Making the most of urban land: the role of rights and responsibilities
On the 8th September 2017, the World Bank, George Washington University and the International Growth Centre hosted the 4th Urbanization and Poverty Reduction Research Conference: Building or Rebuilding Cities for Growth in Washington DC. The conference brought together top academics and practitioners to discuss the role sustainable cities play in economic growth and poverty reduction, and how to build, or rebuild, cities to realise this role. The focus of the conference was three-fold; land, transportation and public services. Below is a summary of the key findings from the session on land, in the context of the current policy debate on land ownership.
As cities grow, they generate enormous wealth. This wealth is capitalised into the city’s scarce resource – its land. As New York urbanised in the 19th century, the real estate mogul John Astor became the richest man in America simply by buying up the land on which the city was built. As Seoul urbanised from 1974-1996, land values rose 33-fold. Policy can play a crucial, two-fold role in the process of urban land development. First, to help establish conditions under which the private sector can use urban land efficiently. Second, to ensure that the public sector can leverage, collectively generated rises in land value to benefit the city as a whole, rather than just a small set of wealthy landowners. As Ed Glaeser noted during the conference, land ownership and land titling policies are not just about the owner’s rights, but also about their public responsibilities - to pay land and property taxes, and comply with land-use planning for the benefit of the city.
Efficient land use: marketable land rights and sensible land-use regulation
Traditionally, economic research on property rights (and land rights in particular) has highlighted two key factors in favour of formalising land ownership in areas currently under informal or customary ownership arrangements. Firstly, formalising land ownership gives owners the security required to invest in property (Field, 2005), and secondly, it provides owners with the legal ability to use land as collateral for loans (De Soto, 2000). However, in practice formal land titling has often failed to make owners feel more secure than long-established customary systems, and is unlikely to unlock significant collateralisation, at least until financial markets are far more developed (Payne and Durand-Lasserve, 2012). These findings have led to increased caution in seeing formal titling as a ‘one-size-fits-all’ solution, and increasing recognition of a spectrum of different land tenure options including customary land holding or collective ownership.
Research on land is increasingly broadening the discussion on the importance of land policy for private sector development on two frontiers, as elaborated below, both of which were discussed at the conference.
- The importance of marketable land rights
A lack of tenure security and ability to collateralise land are not necessarily the key barrier to efficient land use associated with current informal ownership systems. A larger problem may well be the inability of informal land to be traded on an open, competitive land market that generates common knowledge of prices and facilitates easy transaction. When land cannot easily be transferred to its most efficient use, firms cannot buy up land to form productive clusters, and land-use cannot remain responsive to the changing economic needs of the city over time. Instead, cities become disconnected and fragmented, even as prime central land remains underdeveloped or even vacant. This results in disconnected neighbourhoods focussing on low-value local production, rather than co-ordinated urban clusters producing for a higher-value global market. Research by the World Bank demonstrates that dysfunctional land markets in African cities underpin inefficient allocation of land across the city (Lall et al. 2017). Tony Venables presented research at the conference showing that the economic gains from converting informal settlements in central Nairobi to formal sector use are over $14,000 per household living there.
- Land policy isn’t just about land ownership
A narrow focus on land ownership and titling obscures other land-related policies that have strong effects on urban growth, for example land-use regulation. Such policies can also be (relatively) simpler to implement since they do not necessarily entail fierce disputes over who actually owns large tracts of highly valuable real estate.
At the conference, Daniel de Mata presented research to show that legal land-use restrictions that price low-income households out of the formal market are a key determinant of slum formation in Sao Paulo. One such land-use restriction is the requirement that formal housing has a minimum lot size of 125m2. The research estimates that a 10% relaxation in land-use regulation reduces the amount of informal settlements in the city by 15%; achieving this same reduction through lowering the property tax rate paid by formal households would require a 50% reduction in property tax.
