Translate: Chinese (simple) | Chinese (traditional) | Dutch | French | German | Greek | Italian | Japanese | Korean | Portuguese | Russian | Spanish
Earth People Logo
Earth Rights Institute -- The Earth Belongs to Everyone
About Us Programs / Projects News & Events Publications Support Us Contact Us

THIRD WORLD INTERVENTION
A NEW ANALYSIS
(EDITION TWO)

By David Smiley, Research Associate
School of Economic and Financial Studies
Macquarie University, Australia.

2000 (1998, first edition)

Published for the International Union for Land Value Taxation and Free Trade, Fruit and Wool Exchange, 427 Brushfield St. London E1 6EL, UK. (a United Nations Non-Governmental Organization) by Robert Schalkenbach Foundation, 149 Madison Av #601, New York, NY 10016, USA. Tel: 212-683-6424, Toll-free: 800-269-9555, Fax 212-683-6454, E-mail: schalkenba@aol.com
Websites: www.progress.org/books, www.schalkenbach.org

“I am happy to endorse the objectives of this report. I hope the report may lead to a new evaluation of existing interventionist strategies in the light of the complementary self-help strategy which the report proposes. I hope also it will lead to a better understanding of the common ground, and therefore mutual dependency, between government and non-government agencies.” Dr. Keith Suter, president, United Nations Association (New South Wales), visiting lecturer, Department of Social Work, University of New South Wales, past lecturer in postgraduate Peace Studies, Sydney University.

PREFACE TO EDITION TWO

It is a year since the first edition of this report was distributed to some major United Nations, non-governmental, and development research organizations. The main arguments presented have not been seriously challenged by recipients of the report. These are that western interventions in the third world have largely been unsuccessful; that an explanation may lie in the land monopolies which absorb resource inflows, block growth, and maintain gross inequality; that the only third world countries to achieve vigorous, egalitarian growth are those which successfully reformed these monopolies; and that a reformist program based on land value taxation (LVT) could provide solutions to problems far beyond those of growth and equity, to those concerning stability of governments, populations, and the environment, and to those concerning conflict resolution.

The purpose of this preface is to respond to important points raised by some of the major actors involved, to introduce two new appendices, and to restate the level of familiarity with the literature seen as prerequisite to a fundamental understanding of the third world problems addressed in this report.

Responses from the World Bank and IMF were generally supportive, perhaps reflecting recent internal debate on policy directions, new emphases on decentralization and local revenue sources, and on the need to recover large untaxed economic rents created by privatization programs. However, the respondents also suggested that successful policy shifts occur in response to a consensus established from academic input to refereed journals. This view is widely accepted as the basis for all progress in the physical and life sciences. It is less widely accepted with respect to the social sciences and, in this paper, openly challenged when applied to third world development policies, for the following reasons:

  1. There is a view, widespread in the development industry, that policy shifts are driven far more by political directives than by academic consensus. This seems the only rational explanation of policies “…amounting to reorganizing a bankrupt company and placing it, together with massive infusion of new capital, in the hands of the same incompetent managers who ruined it in the first place” (Ayittey, 1998).
  2. Papers on third world problems, upwards of 100,000 published over the last 50 years, have led to the generation of perhaps half a dozen development models capable of influencing industry policy (see for example “Theories of development – A Comparative Analysis” in Todaro’s “Economic Development”). But a reading of World Bank Development Reports over the past few years seems to suggest that not one of these models has proved appropriate to the third world.
The first of these two problems is beyond the scope of this paper. The intention of the report is to explore an extension to neoclassical economics relevant to the second problem.

UN coordination. I have suggested that a UN coordinating body such as ECOSOC, UNDP or NGLS might oversee the evaluation of a report addressing such a wide range of issues and relevant to so many UN organizations. This proposal, though audacious and perhaps somewhat impertinent, has received tacit support from the UN FAO (see letter in the appendix).

Responses from non-governmental organizations. Oxfam, one of the largest and most productive NGOs, found the report, together with “Land Value Taxation” (Gilchrist, 1988) interesting, addressing important issues, and well researched. The DPU at University College London strongly endorsed the report for the issues it raised and the debate it has started. However, both organizations raise concerns some of which are also found in other NGO literature. The first three are closely related and concern the effects of a strategy, proposing a new form of IMF conditionality, upon UN hegemony, national sovereignty, and relationships amongst NGOs, the UN, and national and local authorities.

  1. UN hegemony?. “Your strategy appears to focus on WB and IMF technocrats” and “Engagement with grass-roots organizations, rather than working through WB and IMF, would remove the fear of neo-colonialism” First, no successful land reform, perhaps no successful political reform of any kind in the third world, has occurred without some coercion, usually external. Japan, Taiwan and South Korea provide examples of the former, IMF conditionality provides examples of the latter. Second, LVT is concerned with the most grass roots of all factors: land, and is normally applied as a local revenue and redistributive instrument. The UN FAO, the organization most closely involved in LVT, sees it as being increasingly relegated to local and municipal programs and projects. In the sequence from feudalism to colonialism to independence to neo-colonialism, very little has changed in the effect upon the poor of monopolistic exploitations of land and natural resources, a problem addressed by LVT. Hegemony depends on monopoly and sovereignty. The concept of monopoly is well-established, that of sovereignty is increasingly in disarray.

  2. Sovereignty? “Does the imposition of such a reformist program breach sovereignty?” First, “ it is doubtful whether any single word has ever caused so much intellectual confusion and international lawlessness" (Akehurst, 1987:15). Disputes over sovereignty are frequently territorial, that is to say over positional advantage in land, the usurping of land rent, and access to natural resources. Thus a clear distinction between private rights to uses and social rights to rents which is implicit in LVT might explain some of the confusions and lawlessness associated with sovereignty. Second, sovereignty is almost always breached in some way by any international intervention. For example, structural adjustment programs (SAPs), international environmental standards, human rights interventions, and peacekeeping operations all seek to impose conditions upon sovereign governments. For structural adjustment, it is argued in this paper that LVT is a highly efficient structural adjustment in its own right as well as a remedy for the pain which SAPs inflict upon the poor. For environmental problems it is argued that taxation of resource consumption may often be more effective than legislative regulation. For human rights and peacekeeping initiatives it is argued that both would benefit from a fundamental analysis of the substantial flows in land rent which are almost always involved.

  3. Relationships? “Does the UN have any mandate to share responsibility on land matters with NGOs?” I believe the FAO and UNEP are already doing this, and the NGLS has a general responsibility here, including development and the environment, both of which concern land. “Should NGOs, or national governments and local authorities, be the main agents of social change?” In the report it is argued that LVT is the reform most likely to solve third world problems, and that the evaluation and eventual implementation of this reform requires cooperation between all the actors involved. The FAO is already involved and is able to report that “Member Nations have started to carefully review the process of modernising local land taxes” (FAO appendix). If the UN, Member Nations, local authorities, and the NGOs are already cooperating on problems such as the environment and human rights and if, as is argued in the literature (see Todaro and also Tietenberg), monopolies in land rights are major contributors to both problems, then the sharing of responsibilities for land reform seems appropriate.

