Liu Kai/text
I. Introduction
The year 2023 marks the 45th anniversary of reform and opening up. The great achievements of the socialist market economy with Chinese characteristics in practice have been recognized by the whole world, but at the academic level, they are far from forming a set of economic theoretical explanations that are unanimously recognized by the global mainstream economic community. Many economists at home and abroad believe that most, if not all, of China's outstanding achievements in economic growth, macroeconomic stability, and poverty reduction since the beginning of reform and opening up are only the inevitable results of market-oriented reforms, and have little to do with the factors of the socialist system, such as the existence of a large number of state-owned enterprises and the public ownership of land; if the factors of the socialist system play a certain role, they are also negative and distorting effects. In particular, the papers on China's economy published in foreign academic journals abound and are almost conclusive. Against the backdrop of sustained downward pressure on China's economy, the above view seems to have gained many supporters. Obviously, there are many economists at home and abroad who do not agree with this neoliberal view, and they have two strong arguments: first, most of the former Soviet Union and Eastern European countries have abandoned the socialist system. Second, most developing countries have adopted a capitalist market economy model, and they have implemented a market economy much earlier than China, but the vast majority of them have not been able to achieve the rapid growth that China has achieved in the past four or five decades.
The reason for the above-mentioned theoretical differences is, on the one hand, due to the indelible and difficult to disguise ideological prejudices held by scholars on both sides in the subconscious, and on the other hand, because a complete and convincing theoretical system has not yet been formed to explain rigorously from a theoretical point of view: why the large-scale existence of factors of the socialist economic system is needed under the conditions of market economy, and these factors have a significant impact on the efficiency of resource allocation and economic growth. What special and important role has macroeconomic stability and improved income and property distribution played or will be, and what are the specific economic mechanisms? The author believes that answering the above questions and forming a broad academic consensus is one of the most important tasks and challenges facing the Chinese economic community, and it should also be the core work of constructing China's independent economic theoretical system. This is not only about road confidence, system self-confidence and the support for singing the bright theory of China's economy at present, but also about the direction in which China's basic economic system will be reformed and improved in the future.
Taking public ownership of land as an example, compared with private ownership of land, does public ownership of land with Chinese characteristics have any advantages in promoting economic efficiency under the conditions of a market economy, and what are the advantages of this? What is the specific mechanism of this issue? The mainstream economic circles in the West have hardly studied this issue, which we consider to be very important. On the one hand, they assume that private ownership (including private ownership of land) is an eternal institution, and then argue that it is as pointless to study the economic effects of public ownership of land in the United States from a counterfactual perspective as it is to study the economic effects of nationalization of American enterprises. On the other hand, the mainstream economic circles generally believe that in the industrial and post-industrial eras, the role of land factors in socialized large-scale production has been insignificant, and to a large extent, it can be replaced by capital factors. Whether it is the development of manufacturing industry, or the development of real estate, catering and warehousing, financial services, and other service industries, they are inseparable from the effective supply of land elements. This is particularly true for some developing countries with high population densities and relatively scarce land. Industrialization is a top priority for developing countries, and infrastructure development is particularly important for industrialization and economic development, and both the development of the industrial sector and the construction of infrastructure require a large amount of land. In addition, real estate wealth is the most important component of the wealth of residents in modern society, and the core determinant of real estate value is land value. Therefore, how can it not be important that the land system, which determines the allocation of land elements, is a basic economic system that will have a significant impact on the economic growth and social welfare of developing countries?
Whether public ownership of land is an important reason for explaining the "mystery of China's economic growth" is not clear from the perspective of economic theory. At first glance, a large amount of land rents are owned by the government, which is not necessarily conducive to economic growth, because land rents are owned by the private sector under private land ownership, which may be conducive to private sector investment and capital accumulation. Therefore, to study whether public ownership of land is an important cause of China's economic growth miracle, it is necessary to analyze what China's economic growth would be like if China adopted private ownership of land from the perspective of global institutional comparison, and on the other hand, it is necessary to analyze what China's economic growth would be like if China adopted private ownership of land, and on the other hand, it is necessary to conduct a rigorous analysis based on the quantitative macro model of general equilibrium.
