of last resort for the less well off, 80% of Singaporeans live in public housing and it is very much the norm. [20] Despite these rosy tales of success for all stakeholders arising from state ownership of land, it should be remembered that Singapore is a tale of careful and pragmatic management. In China - where the state owns 100% of all land - the housing crisis is one of the worst in the world, is a significant threat to national economic stability, and has led to situations where entire cities are being built without residents purely as an investment vehicle for homeowners; [21] this is arguably an even worse situation than in the West and arises from simultaneously too much (a lack of investment opportunities on the mainland driving an inflated housing market) and too little (insufficient oversight over housing developers) state involvement.
Property rights have traditionally been seen as an economic growth engine; in Latin America, they are positively correlated with both economic development but also other metrics of individual well-being. [22] A strong entrepreneurial process without well-defined property rights and strong institutions could simply result in economic stagnation or decline, as the market process relies on it for vibrant competition and creative destruction. [23] Rights to land, as one of the main types of property and factors of production, are arguably particularly influential in ensuring economic growth. Particularly in agrarian societies, land, apart from being the main source of a person’s livelihood, is often also the main means by which they accumulate and pass down wealth. [24] Land can also be used as collateral, which both drives future investment and develops the financial and capital markets of a nation. [25] Finally, the ability of unencumbered land to be sold, rented, or leased out to the highest bidder is a classic example of the distribution of resources by the market, and the ability of a nation’s institutions to facilitate this as cheaply and swiftly as possible will be a major driver of its investment and future growth; Sri Lanka’s bureaucratic and expensive to navigate land markets have contributed greatly to its poor position on the World Bank’s Ease of Doing Business Index, [26] and have been linked to lower FDI inflows. [27] Similarly to China, in Vietnam all land is owned by the state and is leased out to firms and individuals. Following 1993 land reforms, in which the foundations of a formal land market were laid down (with transferable, leasable, mortgageable, inheritable and exchangeable land), a number of benefits were quickly seen. [28] Farmers, who were less vulnerable to expropriation, took it as a signal to increase investment; both farmers and households could achieve greater efficiency in investment decisions and could mortgage their land rights in exchange for access to credit, which enabled more efficient investment and facilitated a smoothing of consumption. [29] Despite these advantages, it should be noted that the present structure of land markets in many nations around the world may not act in a manner that produces the most efficient outcome. The owner of a particular piece of property often has some degree of monopoly power, which they will naturally use to set the price of their land above their minimum acceptable price/the market rate; the property owner often chooses to set the price of land at the rate which they feel the buyer should be able to bear, and the disparity between that rate and the price the buyer is willing to pay leads to some efficient sales stalling out or being delayed. [30] This failure of the property to be allocated to its most efficient use (i.e. allocative inefficiency) has been found to negatively affect aggregate productivity worldwide. [31] A potential solution to this allocative inefficiency is the radical so-called Harberger tax. According to Posner et al, “under this system, people periodically report their property valuations to a government registry; pay property taxes based on these valuations, and are required to sell their property at these valuations to any buyer. A key component of this proposal is that buyers can force sales—limiting a longstanding element of private property, which is that the person who owns property keeps it until she consents to sale…People maintain the freedom to hold onto their property if they are willing to self-assess a high valuation; economic decisions are made by individuals, not by the government; and market competition remains the dominant force in the economy.” [32]
It is possible to argue that ensuring private property tenure is the most efficient way to ensure environmental protection. A landowner naturally has a significant incentive to maintain the future value of their land through sustainable farming techniques, reforestation, preventing leakage of chemicals or other toxic substances, etc. However, in the real world, it is clear that relying on property rights alone to protect the environment is likely naive. Many landowners will likely simply take sufficient care of their land to maximise the output they receive, and not attempt to maintain its ecological value for future generations; alternatively, they may take care of their own land and simply dump waste onto common/public lands or to those of their neighbours. In some instances, it may even be more profitable and therefore rational for the landowner to exhaust the resources and usefulness of a piece of property for short-term gain rather than long-term conservation. It is, therefore, necessary for environmental laws and regulations to be implemented: it is clear that, as they are public goods, landowners are often not incentivized to produce environmental benefits, and that it is necessary for the state to hold these landowners accountable for the ecological costs they may impose on others or on society at large. [33] It is here that the argument for state ownership of most or all land presents itself again. For example, the Chinese government’s pro-conservation decisions (such as reforestation initiatives, municipal environmental conservation areas, etc) have been markedly easier to implement as it is the ultimate landowner and can therefore fast-track such projects in an efficient manner. The flip-side of this argument, of course, is the negative social repercussions that it has - some 250 million rural villagers are said to be displaced or planned to be displaced to urban areas as a result of these conservation areas and China’s broader modernization ambitions. [34]
Having considered all of these factors, it is clear that a balance needs to be struck between the perspectives of the economic left and the economic right. While land markets with complete laissez-faire capitalism would wreak havoc on society in the longer term, collectivisation or complete state land ownership brings too many disadvantages to the table as well. The Harberger tax, despite its economic benefits, would likely be too politically unfeasible to implement. Government ownership of all land - although an attractive proposition when implemented well as in Singapore - can all too easily result in mixed outcomes (as in China) or outright poor outcomes (as in Sri Lanka). The practical and politically acceptable solution may be for global governments to return part-way to the post-war settlement, and to take a greater role in the economy, but critically to not overextend themselves and let the markets do what they do best. Greater spending on welfare may be in order, and governments should consider purchasing plots of land in cities and implementing a Singapore-style public housing scheme, which would help cool the overall housing market. Through targeted taxation and pro-tenant regulation, allocative inefficiencies might be reduced and the housing market in particular allowed to cool off more. Finally, the state (particularly in the developing world) should also focus on building stronger institutions and aiding with social uplifting to complement the market and enable sustainable economic development.
References:
[4] In the interest of brevity, this essay will not analyse the merits of land ownership under Communist/Socialist and Capitalist systems; instead, all of the economies discussed will be broadly market or market-socialism based
[7] https://economynext.com/sri-lanka-land-reform-disaster-made-the-state-the-biggest-land-owner-8534/
[9] Ibid, page 41,42
[11] The Role of Property Rights for Land Degradation and Land ...https://edoc.huberlin.de›bitstream›handle›akhter
[25] Ibid
[29] Ibid
[31] Ibid
[32] Ibid