  4. Is LVT politically acceptable? Several respondents raised questions of political acceptance and of the handling of disputes over assessments of tax liability. Recognition of political opposition to any reform involving powerful vested interests led to the report’s IMF conditionality proposal. In the areas of the environment and human rights, coercion for the common good is now being cautiously extended from domestic to global domains. Coercion, by external dictators and the American occupation army, resulted “in all three of Asia’s biggest successes – Japan, South Korea and Taiwan – the groundwork for both fast growth and the income equality that eased the social strains of development was laid by a radical land reform” (The Economist, 29 June 1991, p.16). In comparison, the imposition of a reform which does not (like land redistribution and land usage regulation) disturb existing rights of ownership, in exchange for future loans and past debt forgiveness, seems a very mild form of political medicine. Tax liability is always disputed. But when Denmark put all LVT assessments on the internet, appeals plummeted to less than one in 16,000. And there have been accounts of the immediate withdrawal of an appeal when the government offered to purchase the land at the valuation which had been claimed to be too high. For further discussion, I can only refer readers to literature which, in this particular case, is far better developed than in my paper: Gilchrist (1988), Robert Schalkenbach Foundation publications, and that arising from the work of the UN FAO.

  5. Is LVT applicable in diverse cultures? Have I “fully recognised the cultural values and different ideas of ownership even within single Third World Countries?” First, the paper addresses land rights for all peoples, and for indigenous peoples under Migration, Enclaves, and Intervention or self-help. Second, all states are made up of many sub-populations – indigenous, dominant intruder, and migrant – all with different histories. The historical flows of land rent between these sub-populations largely determine contemporary problems of culturally diverse minorities. For example, the dominant group may have consigned other groups to areas of sufficiently low value or high density to depress incomes to the point at which arise problems of native title, ethnic conflict, and human rights abuse. Then, when land values rise suddenly, typically concerning discovery, exploitation, and control of natural resources, these problems increase, often associated with trans-border incursions. All this may seem to be stretching the question of cultural diversity of ownership. I am simply suggesting that the understanding of culturally different ideas of ownership and solutions to problems arising from this diversity - indigenous land rights, ethnic conflict, and human rights - must fail where initial and subsequent allocations of land values are ignored. Third, and a more direct answer to the question posed by Oxfam, LVT of itself does not disturb cultural values manifested in existing patterns of land ownership. It simply separates social rights to the rent of land from private rights to ownership, use and enjoyment of land. In the next paragraph modes of land ownership are compared. In every one of these modes reformist criteria of equity and efficiency are met by LVT without disturbing the variety of cultural values which define humanity’s relationship to the land.

  6. Commons?. Oxfam’s next point, that the report “says little about the idea of collective land management and the idea of local and national commons” raises a conceptual problem over modes of ownership which is summarised briefly here. The mode of land ownership which historians call “tributary” pervades much of the third world and is addressed throughout the report. The mode associated with transnationals (TNCs) is described in chapter one as the articulation of two monopolistic modes of production, transnational and feudal. The taxation of TNCs was raised by University College London. The taxation of both modes of production is addressed in chapter one. The mode in which intruder populations leave legacies such as “indigenous land rights” and “native title” is referred to in the paragraph above. The mode of land ownership called “commons” was not explicitly analyzed in the report. This mode has been a source of some confusion ever since Hardin wrote “The Tragedy of the Commons” (Science, Vol 162). Hardin himself corrects some misinterpretations in Andelson (1991) “Commons Without Tragedy”. Ayittey (1998) is quite explicit on this confusion “Ownership and control remained within the lineage. Lineage control over the land was exercised by the elders and in some small tribes by the chief. Communal ownership is really a misleading description of this system, for it implies open access by all in the village to any piece of land, which was certainly not the case….The more accurate description is family or lineage ownership”. But even in the case of widely-owned and therefore genuine “commons” such as national parks, the principles of LVT allow society to balance the opportunity cost against the social value of the amenity.

  7. Do environmental programs have hidden costs? Oxfam correctly challenged my claim that environmental programs reduce both incomes and equity within the present generation. Let me dissect this claim. Environmental control via regulation or taxation must reduce the production and consumption of goods and services available to the present generation. However, programs such as wildlife conservation and sustainable agriculture may or may not have this effect. To answer the question for any one program I would need to know not only all the direct cost and benefit flows, but also the indirect flows such as shifts in land rent, not normally included in cost-benefit analyses. These latter almost always arise from any developmental or other intervention, and almost always impact adversely on the poor and landless. There is also a loss of consumption in the West arising from any form of intervention. In a related example of this, a one percent tax levy is now proposed to cover the cost of Australian peacekeeping in East Timor, a small part of a much larger cost which might have been avoided had the landed interests involved been correctly identified 20 years ago.

  8. Does sustainability depend on economic growth? The assumption that it does was also challenged by Oxfam. On the one hand the OECD countries could easily achieve sustainable development without further economic growth simply by following the advice of environmental economists, for example by taxing natural resource consumption to reduce demand and encourage technological substitution. But the Third World has no similar affordability. It has perhaps only two ways of achieving sustainable development. It can make huge reductions in its present levels of demand upon the planet’s natural resources. Given both the genocidal consequences and the powerful desires to emulate Western life styles this seems politically impossible. Alternatively the third world can follow strategies for economic growth leading to affordability of sustainable ecologies. The projections in the report suggest that this would take 800 years at present growth rates, 30 years after the effective implementation of reforms based on LVT.

  9. Taxation principles. Some major organizations confessed that neither they nor their partner organizations had sufficient knowledge of taxation issues readily to evaluate the report, in one case delaying response by six months. The equity and efficiency principles of taxation are well established, they have been applied to the taxation of the surface of the globe from J.S. Mill to Samuelson, and they are now being applied to the natural resources lying either side of that surface by environmental economists such as Tietenberg. Both as a revenue source for welfare and growth and, more importantly, as an instrument for behavior modification, the taxation of land in all its senses is believed by many economists to be central to any lasting solution to third world problems. But economists may underestimate the conceptual problems involved in this understanding as was evident in the next two responses.

  10. Modernisation. “The idea that land rent should be transferred to productive use is not new…Lewis being one example”. The models of Lewis, and after him Fei and Ranis, assumed that rural labor, being of zero marginal productivity, could be moved to a high-productivity modernised urban sector. Lewis did not examine possible reasons for rural zero marginal productivity. These are analysed in chapter one, under “Migration”, leading to a more realistic three-sector model of labor transfer in terms of shifts in Ricardian differential rent caused by monopolies in all three sectors. However, LVT makes no assumptions about modernisation, leaving this to the market or government intervention as appropriate.