2. What are the differences in the land system with Chinese characteristics?
Compared with other countries, especially other developing countries, we can sort out 3 typical facts about China's land system:
1. China's land system is significantly different from other countries in terms of land ownership and land development rights. China's land ownership system is public ownership, i.e., state land ownership and collective land ownership. But all over the world, whether it is a country that has undergone a relatively thorough bourgeois revolutionary land reform (such as France), a country that has not undergone a complete bourgeois revolution (such as India), or a colonial country (such as the United States), most of them are based on private ownership of land. The Chinese government has a stronger leadership position than the governments of other economies in terms of land development rights. Although countries with private ownership of land (such as the United States and France) have also adopted land control measures to restrict private land rights, their capabilities are not comparable to those of the Chinese government. In terms of land acquisition, the cost of land acquisition by the Chinese government is relatively low and the benefits are relatively high compared to other economies. On the one hand, urban land is owned by the state, and local governments have sufficient land to allocate and lease. On the other hand, the combination of collective ownership of suburban and rural land and the expropriation-free system of collective land has given local governments a powerful means to supplement or increase urban state-owned land. Moreover, China implements a strict land use conversion system to ensure absolute dominance and relative low costs of land acquisition. However, for most countries and regions in the world, land acquisition is mostly compensated according to market prices or market prices, and the cost of obtaining land resources is relatively high.
2. Under the conditions of market economy, the Chinese government divides non-agricultural land into two markets, industrial land and commercial and residential land, and adopts different pricing mechanisms. Among them, the supply of industrial land is low and sufficient, while the supply of commercial and residential land is limited and its pricing is determined by the market, and the income from the transfer of commercial and residential land has become an important source of revenue for local governments. Based on the data on land transactions, it can be found that the price of industrial land has been very low and has grown very slowly in the past two or three decades, while the price gap between commercial and residential land and industrial land has widened.
3. The rapid development of China's infrastructure investment is inseparable from public ownership of land. On the one hand, infrastructure construction itself also requires a large amount of land, and the public ownership of land ensures the cheap supply of infrastructure construction land and greatly reduces the cost of infrastructure construction. On the other hand, a large amount of land transfer income from local governments has become an important source of capital for infrastructure investment. In its 1994 World Development Report, the World Bank recommended that investment in economic infrastructure should not be less than 5% of GDP. It is estimated that China's infrastructure investment accounted for an average of about 9.0% of GDP from 1993 to 2008, and the scale of China's infrastructure investment has remained high since 2008. In contrast, however, infrastructure investment in other developing countries has been relatively inadequate. Judging from international statistics, except for India, the proportion of government investment in GDP in other developing countries has been less than 5% for most of the time, and India's government investment has always been below 7% of GDP, which is far lower than China's level in the same period. Today, China has a good infrastructure, and Dr. Sun Yat-sen's dream of infrastructure construction in the "National Founding Strategy" has come true, thanks to the public ownership of land.
3. Why public ownership of land is more conducive to economic growth than private ownership of land
In order to discern the significance of public land ownership to China's resource allocation efficiency and economic growth, it is necessary to conduct the following counterfactual analysis: What would China's economic growth look like if China had not adopted the basic economic system of public land ownership and maintained the historical system of private land ownership like many developing countries? We can construct a dynamic general equilibrium model embedded in the land system to analyze the above problems. Based on the typical facts summarized above, we can make the following assumptions in the modeling: land is an important factor of production for both the industrial and non-industrial sectors, the public ownership of land is reflected in the fact that the land element is owned by the government, and the land rental income is at the disposal of the government, the government divides and prices industrial land and non-industrial land, fully supplies industrial land at a lower price, and raises the price of non-industrial land to maximize the rental income of related land by controlling the supply of non-industrial land, and infrastructure is an important factor of production for both the industrial and non-industrial sectors, and infrastructure investment is funded by the government。 What would the structure of the economy look like if China maintained a system of private land ownership? Unlike the benchmark model, land is no longer owned by the government but by the private sector, and the providers of land (and thus the income of land rents) change. According to historical experience and international experience, the land market under private land ownership will quickly form a monopoly market through land annexation, and the land will eventually be controlled by a small number of people.
