What is the relationship between land finance and rapid economic growth?
Based on multi-party field research tracking the entire processes of urban demolition, rural land expropriation, land consolidation, land reserves, and land transfer over many years, this article analyzes the definition of "land finance", its operating mechanism, and its importance to China's economic growth, and concludes that the essence of land finance is the local government's land monopoly system, which constitutes the core competitiveness of China's rapid economic growth. It also analyzes issues such as sustainability and land expropriation and demolition in the study of "land finance".
Since the reform and opening up, for research on China's rapid economic growth, the land system has been an unavoidable topic. After the tax-sharing reform, "land finance" has become a hot topic of concern to all sectors of society. However, in recent years, academic research has mainly focused on the definition of land finance, its causes, empirical analysis of its correlation with economic growth, existing problems, and solutions. There is relatively little research on the operating mechanism of land finance and its constraints, and literature that deeply studies the impact of the land finance phenomenon on economic growth is not common. Regarding "land finance", the views of the media and scholars are almost overwhelmingly critical. As Liu Hongmei and others said: "At present, the vast majority of scholars regard 'land finance' as a derogatory term." Taken together, criticism of "land finance" centers on the following views: (1) forced demolition damages people's livelihood and stability and harms farmers' interests; [21(2) "land finance" selling land overdrafts future returns, and "the grandfather sells the grandson's fields" is difficult to sustain; (3) land-related income accounts for too high a proportion of fiscal revenue, posing financial risks; (4) management has loopholes, breeding corruption and rent-seeking. Even the moderate view only gives an explanation of practical rationality from the perspective of the separation of fiscal power and administrative power after the tax-sharing reform, but believes it should be corrected from the perspective of reconstructing the pattern of fiscal revenue distribution. Of course, there are also very few people who support "land finance". Du Xuejun, Huang Zhonghua, Wu Cifang, and others believe that "land finance" has a significant impact on economic growth, and using empirical analysis methods, they demonstrated the obvious driving force of "land finance" on economic growth.
The author has tracked the entire processes of urban demolition, rural land expropriation, land consolidation, land acquisition and storage, land planning, infrastructure investment, land transfer, and land financing over many years on the ground. Combining this with an analysis of the causes of China's rapid economic growth over more than 30 years, and from the perspective of the positive externalities of infrastructure investment required for industrialization and urbanization, the author analyzes the constraints, operating mechanism, and rationality of the "land finance" phenomenon, and concludes that the essence of land finance is the land monopoly system, and it is precisely the local government's land monopoly system that constitutes the core competitiveness of China's rapid economic growth.
I. Definition of Land Finance
After the implementation of the tax-sharing reform in the mid-1990s, the land use right transfer system learned from Hong Kong, China's "land lease system" in the late 1980s gradually matured, and local government fiscal expenditure began to rely more on land transfer revenue. This phenomenon is widely called "land finance". Those able to obtain land revenue are mainly the municipal and county-level local government finances. Academia has different definitions of "land finance". The narrow interpretation holds that "land finance" refers only to land transfer fees, that is, the land transfer revenue generated by the government approving and selling land. Dong Zaiping gave a broad definition of "land finance". He believes that "land finance" refers to local governments relying on operating land transfers to increase fiscal revenue. Generally speaking, there are 3 basic ways for local governments to obtain fiscal revenue from land: first, transferring land to obtain land transfer fees; second, increasing revenue in the form of related taxes through the construction and real estate industries; third, mortgaging land to banks to obtain debt income. Yi Yi believes that "land finance" refers to a financing income behavior and fiscal phenomenon in which local governments' disposable expenditure relies heavily on land and its related tax and fee revenue. Shao Yuan, in "A Summary of Issues Concerning 'Land Finance' and the Reform of the Fiscal and Tax System", defined it as: "land finance" refers to the fiscal revenue and expenditure activities and interest distribution relationships in which local governments use land ownership and management rights to obtain income, including acts by local governments to obtain revenue through land taxes, land use right transfers, land financing, and other means, directly or indirectly increasing fiscal expenditure capacity.[7]
Perhaps because scholars find it difficult to access and understand the actual operating process of land finance, the above definitions share the same characteristic of defining land finance from the perspective of external features, simply attributing it to land ownership and its extended rights and interests. Therefore, such definitions cannot explain why local governments can rely heavily on land revenue and why it can continue to this day. Urban land state ownership has existed for a long time. Land transfer as a method of acquisition different from land allocation already appeared during the first batch of commercial real estate development in the early 1990s, while "land finance" became a topic of discussion only after emerging from deflation in 2003. This shows that it was precisely the new changes in the land management system after that time that led to the emergence of land finance.