  11. Indigenous land rights. “The analysis is seriously gender-blind and also reductionist in failing to consider issues such as indigenous land rights or usufruct”. Women’s Rights should, of course, have been discussed in the report, since their advancement is associated with the higher living standards which it is claimed LVT would deliver. Regarding both criticisms, it had been argued at some length in the report that the proposed solution is directly appropriate to all dispossessed peoples and indirectly appropriate to most human rights issues. But the conceptual difficulties facing non-economists in these matters became more apparent after attending two legal seminars, one on “Native Title” and one on “Human Rights”. Accordingly, there are two new appendices on these subjects.

Responses from universities. Apart from University College London very few substantial responses were received from universities. One university declined to read the report without first receiving a fee. A university researcher, involved in anthropological studies in Orissa, found the report highly relevant to his work, whereas another university development center, which included anthropology in its third world research projects, found nothing in the report with which it could engage. This report has never set out to engage with any specific academic research project. Its objective is to present arguments and seek responses regarding shifts in resource allocations towards research and development programs seen, in the light of the general failure of our interventions in the third world, as perhaps more relevant.

Finally, no respondent, raising concerns over the difficulties and therefore implied costs of the proposed reforms, compared these against the costs of all the conventional programs which have failed over the past 50 years, or with the potential costs of their continuance, as projected in the report’s appendices. The FAO suggested that the array of competencies to be mobilised to evaluate the report pervades throughout the entire UN system. The cost projections, simplistic as they are, suggest that this evaluation might be worthwhile. Accordingly, we commend edition two of “Third World Intervention” to all organizations concerned with the delivery or receipt of interventionist programs of any kind.

Three new appendices. Arising from responses to edition one of the report are new appendices: “Indigenous People’s Land Rights” and “Why have Human Rights Interventions failed?”. The most perceptive endorsement of the report, reproduced as the third new appendix, has come from a UN organization actively researching land value taxation. This highlights a general problem concerning assumed knowledge, the level of familiarity with the development literature assumed by the report.

Assumed knowledge. Some responses have revealed a lack of familiarity with the standard literature on development, particularly with concepts of monopoly, rent seeking, environmental economics, taxation principles, and land value taxation. It is argued in the report that such an understanding is an essential prerequisite to the policy shifts seen as necessary to any long term solution to third world problems. Accordingly, key references are embedded at appropriate points in the report, and nearly half the report is devoted to explanatory appendices. With regard to land value taxation, attention is drawn here to Gilchrist (1988) and the publications of the Robert Schalkenbach Foundation, in particular “Land Value Taxation around the World” by Robert V. Andelson.

CONTACT ADDRESSES.

David Smiley, Ph/Fx: (2) 9955-6547, smileyd@bigpond.com.au, 33 Morton Street, Wollstonecraft, NSW 2065, Australia.
Alanna Hartzok, United Nations NGO representative, International Union for Land Value Taxation, Ph/Fx: 717-264-0957, earthrts@pa.net, Box 328, Scotland, PA 17254, USA.
Pat Aller, UN NGO representative, 160 West End Av #14B, New York, NY 10023, USA. Ph 212-496-8256.


EXECUTIVE SUMMARY


OBJECTIVES.
  1. Evaluate the potential for land value taxation (LVT) as a strategy for reducing poverty, achieving high growth, and mitigating the pain and cost of structural adjustment programs (SAPs).
  2. Assess LVT’s long-term role in generating income levels associated with fiscal, political, and environmental stability.
  3. Suggest new research and development roles for government organisations, and new project implementation roles for non-government organisations.
PROBLEMS.
  1. For the last half century, third world development strategies have been based on neoclassical labor-capital models. These predicted high economic growth rates arising from capital inflows, the benefits of which would trickle down to labor. In most regions the results are quite the reverse of these expectations. For the last decade or two, in most regions of the third world, per capita income growth rates have been negative. The greater the endowment in natural resources, the more negative this growth. It is apparent that the labor-capital models have been quite inappropriate, particularly in those economies where landed institutions usurp resource inflows, block growth and maintain inequality. Several kinds of surplus (which economists call economic rents) are being consumed, not invested. Where a country’s institutions lack integrity and tranparency, these surpluses are usurped by private consumption, in a process which economists call ‘rent seeking’.

  2. In addressing this behaviour, SAPs face many complex and elusive examples of diversion of economic rent in a dense network of collusion and corruption. In contrast, LVT faces one highly visible, tangible, and immobile kind of economic rent: increases in land values, Land’s economic rent, transferred from consumption to investment by LVT, would double or triple existing levels of saving. It would also remove much of the dead weight loss holding back third world economies so far from their production possibility frontiers.

  3. The only third world economies to achieve consistently high growth with social equity, almost without exception, are those which have reformed rural land. China’s remarkable growth (14.2 percent in 1992) was driven by town-village-enterprises (TVEs) not state-owned-enterprises (SOEs). Again, almost without exception, recent banking collapses worldwide have followed excessive property loans seeking untaxed capital gains in urban land.

  4. The West began to achieve fiscal, political and population stability at about half its present per capita gross national product (GNP). At present growth rates the rest of the world will take about 600 years to to reach this level. Structural adjustment is slow and painful. But LVT, a structural reform in its own right, complements SAPs while removing their damage. LVT could help third world nations achieve stability within 25 years.
RESPONSES.
  1. Aid programs tend to deliver a variety of benefits to landowners while increasing rents payable by the landless.

  2. Development programs tend to raise land values and therefore rents, displace populations, and degrade the environment, and so reverse the outcomes expected from apparently separate health, food, infrastructure, and other humanitarian programs.

  3. Environmental programs aim to achieve natural justice for all future generations, but have the effect of reducing both incomes and equity within the present generation.

  4. Structural adjustment programs aim to achieve economic reform, but have the effect of reducing incomes temporarily, and increasing inequality permanently, alienating much Western assistance.

  5. Conflict resolution programs tend to maintain or rearrange endowments in land and natural resources, without addressing the sources of conflict in the economic and social consequences of these endowments.

  6. The above responses may simply add to, rather than subtract from, the number of migrants already displaced by the economic, environmental and political problems which these programs address. Furthermore, for whatever reason migrants are displaced, they forfeit the natural opportunities in the land they leave behind. Then, at their final destinations, they add to the land rent collectable by landowners already there, while their struggle to survive in overcrowded camps and slums subtracts from everyone’s natural opportunities in environmental quality.
RECOMMENDATIONS.
  1. Adjust budget allocations, pro tem, away from large-scale interventionist projects, the outcomes of which are evidently far from understood. Budgets should be correspondingly increased for research at home on the unintended consequences of strategies which do not explicitly and quantitatively model the effects of rent seeking, most particularly in land and natural resources.

  2. Design self-help strategies based on LVT, to complement conventional aid and structural adjustment strategies.

  3. Develop systems of incentives for the acceptance and implementation of these self-help measures, for example through aid and loan conditionality.