We believe that the core mechanism of public ownership of land is more conducive to economic growth and residents' welfare than private ownership lies in two aspects:
1. Land elements are easy to form a monopoly market, while private monopoly is not as good as government monopoly. Monopoly will generally lead to distortion of resource allocation, and there will be monopolies in the two markets of "industrial land" and "commercial land" under private ownership of land, so it will produce greater efficiency distortions and welfare distortions than the benchmark model of market monopoly of "commercial land", which is not conducive to the growth of the industrial sector and the process of industrialization. Under the public ownership of land, the Chinese government has provided industrial land at low prices for a long time, which is essential for the rapid development of China's industrial sector, including infrastructure construction, and for Chinese-style industrialization.
2. Infrastructure is a public good that plays an important role in the economic growth of developing countries, and land rent belonging to the government is more conducive to the improvement of infrastructure in developing countries than to the private sector. When land rents are vested in the government, the government can use it for infrastructure investment, thereby increasing total factor productivity, reducing the marginal cost of production, and driving business investment. On the other hand, when land rents go to the private sector, it appears that the private sector has more money for private investment, but from a general equilibrium macro perspective, the private sector only cares about the returns on private investment and does not invest its funds in infrastructure that is a public good, and the result is that the marginal cost of infrastructure scarcity rises, which ultimately discourages private investment.
A reasonable alternative is that under private ownership of land, the government can compensate for the lack of investment in infrastructure by increasing taxes to finance infrastructure. However, taxation is generally distorted, and as we will see in the quantitative analysis results below, although it is desirable for the government to raise the tax rate to finance infrastructure construction under private ownership of land, when the stock of infrastructure is insufficient, it will cause a large loss of efficiency and welfare compared with the situation where land rent is owned by the government under public ownership of land.
IV. Using Public Land Ownership to Quantitatively Explain the "Mystery of China's Economic Growth"
Under the framework of dynamic general equilibrium analysis (see the author's paper published in China Industrial Economics in 2018 for details), we can conduct a quantitative comparative study of China's economic growth under the two systems of public and private ownership of land. Our key quantitative results are as follows:
1. Under the benchmark model, other things being equal, if China adopts private ownership of land, then GDP will be reduced by 36%, and residents' welfare will be reduced by 34%.
The numerical simulation results show that, all other things being equal, under the private ownership of land, the GDP will be reduced by 36%, the output value of the "industrial sector" and the "non-industrial sector" will be reduced by 42% and 25% respectively, the fiscal revenue will be significantly reduced by 38%, and the infrastructure investment and stock will be reduced by 40% and 41% respectively. The decline in GDP has led to a decline in the level of household welfare, which is measured by the level of per capita consumption at a steady state by 34%.