First, we can find part of the reason from the successive amendments to the provisions on land acquisition and transfer in the "Land Administration Law of the People's Republic of China" after its promulgation in June 1986. The first amendment in 1988 stipulated: "The right to the use of state-owned land and collectively owned land may be transferred according to law; the state implements a system of paid use of state-owned land according to law." This laid the legal foundation for state-owned land to enter the market. The second amendment in 1998 stipulated: "The state implements a system of paid use of state-owned land according to law. Construction units using state-owned land shall obtain it by means of paid use." The third amendment in 2004 stipulated: "The state may, for the needs of the public interest, expropriate or requisition land according to law and give compensation." At the same time, Article 43 stipulates: "Any unit or individual that needs to use land for construction must apply according to law to use state-owned land; however, this does not apply to the establishment of township and village enterprises and the construction of housing by villagers using land collectively owned by farmers of the collective economic organization upon approval according to law, or to the construction of township (town) and village public facilities and public welfare undertakings using land collectively owned by farmers upon approval according to law." This means that urban construction land must use state-owned land. At this point, the path for local governments to acquire and transfer land was determined, and the requirement that urban regional construction "must apply according to law to use state-owned land" laid the foundation for the local government monopoly system of land transfer.
Second, the Ministry of Land and Resources Order No. 11 of July 1, 2002, "Provisions on the Transfer of State-owned Land Use Rights by Bidding and Listing", terminated the negotiated transfer method for state-owned land, with the implementation deadline finally set on August 31, 2004. From then on, local governments finally obtained complete monopoly power over land for urban construction. State ownership of land ownership does not mean that land use rights belong to local governments. In fact, the use rights of urban land had always been a kind of "unit ownership system". Government agencies and public institutions at all levels actually held land use rights through allocation. For example, during the housing system reform in the late 1990s, it was very common for various units to transfer land to developers through negotiated agreements to solve the funding problem for housing reform housing construction, and local governments could only obtain related tax and fee revenue. Raising funds for urban infrastructure construction became a huge difficulty and major responsibility for local governments. With the implementation of "bidding, auction, and listing", local governments objectively obtained a highly monopolistic exclusive operating right over urban construction land, and the "land finance" phenomenon began to appear.
Third, the strictest land use control in our country caused by the national policy of farmland protection further provided local governments with exclusive power to change land use for "land finance". This is particularly important in the current process of industrialization and urbanization. The local government's monopoly and exclusive operating position over urban construction land has been further strengthened.
From this it can be seen that all the characteristics of the above definitions of "land finance" can only be possessed after local governments have obtained the power of land monopoly operation. Without the formation of this system of land monopoly operation, all parties could transfer land through negotiation, and local governments would not be able to "rely heavily" on land-related revenue, much less use land for financing, and thus would not be able to carry out land operations. Therefore, the author believes that the accurate definition of land finance should be: the fiscal revenue and expenditure activities and interest distribution behavior in which local governments use the land monopoly system formed by relevant national laws and regulations to obtain operating income, including acts by local governments to obtain revenue through land taxes, operating land use rights, land financing, and other means, directly or indirectly increasing fiscal expenditure capacity.
⟦NL> II. The Current Operating Mechanism of Land Finance under the Land Monopoly System
The smooth operation of "land finance" first presupposes the continued existence of the demand for industrialization and urbanization, and then is due to the current land management system granting local governments three major monopoly powers over land:
First, local governments have the power to formulate plans, change land use, and carry out construction, that is, the exclusive power of planning, conversion, and construction.
Second, local governments have the exclusive power to transfer land in the primary land market, that is, the exclusive power to sell land.
Third, local governments actually have the power to expropriate land, that is, the exclusive power to buy land.
From the institutional arrangements derived from these three powers, municipal and county-level local governments have in practice formed a land monopoly system over urban construction land.
III. The Necessity of Land Finance
1. The problem of financing infrastructure construction funds for industrialization
An unavoidable problem in the process of industrialization and urbanization is how to raise funds for various infrastructure constructions; otherwise, industrialization and urbanization will be difficult to sustain. Apart from closed-toll expressways and chargeable projects such as water, electricity, gas, and communications, local government infrastructure construction funds can only come from taxes or from land value-added revenue, thus forming the so-called fiscal model supported by taxes and the fiscal model supported by taxes and land transfer revenue. Whichever model it is, it faces the difficult problem of how to raise funds.
The formation of the local government land monopoly system objectively achieved a certain degree of stable expectation of land revenue, thereby providing a more effective financing foundation for urbanization and industrialization. On the premise that industrialization demand already exists, the speed of urbanization depends to a large extent on its ability to obtain financing. As collateral for financing, land is far more efficient than future taxes as collateral. Because tax collection itself is a process with extremely high transaction costs. For local governments that cannot use land as collateral, their financing scale is inevitably greatly limited. If financing construction funds through land finance is to be abandoned, local governments must be allowed to issue bonds, or property taxes must be levied as a source of funds as some scholars suggest. The former involves a level similar to sovereign credit; once out of control, it will truly become a local government debt crisis, and its scale is controlled by administrative factors other than economic development; the latter is constrained by the fact that we do not have a tradition of large-scale taxation of residents' property and lack a strict supporting management system. For local finances under the "separate mess system", it is very difficult to ensure that "money for soy sauce cannot be used for vinegar". Judging from the experience of other countries, residents' "tax resistance" is harder to handle than enterprises' "tax evasion", and its transaction costs are far higher than directly collecting land transfer revenue from developers at present.