  4. International and local NGOs should share more UN project responsibility, especially in those projects concerned with the reform of the most local of all factors - land.


CONTENTS.


INTRODUCTION AND SUMMARY
Main problems
Main collective responses
Intervention - neoclassical or geoclassical?
Strategic implications

CHAPTER 1. INTERVENTION - A NEOCLASSICAL CRITIQUE
Migration.
International government aid
Non-government organisations
Foreign direct investment
Domestic welfare programs
Land reform
Debt management
Structural adjustment
Conservation
Conflict resolution

CHAPTER 2. A GEOCLASSICAL SYNTHESIS
Institutional failure.
Rent seeking.
Land redistribution and the Tigers.
Tax reform.
Intervention? or self-help?
A geoclassical growth model.

CHAPTER 3. SOME STRATEGIC IMPLICATIONS
Some implications of the test results.
Common interests.

SUMMARY, CONCLUSIONS AND RECOMMENDATIONS
Western intervention.
Explanations.
Effective institutional reform.
Models of reform.
Conclusions.
Recommendations for aid and development organisations.

REFERENCES

APPENDICES
  1. Economic growth theory
  2. Conflict resolution
  3. Modes of rent seeking
  4. Property theories
  5. A geoclassical model
  6. Review of assumptions
  7. Three economic growth projections
  8. Response from the UN Food and Agriculture Organization


INTRODUCTION


BACKGROUND

In the second half of the twentieth century, the West embarked on a series of collective, interventionist strategies targeting perceived third world problems. The strategy targeting poverty became known as development economics. That strategy targeting armed conflict became known as peacekeeping or, more generally, conflict resolution. And the strategy targeting the depletion and degradation of natural resources, not only in the third world, became known as environmental economics.

These strategies have not been entirely successful. For example, excluding the land reform Tigers such as China, the growth in third world incomes - gross national product (GNP) per capita - has not risen strongly as development economics predicted. Quite the reverse. This growth has fallen and has been consistently below zero for 15 years. Conflict resolution strategies have been unable to contain the size and frequency of armed conflicts, which seem to arise out of poverty and disputes over land rights. And environmental economics has been urging conservation programs upon a third world where the affordability of these programs is decreasing rather than increasing, and where private and social property rights in natural resources remain confused.

The purpose of this paper, then, is to review a range of third world problems and the uses made of development economics, conflict resolution, and environmental economics in addressing them. It will be argued that these three strategies are, to some extent, in conflict with each other, and each contains serious internal contradictions. Central to these conflicts and contradictions is the question of property rights in land and natural resources. A reform strategy based on the taxation of land and natural resources will be presented. It will be argued that criticisms of this tax strategy, whether valid or not for the West, are irrelevant in the third world. Quite the contrary. The strategy presented is seen as perhaps the only way of offsetting the negative impacts upon social equity of the structural adjustment programs of the International Monetary Fund (IMF) and the World Bank. Finally, the reform proposed could lead, faster than any other, to a standard of living associated with political, population, and environmental stability.

Since the structural reform proposed here is relevant to all types of projects and within all levels of intervention, the paper is aimed at a wide range of third world development organisations, both government and non-government. Given this wide range, the report is structured into three levels. In this section the main problems, responses, and reform proposals are summarised at a non-specialist level. Chapters one, two and three provide supporting economic analyses. At a third level are technical appendices. Since the use of economic concepts is unavoidable, even in this non-specialist introduction, preliminary definitions of some terms are provided. Further clarification of these, and definitions of other terms, will occur in context.

DEFINITIONS

Institutions (In this report) are organisations which divert economic outcomes from those which markets would achieve. In this context, beneficial institutions are those which correct for market failure. Harmful institutions (with which this report, and most institutional analysts such as Olson, are largely concerned) are individuals, private agencies, or government departments which exploit opportunities arising from either market or government failure. This exploitation may be passive, arising from established monopoly or excessively large initial endowments, or active, as in bribery and more direct forms of coercion to obtain economic advantage.

Economic Rent here is simply any unearned surplus obtained by rent seeking activity or by initial endowment. The term is more formally defined in monopoly theory.

Land Rent is the factor return to land and natural resources. Western economists, increasingly viewing natural resources rent as a form of economic rent, are apparently not yet agreed as to the conditions under which surface land rent is distinct from economic rent. In the third world, it will be argued in this report, there is little distinction.

Rent Seeking is a self-seeking activity generating social waste rather than social surplus. Rent seeking theory has, over the past 25 years, provided economists with a powerful tool for analysing the reasons for poor economic performance.

ABREVIATIONS

The following abbreviations will be used occasionally:
CBA (Cost Benefit Analysis),
GNP (Gross National Product),
IMF (International Monetary Fund),
LDC (Less Developed Country),
LVT (Land Value Taxation),
NGO (Non-Governmental Organisation),
NPV (Net Present Value),
OECD (Organisation for Economic Cooperation and Development),
SAP (Structural Adjustment Program),
TFP (Total Factor Productivity),
UN (United Nations).


MAIN PROBLEMS


Poverty and inequality. Poverty is difficult to measure, and research indicating the futility of attempts to define it has been reported recently (Economist, 1998b:88). Because of this, inequality of income is used as a measure of equity in this report. For example, inequality between nations can be measured by reference to World Bank Development Report tables. These indicate large and growing income inequality between rich and poor nations, for example:
1980 1995 Income (per capita GNP) for the West was found to be:
16 23 times greater than that of the rest of the world
40 58 times greater than that of low income economies
45 86 times greater than that of low income, excl. India and China
Table 1. Income comparisons. World Bank Development Report, 1997

Inequality of income within countries can be measured by decile tabulations and Gini coefficients. Research cited by Todaro (1997:150) indicates growing inequality within low-income countries, countries where land is the principal form of wealth and the main source of economic and political power. But undeclared incomes and imputed land rents must mean that inequality is greatly understated. The accumulation of landed wealth, and the difficulty of measuring it, are well illustrated in the following extract (Lappe and Collins, Food First, 1977):

“The buyers are a motley group, some connected with land through family ties, some altogether new to agriculture. A few have unemployed rupees acquired through undeclared earnings, and most of them look upon farming as a tax haven, which it is, and as a source of earning tax-free supplementary income. The medical doctor from Jullundar who turned part time farmer is sitting pretty. The 15 acres he purchased four years ago have tripled in value. To listen to him, he is farming ‘for the good of the country’ ... His only vexation is whether or not he will succeed in buying another 10 acres he has his eyes on - and what a disappointed man he will be if they escape him. As we watched him supervise the threshing, he was anything but a gentleman farmer.”