The numerical simulation results of the above counterfactual analysis are also consistent with our theoretical predictions. On the one hand, the "industrial sector" (including the production sector of some infrastructure in reality), which occupies the dominant position in the national economy, can no longer use the land element at cheap land rent, which is not conducive to the development of the "industrial sector". In fact, the real marginal cost of "industrial goods" under private ownership of land increased by 6% compared to the benchmark model under public ownership of land. India, for example, has a high cost of industrial land, which hinders its industrialization. On the other hand, land rental income is no longer owned by the government but by the household sector, which inhibits the government's ability to finance infrastructure construction, which in turn reduces infrastructure investment and weakens economic growth. At the same time, the private sector, which has monopoly land rent incomes, has not only failed to increase private investment, but has reduced it by 20 percent, under the dual pressures of rising marginal costs of "industrial goods" and declining marginal output in the context of insufficient infrastructure stocks. The rise in marginal costs due to rising land rents, the lack of investment in infrastructure due to the limited financing capacity of the government, and the lack of private investment due to the deteriorating economic environment have all contributed to the decline in the output value of the "industrial sector" and the "non-industrial sector" and the sharp decline in GDP. The decline in GDP has also lowered the level of consumption in the household sector, which in turn has led to a sharp decline in the level of social welfare.
Under the public ownership of land with Chinese characteristics, land rent income has become an important source of financing for infrastructure, which is related to the so-called "Henry George's theorem". The "Henry George theorem" shows that, under certain conditions, land rent income can be used as the sole source of funding for public goods, without the need for the government to levy other distorting taxes.
2. If China adopts private ownership of land and finances infrastructure construction through tax increases, then tax increases will lead to large efficiency and welfare losses.
We conducted the following counterfactual analysis: under private ownership of land, the government raised the tax rate to bring the level of GDP to the same as the baseline model under public ownership of land. Numerical simulations show that the tax rate needs to be raised from 24% to 32.5% in the benchmark model in order to produce a GDP level comparable to that in the benchmark model under public ownership of land. In this case, the increase in the marginal cost of the "industrial sector" due to higher land rents has not changed, so that the output value of the "industrial sector" is still 10% lower than the baseline model, although it has benefited from the increase in infrastructure stock. In addition, compared with the benchmark model under public land ownership, the policy instrument of financing infrastructure construction through tax increases to promote growth is less efficient in terms of fiscal efficiency and infrastructure investment efficiency.
In general, taxes are distorted, and raising the tax rate may result in a certain loss of welfare. Therefore, compared with the baseline model, although the tax rate from 24% to 32.5% can achieve the same total output under private land ownership, the level of household welfare falls by 9%. This is also the inevitable result of excessively high and inefficient infrastructure investment squeezing household consumption. Through further analysis, it can be found that under the private ownership of land, although the policy of promoting growth by raising the tax rate can bring about an increase in GDP in the long-term steady state, its promotion effect on residents' welfare is not linear and monotonous.
Of course, the numerical simulation results also show that under the private ownership of land, when the infrastructure stock is insufficient, it is still advisable for the government to raise the tax rate to finance the infrastructure construction, which is conducive to the increase of GDP and the improvement of residents' welfare in the long run. Therefore, for most developing countries, where the basic system of private ownership of land cannot be changed for the time being, financing through fiscal means to promote infrastructure investment is still the right policy option when the infrastructure stock is insufficient.
Back in the present, China is facing another "economic growth mystery". Before the pandemic, society was generally full of confidence in the future of China's economy, and was full of confidence in China's realization of the 2035 long-term goals and the second centenary goals. Now more and more people are full of worries about the future of China's economy, whether China can maintain an economic growth rate of 5%-6% in the next 15 years, or only have the potential of 4% or even 3% or 2%, which seems to be a mystery and is no longer as clear, certain and palpable as before. Theoretically speaking, the socialist market economy system does have greater institutional advantages than the traditional market economy system, and its core logic lies in the fact that its dimension has been raised, and the means under the traditional market economy system have been superimposed on the factors of the socialist system, so that the government has a wider set of policy choices and policy tools, and the global optimal solution selected in a wider policy concentration is generally better than the local optimal solution under the traditional market economy system. So, can public ownership of land play an important role in solving the current "mystery of China's economic growth"? How can we give better play to the advantages of public ownership of land to enhance China's economic growth potential and residents' welfare?
(Liu Kai is a professor at the School of Economics, Renmin University of Chinese, and a researcher at the National Academy of Development and Strategy)
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