The Role of Urban Leadership and Development Paths in Rural Reform
Land transfer is the third market gate between urban and rural areas. Comparatively speaking, the first two gates - the markets for agricultural sideline products and rural labor - both broke through from the rural side first, "encircling the cities from the countryside," and only then moved from countryside to city, forming the city's markets for agricultural produce and migrant workers. Only the gate of the land market was opened in the reverse direction: urban land transactions appeared first, then radiated outward from near to far, slowly merging into a land market connecting urban and rural areas. Is there any significance to this different "roadmap"? After much reflection, the significance is enormous. Without anyone realizing it, China had shifted from "1 billion people, 800 million farmers" into rapid industrialization, and because of giving greater play to market mechanisms, it also launched rapid urbanization. Under the new circumstances, the relative market value of urban land and space rose rapidly, triggering a chain of events that installed powerful new engines for both economic development and institutional change.
In fact, the very necessity of agricultural sideline products entering the cities had long revealed the dominant position of towns and cities. If towns and cities were not economically crucial, why would the agricultural sideline products produced by 800 million farmers have to be sold to 200 million urban residents to constitute the first pot of gold for farmers' prosperity? By the same logic, farmers working for farmers offered too small a market and low income; only by going through untold hardships to work in cities could a increasingly meaningful figure be recorded in the ledger of rural household income. This is to say that although the rural population is huge, from the perspective of economic strength, towns and cities were the economic engine early on.
The problem was that the system of urban-rural separation suppressed the engine function of cities. For many years, not only could cities not lead the countryside, but cities actually suppressed the countryside, leading to an excessive farmer population, insufficient food and clothing, very low enthusiasm for supplying agricultural products, and an inability to increase farmers' own incomes, leaving no way to support the triumphant advance of national industrialization. In the early reforms, the rural breakthrough came first, unfolding along the line of releasing the supply potential of agricultural sideline products and rural labor, relaxing controls, opening the city gates, and developing urban-rural market relations; the national economy finally came alive.
Once factor flows were freed, the momentum of agglomeration could not be stopped. This was also the first topic after the opening of this series. Why cities? Why urbanization? It all arises from "density" - cities are defined by density; agglomerated economic density stimulates a rise in population density, and population density, through concentrated demand, continuously raises the division of labor, efficiency, and income. Under their interaction, the spatial distribution of the national economy takes on an agglomerated form, and the "urban engine" that seemed not to exist for so many years finally revealed itself day by day. Cities not only drive economic growth, but are also the birthplace of spirit, culture, science, innovation, and fashion.
The most important economic change was the rapid rise in the relative price of urban land - in fact, of spatial location. In recent years, housing prices have become society's number one concern, and many people exclaim that they cannot understand it. In fact, bricks and tiles plus installation and construction are not hard to understand; what is truly difficult to understand is land price. Whether one speaks of money, speculation, or bubbles, each may have its own rationale, but in my personal view, the decisive factor is still the severe shortage of spatial locations that concentrate both people and wealth. In a China so vast, looking in all directions - east, west, south, and north - there really are not that many "places" that attract people and attract business, and that attract even more people after attracting business. Things are precious when they are scarce; the land prices in these places - without exception cities, especially major metropolises - rise unstoppably.
The 1988 constitutional amendment opened the legal channel for the marketization of urban land. As explained earlier, at the time no one deliberately allowed only urban land to be marketized, because the wording of the constitutional text was that "the right to the use of land may be transferred according to law," and it did not limit transfer to urban land only. It was just that the Constitution said transfer must be according to law, while what was promulgated in 1990 was the regulation on "the transfer of the right to the use of state-owned land in towns and cities," and whether rural collective land could be transferred was shelved (and 10 years later entered the "negative list"), thus forming the pattern in which urban land first legally entered the market.
To be fair, what can truly fetch a price is still urban land. Understanding this is extremely important for understanding the practice of opening wide the gate of the land market between urban and rural areas. The reasoning is not profound either; we may begin with the concept of "asset" - any resource that can continuously bring future income is an asset. Land can continuously produce agricultural sideline products, and can also "grow buildings" for continuous human use, so of course it is also an asset. How are assets priced? The criterion set by Fisher is "the discounting of future income." If a plot of land can yield 100 yuan per year in the future, assuming an interest rate of 10 percent, then we say this plot is worth 1,000 yuan - meaning that this plot is like a cash asset deposited in a bank; since it can earn 100 yuan in interest each year, its asset value is 1,000 yuan.