Economic stagnation. Some of the problems facing the development of the third world are illustrated by the following data on income growth derived from World Bank Development Report tables. World Bank data are used throughout this report, using labels shown in parentheses in table 2. The ‘West’ is taken here to be equivalent to the OECD economies, The ex-socialist ‘Transition’ economies closely map the World Bank’s ‘Middle Income, Europe and central Asia’, and ‘LDCs’ are Less Developed Countries. The term ‘Third World’, depending on context, is usually synonymous here with LDCs, but excluding those defined below as Tigers.

Growth. Average income growths were found to be 1960 - 1980 1985 – 1995
High income economies (West) 3.6 1.9
Middle income economies 3.8 -0.7
Middle income, Europe & C. Asia (Transition) 4.2 -3.5
Low & middle income economies (LDCs)   0.4
Low income, excluding India and China 1 -1.4
High income oil exporters 6.3 -2
India 1.4 3.2
China 3.4 8.3
Table 2. Declining rates of economic growth.

India has been selected as a large country which has experienced structural adjustment. China has been selected as a large country which has experienced land reform, as have Taiwan, South Korea, and Chile, labelled ‘Tigers’ in this report.

Environmental degradation. High up in the list of contributing factors here are population growth, economic growth, and property rights (See for example Todaro, Tietenberg, World Bank 1992). Population growth, perceived as an environmental threat, is not expected to peak, at 10.6 billion, until 2080(Earthscan, 1996). Economic growth, though also perceived as an environmental threat, is nevertheless strongly correlated with falling birth rates, and can provide the technology for cleaner resource conversion, and for scarce resource substitution. Furthermore, research (World Bank, 1992:40) suggests that pollution levels rise initially, and then fall, as GDP increases.

So, economic growth should eventually deliver the levels of income at which sustainable development becomes affordable. But, until this point is reached, the planet sustains cumulative, possibly irreversible, damage. Given high birth rates and assuming positive but low economic growth rates, sustainable development could be a very long way off for LDCs. If conventional strategies of economic growth have failed, then other ways of quickly raising economic growth need to be found.

Armed conflict and political collapse. Armed conflict and subsequent political collapse is now almost exclusively a third world problem. For example, between 1949 and 1989, more than 99.4 percent of the deaths due to conflict has occurred there (World Bank, 1991:128-142). Conflict is now more important than any other disaster with which humanitarian agencies have to deal.

Is it possible to identify the causes of conflict in such a way as to lead to effective containment strategies? The Red Cross (1996:138) has defined and tabulated, for 1990 through 1995 and for different regions of the world, two main causes. One, coded G for government, concerns the type of political system and a change in central government or its composition. The other, coded T for territory, concerns control of territory, through interstate conflict or internal secession. For Middle East, Asia, and Africa the frequencies of conflicts coded as G or T were roughly the same. For Europe the causes were exclusively territorial, for the Americas exclusively governmental.

The latter is surprising. For example it might be argued, since problems of landlessness have always characterised Latin America, that nearly all armed conflict there (and perhaps elsewhere) ultimately concerns ownership of land and natural resources for which political systems may be a surrogate. And it might be argued, in view of the number of conflicts involving Islam, that there should be a category R for religion. But Islam fuses religion and government into one unique polity. The Red Cross would therefore probably code these conflicts as G. But perceived territorial wrongs, and disputes over oil, gas and coal appear to underlie much Islamic militancy, which would suggest a code of T. Militancy may also be an outcome of poverty, for whatever reason, including inadequate access to land and ideologically channelled resentment at this poverty, for example in Iraq.

The casualties from armed conflicts are reported daily in the media. Surprisingly, there has been little analysis of the land value flows both causing and caused by these conflicts. These land values have their genesis in positional advantages on the globe’s surface, and resource advantages either side of this surface. It may be that long term strategies for conflict resolution, in following emerging trends in environmental strategies, need to make a distinction between private and social rights to the natural opportunities being contested. The collective political maturity which this implies is a very long way off, though a major political catastrophe could hasten its arrival. More pragmatic solutions are seen in sublimating the hostility of the disadvantaged and dispossessed. This may be achieved by encouraging efficient and equitable economic growth in regions of political instability, a main theme of this report.

Human dislocation and migration. According to Todaro (1989:263): “One of the most perplexing dilemmas of the development process is the phenomenon of massive and historically unprecedented movements of people from the rural countryside to the burgeoning cities of Africa, Asia and Latin America.” Population displacement and migration are byproducts of all of the main problems already summarised, and of natural disasters which are not considered here. The number of third world refugees, for example, has increased from about eight million in 1985 to nearly 20 million in 1995 (World Bank, 1997, Fig. 8.2). The construction of large dams alone uproots four million people each year.

But there are many others beyond the reach of statistics: “We think two million sleep on the streets. Birth and death rates are unknown but certainly high” (Calcutta street clinic doctor interviewed by the author). To these homeless must be added dwellers in hutments built of recycled materials: “If these hutments grow at the same speed, very soon more than 60 to 65 percent of the population will be slums...” (Mahratta Chamber of Commerce, Pune). A quarter of China’s population is expected to migrate into its cities by the year 2010. Global estimates of displacement vary widely, up to 100 million persons now and up to one billion by 2050 (Red Cross, 1996:13). These figures seem roughly in line with recent UN projections of urban populations rising from 2.4 billion to 5 billion by the year 2025 (UN 1995).

But, whereas examples of all this displacement are reported daily, the transfers of real or imputed land rent from the have-nots to the haves seem not to enter the accounting systems of development economics in ways which might suggest solutions. Public collection of these otherwise privately appropriated transfers, in reducing the cost of urban land and supplementing revenues for welfare, would immediately soften the impacts of migration. More important, in reducing rural inequality, public collection of land rent would reduce incentives to migrate and encourage stable growth in regions of transition or political instability. At present, for whatever reason migrants are displaced, they forfeit the natural opportunities they leave behind. Finally, they then add, at their destinations, to the land rent collectable by those who were there first. In addition, their struggle to survive in overcrowded slums subtracts from everyone’s natural opportunities in environmental quality.

Summary. Poverty, inequality and economic stagnation are the concern of development economics. Political collapse of states is the concern of conflict resolution. And environmental degradation and sustainable development are the concerns of environmental economics. But these problems are not independent, they impact one another.


MAIN RESPONSES


What are the main collective responses? They are seen here as government aid, non-government aid, foreign direct investment, welfare programs, land reform, debt management, structural adjustment, conservation, and conflict resolution.

Government aid. Governments individually, and collectively through international and regional organisations, have provided massive capital and other resource inflows into the third world, particularly in the last half century. Within this report we will be assessing four criticisms of this aid, that it has flowed into consumption rather than into productive investment for growth (Boone, 1994), that the failure of this aid is almost entirely due to institutions rather than to lack of physical or human capital (Olson, 1996), that this aid may sometimes achieve efficiency outcomes but at the expense of equity outcomes (Oxfam and other critiques of IMF conditionality), and that both the direction and content of aid depend too often on political agendas (Todaro, Oxfam, and many others). But, for whatever reasons aid goes adrift, it has created massive foreign debt. Apparently unrecoverable, this debt hovers around 30 percent of third world GNP (Todaro, 1997:509).

