Working the land: How to capture land value for public benefit
Morning Star : July 7, 2004 : Jerry Jones
Reproduced here by kind permission of Morning Star.
Undoubtedly, the state-ownership of land has major advantages for ensuring that society as a whole, rather than private landowners, benefits from the increasing value of land arising from the activities of society.
This is well illustrated by Hong Kong under British rule, where all land was Crown Land – that is state-owned.
However, state-ownership by itself is no guarantee. Without measures taken to value land in relation to its location and quality, and collecting the economic rent accordingly, those occupying the land will benefit at the expense of the public at large.
Moreover, land will tend to be used indiscriminately irrespective of its value. This happened, for example, in the former Soviet Union, where land, as well as capital, was treated as a free good.
Consequently, there were many instances of land being used inappropriately or inefficiently, such as enterprises holding land vacant in case they might need it later.
Of course, since all enterprises and buildings were state-owned, economic rent from land would largely have ended up with the state, from which presumably the public benefited.
But – as in the system as a whole, because of the opaque accounting system – what came from where, and how efficiently it was administered, and who precisely benefited from what, was practically impossible to determine.
Second, since land use was under state control – as indeed it is in most countries, including Britain, it cannot be said that land use was entirely indiscriminate.
However, it was based not so much upon the economic value of particular sites, but more according to administrative convenience, and the relative effectiveness of lobbying by enterprise managers, local politicians and other vested interests, and the connections they had with the planning authorities.
Even when there is an effective system of collecting economic rent from state-owned land, this can be undermined by the lobbying of vested interests, as was the case in Hong Kong (see below).
Meanwhile, in countries such as Britain, where the private ownership of land is thoroughly entrenched, would nationalisation, in which all private titles to land were abolished and land declared public property, be the most effective course for collecting economic rent for public use? Is it even necessary?
If a political party included in its manifesto land nationalisation without compensation, one needs little imagination to picture the propaganda war that would ensue – paid for by the wealthy 0.5 per cent of the population who own most of Britain’s land.
Britain’s 16 million homeowners could easily be persuaded that the government was about to steal the land that they had bought in good faith along with their houses, even though state-ownership of land would make no difference at all to their right to the land.
Alternatively, if compensation were offered, and if based on market values – which inevitably would incorporate a speculative element – the amounts involved would be astronomical. It would also be immoral.
As Henry George observed 125 years ago, “to buy up individual property rights would merely be to give landholders in another form a claim of the same kind and amount that their possession of land now gives them.
“It would be to raise for them by taxation the same proportion of the earnings of labour and capital that they are now enabled to appropriate in [economic] rent. Their unjust advantage would be preserved …”
In fact, as George also pointed out, the key issue is not the confiscation of land itself, but the confiscation of the economic rent from land to which the public at large should be entitled because it is they who create land value.
Then, the only point of owning land would be to use it. Landowners would have to pay the rent according to its value even if they could not use it economically, when they would have every incentive to sell it on as quickly as possible. Speculating on land would be a thing of the past – it would be too costly.
In short, the price of land would drop. In effect, the land market would become the buying and selling of land use – income and profit would derive only from the particular economic activity on the land, not from the land itself as now.
As for Britain’s owner-occupiers, the economic rent that they would pay would be less than what they currently pay in tax, so they would be better off.
The wider economic benefits of such a course, and the various problems that will have to be overcome, will be explored in future columns.
Hong Kong lessons
In Hong Kong, land could only ever be leased, normally for a 75-year period, subject to conditions specifying broadly the use to which the site is to be put, such as industrial, residential or commercial.
At first, the 75-year leases were auctioned on the basis of an annual rent. In effect, therefore, the economic rent was determined by the value placed on the land by the market. Purchasers benefited from access to land at a low initial cost leaving them with more resources to develop the site.
However, the auctions generated strong competition, and the annual rent bids turned out to be high. This led to purchasers having difficulties paying the rent in less prosperous times.
Thus, after a few years, the system was changed to bids of a capital sum for the lease and a relatively small annual rent. In effect, therefore, a major portion of the future stream of economic rent was capitalised in advance.
This led to a problem when the 75-year leases came up for renewal, which was to have been for a further 75 years upon payment of a ground rent fixed by the Crown Surveyor, determined by the site value, disregarding the level of development of the particular site.
The trouble was that because of all the public and private investments that had taken place in the colony, land values had increased dramatically, so that there was a huge jump in the assessed ground rent, which would hardly have been noticed had rents been raised annually in line with increasing land values.
In the event, in spite of a court ruling in the government’s favour, such were political pressures that the government was finally forced to set rents, upon renewal, at 3 per cent of rateable value.
This meant that a major proportion of the rent forthwith derived from buildings rather than land, so that, as Richard Clarke, the former Director of Lands in Hong Kong, put it, ‘a large part of the annual land value arising from the efforts of the community for use on its behalf … was left in private hands’.
As will be discussed in a future column, this also had the disadvantage of acting as a disincentive to develop sites to their full potential.
Nevertheless, some 40 per cent of government revenue, either directly or indirectly, still came from land, of which about half came from the auctioning of leases.
Indeed, between 1969 and 1989, the latter brought in £42 billion, which was nearly three times the capital cost of the Mass Transit Railway completed at the end of that period.
Meanwhile, the state collection of economic rent from land meant that
other taxes were among the lowest in the world.
This encouraged a high rate of investment in manufacturing and port facilities
handling imports and exports to and from Mainland China, and in housing.
And that was needed. Over the years, Hong Kong had to absorb a huge influx
of immigrants from Mainland China. Thus, between 1900 and 1997, when the
colony reverted back to China, its population had increased 14-fold, to
nearly 7 million.
This put enormous pressures on housing and employment. Even into the 1980s,
housing conditions for many were still appalling to say the least.
But the high rate of construction of new blocks of flats, peaking at 57,000 flats in the public sector and 30,000 in the private sector a year, including the creation of eight new towns in the New Territories, has gone a long way towards resolving that problem – greatly facilitated, of course, by Hong Kong’s land policy.
By the time of the handover, Hong Kong had a GDP greater than that of London, with a similar population. Living standards had been raised from a level about the same as Calcutta in the 1940s to something like that of Ireland in terms of GDP per capita in the 1990s, with a life expectancy higher than that of Britain or the US.
And all this was achieved without saddling itself with either a national or a foreign debt. Indeed, when China retook Hong Kong, it had reserves of £55.5 billion – some £15 billion more than the Bank of England reserve fund.
Read third article in series of 5.