Of course, asset income is in the future and is determined by expectations, and people's expectations will always deviate somewhat. This is also where asset pricing becomes troublesome. But experience also says that however troublesome it is - and in severe cases it means financial crisis - it is still far better than a system that does not let asset prices perform the function of resource allocation. Today, when we speak of "the decisive role of the market in resource allocation," a very important point is to let the asset pricing mechanism play its role.
Land can grow agricultural products and can also carry buildings, both of which are indispensable for humanity to improve life. The problem is resource allocation - how much land to leave for growing agricultural products, and how much land to use for "growing buildings"? Planned economy advocates - today wearing a more fashionable mask - claim that they truly understand optimal allocation, but experience proves that people actually know very little about this. To say that market allocation relies on the price mechanism ultimately means relying on changes in relative prices to remind and induce acting subjects to "allocate" resources.
Roughly divided, there is land for growing agricultural products, land for building houses in rural areas, and land for "growing buildings" in cities. Which type of land's market price rises faster? The answer is urban land that carries buildings. Why? Demand for agricultural products is affected by Engel's Law and increases only to a limited extent. At the same time, technological progress and imports easily provide substitutes. Demand for rural housing was very strong in the early period, but after farmers could go out to work, this demand steadily declined. Yet the demand for "growing buildings" in cities - especially good cities that strongly attract people - flourishes without decline, while also facing supply constraints. Adding these together, it should be reliable to say that the relative price of urban land rises faster than that of farmland and rural land. The secret behind this is still "agglomeration" and "density," and ultimately objective changes reflected in subjective expectations.
Expectations cannot be separated from the support of experience. One's own experience is irreplaceable, and the experience of others also helps. In this regard, opening up has made an indispensable contribution. For example, the system by which urban land use rights on the mainland can be transferred - commonly known as "land leasing" - was basically learned from Hong Kong, China. Why learn from Hong Kong, China? Proximity offered geographical convenience, and the cost of visits and inspections was low. Most importantly, the effects could be "seen": they implemented land leasing and opened a path to financing urban infrastructure, so why could the mainland not try it too?
People from Hong Kong, China had witnessed urban land prices "take off" along with economic takeoff, so their expectations were naturally extraordinary. Several years ago, when I was in Chengdu watching land auctions, I encountered a case of a "land king." I saw representatives of mainland real estate firms raise their paddles until their arms trembled, needing colleagues to help hold their arms down before they could bid! But the representative of Wharf Holdings did not change expression or tremble; whenever you raised your paddle, he raised his, until he truly won. The land price in that auction, as I recall, was 88 million yuan per mu. Why did the visitor from Hong Kong, China have the manner of a great general? Strong capital was one aspect, but more important was that they had been tempered in Hong Kong, China, and this was simply a case of the great sorcerer meeting the lesser.
The experience of others plus one's own together support expectations and, calculated to today, produce the current price of urban land. Because people believe future returns will rise greatly, they are willing to pay cash to the land transferor to purchase the opportunity for future returns. When this investment is brought in, there is money to build streets, construct facilities, and dig subways. Pouring capital into urban land greatly increases the capacity to carry economic agglomeration and population agglomeration; the anticipation that "density" will generate higher income comes true, the urban engine roars, and "urbanization-driven economic growth" makes a grand entrance.
It turns out that urban land price has nothing to do with soil fertility and is related only to location. Viewed simply and statically, where urban density is highest, expectations of future returns are highest, everyone rushes to come, and competition pushes land price to the highest level. As density declines, land price also declines. Such a distribution of urban land prices determines that the path of land marketization is not "the countryside encircling the cities," but rather radiation and diffusion outward from the urban center. If agricultural sideline products and rural labor both first freely stepped into the market in the countryside, then pushed open the city gates, until an urban market appeared, then the marketization of land generally begins from the metropolis and expands from the inside outward.
From this, we also see changes in the driving force of reform. The rural reform that began in the 1980s caught the trend first and for a time even had the bold ambition of giving the cities a reform push as well. But once large numbers of migrant workers entered the cities, rural reform had no major drama left and in fact made no progress for a long time. Only when cities rose again did metropolises, central cities, and all places with relatively higher land prices begin, from the inside outward, to open the gate of the land market bit by bit. The principle implicit in this is worth our careful appreciation.