Non government aid. A large number of voluntary, charitable non-governmental organisations (NGOs) have headquarters in Western countries. In third world countries there are many field workers and representatives of these NGOs, often working in conjunction with local NGOs. All these people deliver and maintain a very large range of services, typically in agriculture, health and education. With first hand knowledge and experience of the structures which obstruct their efforts they must nevertheless leave initiatives for the reform of these structures to others. Within this paper we assess proposals for NGOs to accept a wider role in the implementation of reform programs, particularly in conjunction with international agencies and national government donors, and with recipient regional, national and local organisations.

Foreign direct investment. We distinguish here three types of capital flow. There are short term speculative flows, for example those seemingly associated with recent economic disasters. It is quite beyond the scope of this report to consider suggested reforms such as global frameworks of fiscal discipline, and international insurance instruments for loan guarantee. However, it will be argued in this paper that, since a high percentage of loan defaults has apparently been caused by land speculation, the reform of irresponsible banking systems could be greatly hastened by taxation reforms which remove incentives for this type of speculation.

A second type of capital flow has many examples in China, and in the other Tigers which have addressed their land problem. Here, long term productive investments are negotiated competitively, that is to say between many consumers and many potential suppliers of capital.

A third type of capital flow also concerns long term productive investments. But, in these cases a foreign monopolistic agent, such as a transnational corporation, negotiates land and resource rights with a local monopolistic agent. Although this type of investment has received much political attention under the headings of ‘Dualism’ and ‘Enclave Economies’, there has been little analysis of the land value flows involved. The economic and equity outcomes of this type of collusion are analysed in this report.

Welfare. It seems that much economic aid and some forms of foreign direct investment can have unintended consequences, especially for social equity. Can social welfare objectives be met through local taxation? Because of the high levels of institutional and private corruption, conventional taxation outcomes in the third world are likely to be much less efficient and less equitable than those in the West. The largest sources of revenue, indirect taxes, are distortionary and regressive, and typically account for 85 percent of total tax collection. Income and profit taxes are usually honeycombed with exemptions, when they are not evaded altogether. Property taxes, including land taxes, typically contribute less than two percent of revenue. A comparative analysis of taxation strategies is found in chapter 2. What is needed is a tax strategy which can support a substantial local welfare program.

Land reform. Though frequently advocated in the literature, land reform is often interpreted in agrarian societies as land redistribution. Land value taxation, likely to be considerably superior to land redistribution, has been implemented mostly in the urban West, but partially and at very low tax rates. Other methods have met with failure. For example, private consolidation of land into large holdings may or may not be efficient, but leads to great social inequality. Public consolidation, collectivization, has achieved equity in the past, but at the expense of considerable inefficiency. Tenancy reform has generally been easily circumvented, as have ceilings and floors on rent, farm sizes, and wages. Agricultural reforms, such as the “Green Revolution”, are often included under the heading of land reform. In this report the Green Revolution is treated separately as one of the outcomes of development investment which “mostly served the needs and vested interests of the wealthy landowners” (Todaro, 1997:326).

Debt management. Reactive debt management strategies include default or repudiation on the part of the debtor, and loan rescheduling or forgiveness on the part of the creditor. Proactive debt management strategies include the use of land value taxation revenue to move, inter alia, towards solvency. All these options are analysed later in this report.

Structural adjustment. The Marshall plan, while pumping capital into post-war European development, left the task of structural reform in the hands of local institutions, which were well understood. When it was found that similar capital injections into third world development led to debt rather than growth, the task of structural reform was picked up, by default, by the World Bank and the IMF. The prevailing reform strategy is structural adjustment and, like capital injection, its neoclassical economic logic is impeccable. However, the outcomes of structural adjustment programs, in terms of efficiency, have been mixed and, in terms of equity, have generally been disastrous. Local institutions were not, and still are not, well understood.

Unsurprisingly, structural adjustment programs have been heavily criticised, by local institutions for reasons connected with the preservation of rent seeking opportunities, and by NGOs and social commentators for equity reasons. Though these equity criticisms are convincing, the proposals offered are unlikely to be effective since they still sit within a prevailing two-factor capital-labor structure, whether neoclassical or socialist. Accordingly, this report advocates a complementary reform which would not only offset these equity effects of structural adjustment programs but which would represent a major structural adjustment program in its own right, by restoring land as the third (and major) factor in third world economics.

Conservation. Typical political responses to environmental problems have included exhortation at the international level, and attempts at regulation at the national level. Economic responses, often referred to as green taxes, are moving towards the concept of social ownership of the rent of natural opportunities. But although green taxes encourage the economic rationing and technological substitution necessary to conservation, they restrict the economic growth necessary to achieve incomes at which conservation might become affordable. Affordability for the third world, given contemporary economic growth rates, is elusive, to put it mildly. What are needed are reforms to stimulate growth.

Conflict resolution. There have been three main international responses to territorial conflict. First, appeal to rules derived from the United Nations Universal Declaration of Human Rights. Second, largely unsuccessful mobilizations intruding into dynastic struggles over monopolies of territories and natural resources. And third, a backup for the failure of both in the form of trade sanctions which seem more likely to delay rather than advance the evolution of the politically stable state. These responses remain short term necessities. But ,if conflict is a response to poverty, then strong and equitable economic growth may be the only appropriate response to conflict.

Summary of the main responses. These responses to third world problems have been frequently and heavily, but seldom very constructively, criticised. As a lead-in to subsequent analysis of these responses, and to anticipate its recommendations, some less obvious side-effects of these responses are summarised here.

  1. Aid programs tend to deliver a variety of benefits to landowners while increasing rents payable by the landless.

  2. Development programs tend to raise land values and therefore rents, displace populations, and degrade the environment, and so reverse the outcomes expected from apparently separate health, food, infrastructure, and other humanitarian programs.

  3. Environmental programs aim to achieve natural justice for all following generations. But this has the effect of reducing both incomes and equity within the present generation.

  4. Structural adjustment programs aim to achieve economic reform, but have the effect of reducing incomes temporarily, and increasing inequality permanently, alienating much Western assistance.

  5. Conflict resolution programs tend to maintain or rearrange endowments in land and natural resources, without addressing the sources of conflict in the economic and social consequences of these endowments.

  6. All these responses simply add to rather than subtract from the number of migrants already displaced by the economic, environmental and political problems which these programs address. Furthermore, for whatever reason migrants are displaced, they forfeit the natural opportunities in the land they leave behind. Then, at their final destinations, they add to the land rent collectable by those who were there first. Meanwhile, their struggle to survive in overcrowded camps and slums subtracts from everyone’s natural opportunities in environmental quality.
The aggregate result of these adverse side effects is widespread and rising resentment, easily focussed on all forms of intervention. This resentment may lead to the rejection of upstream initiatives such as structural adjustment programs, and curtailment of downstream initiatives such as welfare. These downstream initiatives are then further curtailed by donor disillusionment and recipient shortfalls in government budgets. This resentment may lead, for a variety of covert reasons, to the breakdown of peacekeeping. And this resentment, heightened by perceptions of inequality, must act as a brake on international efforts to contain the degradation and depletion of the natural environment.