De Mata’s research echoes similar research on the often vastly underappreciated role that land-use restrictions play in limiting housing supply and increasing prices in developed cities (Glaeser and Ward, 2009). However, further research on land-use restrictions may well prove even more important in developing cities, since land-use restrictions are often a legacy of colonial planning and highly removed from the genuine needs of low-income residents. In Dar es Salaam, the minimum lot size is 375m2 as compared to approximately 30m2 in Philadelphia, US, at similar stages of economic development (Lall et al. 2017). Most low-income residents cannot afford to comply with this regulation, and are therefore pushed into informality.
Land rights come with responsibilities that serve the public good of the city
The same rights that enable the private sector to use land efficiently, enable the government to impose responsibilities on the landowner for the public good. These include the responsibility to pay tax and to adhere to land-use plans.
Unlocking the potential for land and property taxation
First and foremost, making land rights legally enforceable enables governments to impose taxes on the often enormous and collectively generated land value appreciation associated with the urbanisation process. This is not only fair, but facilitates a virtuous cycle of self-financing urban development. Appreciating urban land and property values finance the public investments that make the city more productive. Rwanda’s recent Land Tenure Regularisation programme is a good example of this. From 2009-13, Rwanda formally registered almost all land plots in the country in a low-cost, community-based mapping programme. This not only stimulated investment activity, but also helped to achieve a five-fold increase in land-related revenues from 2011 to 2013 (World Bank, 2014).
Enabling a well-defined process of government land acquisition
Secondly, legally enforceable rights can help to enable a fairer and more transparent process of government land acquisition. The ability of governments to acquire land for public purposes where necessary is an essential part of urban development. Yet current procedures for land acquisition in many developing cities are either ill-defined or not followed in practice. One the one hand, land acquisition is sometimes implemented with little justification in terms of public interest and with negligible compensation particularly for customary landowners. On the other hand, in cities such as Kampala, the high costs of land compensation paralyse public infrastructure provision. Since compensation payments are based on land values after the acquisition is announced, speculators rush to buy up land to access increasingly high compensation payments. Land acquisition costs now constitute well over half the cost of government infrastructure projects in the city.
Cities across the world continue to grapple with the proper role of and compensation required for government land acquisition. Singapore is an interesting example of a government using innovative methods to resolve this issue. During its rapid growth in the 1970s and 1980s, Singapore reformed its colonially-inherited and complicated land acquisition laws to allow government land acquisition with compensation fixed at 1973 land values; this was justified on the grounds that land value appreciation since then had been socially, rather than privately created. Singapore’s Prime Minister from 1959-1990, Lee Kwan Yew, has argued that Singapore’s rapid urban development simply would not have been possible without this reform to facilitate urban regeneration and infrastructure provision at lower public cost (Yew, 2000). The role of government land acquisition in urban development, and the payment of appropriate compensation even in the context of informal land ownership, offers a promising direction for future research.
Discussions at the 4th Annual Urbanisation and Poverty Reduction conference, therefore, served to highlight new and important issues that put land policy at the centre stage for driving urban development. Further details on the conference, including presentations delivered, can be found here.
References:
Field, E. (2005), “Property Rights and Investment in Urban Slums”, Journal of the European Economic Association 3(2-3): 279-290.
Soto, H. D. (2000), “The mystery of capital: why capitalism triumphs in the West and fails everywhere else”. New York, Basic Books.
Payne, G. and Durand-Lasserve, A. (2012), “Holding On: Security of Tenure - Types, Policies, Practices and Challenges”. Research Paper prepared for the OHCHR Special Rapporteur
Lall, S. V., Henderson, J. V., and Venables, A. J. (2017), “Africa's Cities: Opening Doors to the World”. Washington, DC: World Bank.
Glaeser, Edward L., and Bryce A. Ward (2009), “The causes and consequences of land use regulation: Evidence from Greater Boston.” Journal of Urban Economics 65, no. 3: 265-278.
World Bank, Rwanda Land Governance indicators, April 2014. These figures concern land lease fees, property tax, rental income tax, transaction fees including notary fees, issuance of building permits etc.
Yew, L. K. (2000), “From Third World to First: Singapore and Asia’s Economic Boom”, Harper Collins Publishers Inc., New York