In addition, whether through the accumulation of tax surpluses or the issuance of bonds approved by the central government, the funds raised cannot keep the same pace as the urbanization demand driven by economic development. Under the condition that the government monopolizes the primary land market, the government can use future land value-added revenue as collateral to finance infrastructure construction. At this time, land value-added revenue is basically predictable and is supported by the demand of economic development, so it is a process in which demand and supply develop in sync. At this time, financiers can fully trust that the government can recover the investment in infrastructure construction through land transfer revenue.
The "Opinions of the State Council on Reforming the Railway Investment and Financing System and Accelerating Railway Construction" issued in August 2013 clearly pointed out that comprehensive development of land for railway stations and lines should be supported, thereby solving the difficult problem of raising funds for railway construction. This once again proves the necessity of land monopoly rights for infrastructure construction.
In today's China, the so-called "taxes protect operations, land protects construction" is the current fiscal survival state of local governments. Objectively, land finance based on land monopoly rights has provided enormous operating space for local governments to promote our country's rapid industrialization and extensive urbanization. If local government land finance were denied, our economic development and competitive advantage would lose an economic foundation that cannot be replaced in the foreseeable future. "Abandoning land finance is destroying the Great Wall yourself."
2. The problem of externalized effects of infrastructure and public supporting investment
The land required for industrialization and urbanization cannot be directly made to meet requirements simply through conversion and expropriation. Instead, after unified planning, infrastructure construction investment is needed to reconfigure land resources, turning "raw land" into "serviced land", before it can be effectively used. The acts required to allocate land resources, such as formulating plans, changing land use, investing in infrastructure construction, and public supporting facilities (schools, hospitals, water, electricity, roads, etc.), have extremely strong interest externalization effects. If one entity invests and all entities owning surrounding land share the returns together, the result will inevitably be that the investment behavior is unsustainable. Only with the help of monopolistic land operation can interests be internalized to the greatest extent, and only then will a sustained investment motive be generated.
With monopolistic land operation rights, local governments can fully internalize the externalities of land value-added revenue, making it possible to raise enough funds to solve the "which came first, the chicken or the egg" problem of industrialization, so that both the input and return of infrastructure can be balanced within local public finance, and thus they can plan and invest in infrastructure and public supporting facilities according to overall efficiency requirements without worries. Conversely, if this process were left to the market, each investor, in order to avoid externalization of interests, would inevitably try its best to control the intensity of investment. In this way, achieving the overall efficiency of land resource allocation would necessarily require paying huge transaction costs, and may even ultimately fail to obtain effective allocation results, causing the speed of urbanization and industrialization to decline or even stagnate.
Taking the Chengdu municipal area as an example, urban construction land expanded from 584,400 mu in 2002 to 1,970,200 mu in 2011. These more than one million mu of newly added construction land have different uses according to urban planning and require a large amount of infrastructure support, such as roads, pipe networks, power plants, parks, subways, schools, hospitals, and other public facilities. Under the condition that the government is the sole supplier of construction land, the different uses of land brought about by planning and construction and their costs and returns, as well as the input and return of infrastructure support, are all resolved within the local government, and all interests can be internalized as much as possible. This greatly reduces the transaction costs of using land for industrialization and urbanization.
If the process of reallocating land resources were entirely left to the market, because public charging for urban infrastructure simply cannot be operated by market investors, investors would also need to obtain returns through the appreciation of surrounding land. This would require developers to develop over a sufficiently large land area to obtain as much benefit as possible from infrastructure supporting investment; otherwise, "free riders" would swarm in, and the terms of transaction would become more complicated. In theory, different market entities can only promote the overall efficiency goal of planning and construction through repeated games with high transaction costs, but in reality, due to the high cost of land construction, the opportunity for repeated games is almost zero, and it will be difficult to achieve in one stroke an infrastructure construction level that meets the needs of industrialization and urbanization. Compared with the existing land monopoly method in which the government monopolizes the primary land market, it adds more links, more bargaining processes, and more disorderly competition, leading to slower industrialization and urbanization, and possibly even overall stagnation constrained by the separation of interests among various entities. In reality, such so-called urban area owner-initiated renovation projects almost never succeed without additional subsidies, and failed cases can be found everywhere.
In short, land value appreciation mainly comes from investment in infrastructure and public supporting facilities, and the land monopoly system means "appreciation returns to the public". The externalities of infrastructure and public supporting investment illustrate a basic principle: if land value-added revenue does not return to the public, it will be very difficult for land to appreciate.