INTERVENTION - NEOCLASSICAL OR GEOCLASSICAL?


Western intervention in the third world seems to have relied on neoclassical, labor-capital economic models of the real world. These models are inappropriate to economies where landed institutions can usurp resource inflows, block growth and maintain inequality. It is argued in this report that the harmful effects of this institutional behavior could to a large extent be corrected by taxation reform. The reform proposed would shift the neoclassical emphasis on the taxation of consumption, capital and labor in the direction of what might be called a geoclassical emphasis on the taxation of natural opportunities in land and natural resources.

Institutional failure. Olson (1996) implies that it is third world institutions which are entirely responsible for the massive squandering of all kinds of resources. And the World Bank, in analysing what it calls the pathology of state collapse, concludes that states which have been run into the ground by corrupt, negligent or incompetent leaders and officials, or which have been fragmented in civil war, in all cases have suffered institutional failure (World Bank, 1997:158). How can institutional failure be prevented, or damaged institutions repaired? Since Development Economics has not been able to predict or effectively deal with economic collapse, and since the theories and strategies of Conflict Resolution have similarly been unable to predict or effectively deal with political collapse, the question is extraordinarily important. So, how can the behavior of Olson’s institutions be explained, perhaps in a way which might lead to alternative reform strategies?

Rent seeking. Variously known as DUPSA (Directly Unproductive Profit-Seeking Activities), or activities generating social waste rather than social surplus, rent seeking refers to all activity aimed at capturing an unearned surplus which economists call economic rent. In any economy there are thousands of examples of monopolies to import, produce, or export goods or services. In a famous example, the granting of a monopoly on import licences in India transferred an unearned profit equivalent to 14 percent of the entire Indian government revenue into private hands. This diversion of this unearned surplus can occur through persuasion, bribery, corruption, armed coercion, or quite simply through what economists call “initial endowments”. Conventional reform, targeting the unearned surpluses flowing through Olson’s dense networks of collusion and corruption, is a slow and painful business, as the World Bank and IMF well know. But land can be described by three simple attributes: site, title, and rental value. In situations where initial endowments in land are caused by or encourage monopolistic structures, land rent becomes what economists call economic rent, and a legitimate target of taxation. Rent seeking theory then provides a measurement of the equity benefits in transfer payments and efficiency benefits in the removal of dead weight loss (See chapter two and appendix C).

Land redistribution. The Asian Tiger reforms effectively removed a very large component of monopolised economic rent, simply by redistributing agrarian land. Though this reform falls far short of that based on the taxation of land values, its results suggest that structural adjustment, should precede, not follow, capital injection.

Land value taxation. This strategy is elaborated in chapter two. Its objectives are summarised here as the improvement of production efficiency and distributive justice. It is implemented by identifying each parcel of land, calculating the rent of the land component excluding structures, and collecting this rent, at an appropriate rate, by a land tax. It applies to all land: urban, industrial, and rural.

A geoclassical model. For development economics and conflict resolution, though not for environmental economics or for local government financing, land value taxation may appear to be an entirely new politico-economic product, therefore requiring feasibility study and testing. And this is what recipients of this report are asked to do. For exploratory purposes we have constructed simple growth models of four stereotypical economies representing no reform, structural reform, agrarian land redistribution, and land value taxation. Each economy was set three tasks:

  1. To repay foreign debt of 30 percent of GNP
  2. To reach incomes which might be associated with political stability.
  3. To reach incomes at which sustainable development might become affordable.
The differences in the times to reach these targets, and in the costs incurred along the way, are astonishing. Accordingly, some comments on Cost Benefit Analysis are included in appendix E, and all assumptions used are critically examined in appendix F. The three test runs are reported in appendix G.


STRATEGIC IMPLICATIONS.


From the arguments presented, this report will suggest that the third world aid industry needs to:

Seek a much greater understanding of the unintended consequences of each other’s activities, across projects and between levels of the entire aid industry.

Consider fine tuning or redesigning short term strategies in order to reduce the effects of these adverse interactions.

Recognise that long term goals such as stable populations, politically stable states, and environmentally sustainable development, are unattainable without strong and especially equitable growth. A new collective strategy is needed for achieving this without the short-term economic, and long-term social costs, of contemporary strategies.

These, then, are the reasons for addressing so wide a readership. This introduction and summary section has been aimed at the non-technical reader. The remainder of the report takes the form of economic analysis or extended discussion of the problems, collective responses, and reform proposals referred to. Reference material is drawn from readily available World Bank reports, well-known specialist texts, and research summaries published in The Economist.


CHAPTER 1. INTERVENTION - A NEOCLASSICAL CRITIQUE.


The main international response to problems of growth and poverty has been the delivery of aid packages and associated loans. There have been further international responses arising from problems of the environment, territorial conflict, and humanitarian emergencies. The main domestic responses to problems of growth and poverty have been attempts to tax assets of low visibility or high mobility, and to implement programs of land reform and foreign direct investment (FDI) which, with the exception of the Tiger economies, have been largely unsuccessful. In almost all cases property rights in land and natural resources are involved. Yet neither international or domestic responses seem to reflect any fundamental analysis of private and social property rights in respect of the scarce natural resources being appropriated, degraded, disputed, or inappropriately used.


MIGRATION.


We commence our examination of inadequacies in neoclassical economics when applied to third world development with a critique of migration theory. A major cause of rural-to-urban migration is the continuous world-wide improvement in agricultural productivity. It is assumed here that the migration resulting from this is, from the standpoint of the rural sector, economically efficient. It is probably irreversible anyway. But migration may also be economically inefficient, and therefore reversible by effective reform of the causes of inefficiency. We are concerned here with inefficiencies in the second case and with equity in both cases. We outline two migration models, a ‘pull’.stimulus and a ‘push’ stimulus. A third, coercive model, associated with armed conflict, is summarised separately in appendix B. As a result of any of these three stimuli, displaced persons are absorbed typically into the slums of an informal economy, into an urban sink. The characteristics of poverty and unemployment of this sink are extensively tabulated by Todaro, and in Red Cross (1996:131-135). We conclude with an outline model of the negative externalities which the rural sector imposes on migrants, the negative externalities which migrants then impose on urban populations and infrastructure, and a means of internalising these externalities.

