How land policy shapes economic outcomes in China, US, UK, and India

How to improve land and capture its value is central to growth and development policy even in the 21st century

It is two centuries, a year, a month, and a week since David Ricardo died. Ricardo was many things: A financier, an abolitionist, a liberal politician. He is remembered, however, as the founder of modern economics. He developed many of the essential principles that underlie economic theory, from the law of diminishing marginal returns, to comparative advantages in trade, to the functional equivalence between different ways of raising money.

But if I were to paraphrase Ricardian principles today, it would be this: When wealth grows, money is spent, or technology improves, the benefits flow to those who control what is most scarce, and usually to those that determine the fate of the one irreplaceable resource, land. The Ricardian theory of rent was revolutionary in that he showed improvements that made farming more productive would benefit landowners, not tenants.
 

Ricardo was able to understand the centrality of land policy to Regency-era British political economy because it was, after all, an economy, society and polity still obviously dominated by landowners. When he famously made his million speculating on the Battle of Waterloo, he immediately removed to Gloucestershire to set himself up as a country squire and enter Parliament.

National and global economies are infinitely more complex than they were 200 years ago. But land, land improvements, land use, and land value are at the centre of 21st century development and growth in a manner that the discipline of economics is not quite as prepared to describe today as it was in Ricardo’s day.
 

When land value is monopolised and not shared, economies turn into stagnant rentier societies. When land is not allowed to improve in productivity, economic growth declines. When land tenure and ownership are compromised, counterparty and political risk imperil the entire economy. And, indeed, the ownership, control and management of land continue to determine the fate of powerful states just as much today as they did when Ricardo’s fellow landlords dominated the unreformed British Parliament.
 

The pivotal nature of each of these trends is visible in the economic trajectories and concerns of almost all major economies today — the United States (US), the People’s Republic of China, the United Kingdom (UK), and even India.
 

China is perhaps the most obvious example. Growth accelerated, took hold, and spread across large parts of the country because of how land was improved, and how the value of this improvement was captured and put to work. Here’s a reduced-form model of the process: Local governments that could build land banks then could borrow against the future value of land. They would use this capital to improve the land, capture a large part of the value increases alongside the owners of capital, and plough it back into further improvements. Through this process, infrastructure was built up across the country and multiple areas and sectors rendered productive.
 

The problem is, of course, that debt also grew. A debt crisis is, in fact, an ownership crisis. The stability of land tenure is threatened: Who controls the land and its value? The local government? The real estate companies that responded to the local government’s calls to build on that land? The owners of the capital that financed the building? Or the central government, because in the end in China all power flows from the emperor?
 

Overspeculation in land has led to the real estate market and linked markets being a far larger proportion of the Chinese economy than in its more mature peers — 24-30 per cent of gross domestic product or GDP, as compared to 15-20 per cent elsewhere. This will have to shrink. It means, however, that some individuals need to swallow a share of the losses. It is this division of the spoils that is politically contested, and which requires Beijing to step in. It has so far not done so. The outcome is that land value is tangled up in uncertainty, and the economy as a whole is suffering.
 

In the US, a political and economic rebalancing is being driven by sharply different approaches to land policy. In many Republican-leaning red states, prosperity is growing simply because they are choosing to build — a policy of land improvement that has caused them to be more productive and to attract internal migration. Florida and Texas are benefiting, while Democratic California and New York are not. Indeed, in future redistricting — when seats in the House of Representatives and the electoral college are re-allocated in line with changing population shares — the red states’ political power will grow as a consequence.
 

The US, unlike China, has strong property rights. Ownership of land is secure and predictable. But its land markets are actually too rigid and inflexible. Property loan rates, for example, are locked in for decades. This means that those who bought when prices were low are benefiting disproportionately at the expense of rentiers and real estate developers. Meanwhile, those who have bought a house in a declining location cannot easily sell it to move where the jobs are. A lack of such sales means that both the housing and labour market is “frozen”. This means that industrial policy defined around creating new jobs in new areas — the core of “Bidenomics” — risks ignominious failure. It will merely increase costs.
 

The UK is a sharp example of what a frozen land market can do to a society. Almost all its economic gains of the past 40 years have accrued entirely to the owners of land, mainly because its restrictions on land improvement, infrastructure development, and building new offices or housing are more draconian than in any other developed economy. From a Ricardian point of view, if you have extremely flexible markets and supply for all other resources, but an absolutely inflexible market and zero new supply of land, then all the benefits flow to the owners of land. The UK is now a decaying rentier’s paradise, with no hope of growth until the government can somehow unlock, expropriate, or diminish the value of privately-held land.
 

India’s recent struggles with reform are also, at their root, about land. India has a similarly inflexible land market. In fact, it has no land market as such; land use is determined by bureaucratic diktat, and there is no secure record of ownership. But, unlike China, local governments will also struggle to build land banks or borrow against it. Here, if anyone captures value from land, it is not rentiers but the middlemen linked to politicians and bureaucrats who can influence the change of land use notification. The outcome is that neither the private nor the public sector can easily transform or build on land. Agriculture is low-margin and investment in industry is low in large part as a consequence of these restrictions on land ownership and value extraction.
 

These issues may all seem distant from the questions that Ricardo meant to address. But they show that, at its heart, economic development must first answer one question: What shall we do with the land?

The writer is director, Centre for the Economy and Growth, Observer Research Foundation, New Delhi