Todaro’s expectations incentive ‘pull’ model. Todaro (1989:278-284)) has developed a well-known rural-to-urban migration model in which the migrant compares his estimate of the net present value (NPV) of future higher but uncertain urban income streams, minus a (possibly) non-recurring cost of migration, with the NPV of lower, but known, future rural income streams. This mathematical version of “The streets of Calcutta are paved with gold” illustrates the pull incentive to migrate.

A rural debt coercive ‘push’ model. A more realistic and useful coercive push model might explain migration as follows: Consider a farmer in a country which, like nearly all countries, can produce more than enough food for all of its inhabitants. As a result of any or all of the third world problems identified in this report, the farmer runs out of food. Without substantial collateral he has to borrow, at an interest rate between 50 and 200 percent (Todaro). This high rate may reflect many factors, monopoly power, risk, or the fact that he borrows. say, 1000 rupees-worth of grain at high, pre-harvest prices and has to return back a much larger quantity at low, post-harvest prices. He uses this loan to feed his family and, if he is a tenant or sharecropper, to continue paying a rent equivalent to 50 to 80 percent of his crop to a hereditary landowner (Todaro). Eventually he defaults. If he is a smallholder he loses his land. Next time, he and his family become debt bonded. Finally, he migrates, with or without his family. Let us follow this migrant through another model of the trail of problems associated with monopolised land rent.

Rural-to-urban migrants. In a three-sector, rural, urban-formal, and urban-informal economy, rural migrants may pass through, but more likely remain embedded within, the informal sector of the city, depending on income from ambulatory services, begging or crime. Apparently rent-free vacant and public spaces turn out to be managed by illegal “slumlord” rent collectors, until the shacks are bulldozed and the occupants moved on. Alternative accommodation, if not dried up by rent control, is available at rents which always rise with population. Public savings in the formal economy are diverted from productive investment to meet rising costs of welfare, congestion, crime, pollution and infrastructure decay. At the same time, private savings are also diverted from productive investment into unproductive, untaxed speculative investment in the rising land values created by migration and population growth.


INTERNATIONAL GOVERNMENT AID.


Development aid. Boone (1994) found that aid is only effective in unusual cases where it represents more than 15 percent of recipient GDP. For all other cases he reports: “I find no significant correlation between aid and growth. I conclude that virtually all aid goes to consumption.” Aid programs appear to have had little impact on growth or inequality, and to lead, almost inevitably, to debt. Olson (1996) suggests that differences in the growth of countries are not due to differences in physical, human and natural capital, as suggested by neoclassical and endogenous growth theories, but are almost entirely due to differences in institutions, and that capital of all forms is being massively squandered by third world institutions. Milton Friedman is reported as asserting that money given to corrupt third world regimes simply breeds further corruption, makes the poor there poorer, and that the best thing the World Bank could do was to disappear (Daily Telegraph, 1994). And more recently, the World Bank has found that, for countries classified as having bad economic policies, one percent of GDP in aid slows growth by 0.3 percentage points a year (Economist, 1998d). The economic theories which these statements are challenging, and their unintended consequences, are analysed in appendix A.

Humanitarian aid. Neither is humanitarian aid exempt from unintended consequences: “where massive needs exist, the donor-country media and public usually compel a humanitarian response...this response cannot be a substitute for - and may complicate - finding political solutions” (Red Cross, 1996:15).


NON GOVERNMENT ORGANISATIONS.


But humanitarian aid is not only the concern of governments. It is a concern of the huge network of international, national, and local indigenous groups called NGOs. Volume three of The Oxfam Handbook of Development and Relief gives some idea of their size and scope. And the World Bank (1997:113-116) suggests that, in a world of collapsing states, NGOs have greatly increased importance, not only in lieu of failed, public providers, but also in repairing and improving the institutional capability of the State


FOREIGN DIRECT INVESTMENT.


In cases where many competing investors have negotiated with many competing regional and industrial seekers of investment, as in China, Foreign Direct Investment (FDI) has been relatively successful. But where a single powerful investor, typically a transnational corporation (TNC), negotiates with a monolithic local interest group, typical of traditional land-owning elites, the outcome tends to benefit the two negotiators rather than the economy in general or the poor in particular. The reform of either monopoly would improve the chances of efficient and equitable investment, but the reform of the local monopoly would also solve problems far beyond those addressed by FDI. An enclave theory, developed below, applies economic analysis instead of the more usual political analysis to the problems of enclaves, or dualism.

Todaro defines enclave economies as pockets of economically developed regions, typically operated by foreign firms in mining and plantation activities, coexisting with an adjacent, economically stagnant region. Some, including Todaro, define this coexistence as chronic, not transitional, the articulation of indigenous with external modes of production. Others, citing the example of China and other Tigers, argue equally strongly the benefits of competitive foreign investment. So what are enclaves, are they necessary, where do they come from, and what solutions are there to the enclave problem? If enclaves are defined as foreign territory surrounded by one’s own territory, this implies enclosure and expropriation, in turn defined as:

Enclosure: enclosing (especially of common land to make it private property)
Expropriation: dispossession from estate, etc.

An enclave model. Famous examples of expropriation, enclosure and enclaves occurred in England, Scotland and Ireland, the reverberations from which are still being felt in Northern Ireland. In later colonial examples, inducements to replace traditional, self-sufficient tribal employment by wage employment were obtained by shifting indigenous populations into progressively smaller and less fertile areas.

Case studies. In a contemporary equivalent case, a transnational corporation (TNC) negotiates land rights to an enclave sector with a local landed monopoly. This one-to-one collusion between two monopolies results in the enclosure of sufficient land for development purposes. Just sufficient labor is retained in the enclave sector. Surplus labor is excluded and migrates to what is left of the original rural sector, raising land rents there, or to the urban informal or formal sectors, raising land rents there too. Increases in land price and land rents in the enclave sector will depend on the ratio of labor-saving to land-saving investment there, the benefits usually being shared by the two monopolies. The author has found relevant case studies for Cuba, Nicaragua, Chile, Indonesia, the Philippines, and many other third world countries, but none for the land reform Tigers.

Solutions. Here are five domestic solutions to the enclave problem:

  1. Terminate negotiations. The TNC simply goes somewhere else.
  2. Complete negotiations. Hope that the benefits of technology and scale economies trickle across to the LDC and trickle down to the poor.
  3. Arrange for many-to-many negotiation between competing consumers and competing suppliers of development services. This ensures competition, efficiency and equity, and spreads the risk.
  4. Expropriate the foreign assets. Usually, this is simply an asset transfer from one form of monopoly to another.
  5. Select small, domestically appropriate projects in joint ventures with NGOs, and fund these from LVT.
These options raise three important issues: taxation of the TNC monopoly, taxation of the domestic private monopoly, and funding of domestic public projects.
  1. Domestic taxation of foreign corporations is a well-known problem. Even more so than in domestic taxation, capital can fly and profits can be made invisible. Land, however, as a legitimate target of taxation, remains immobile, highly visible, and within the country.
  2. Where the TNC has negotiated with a private, local landed monopoly, the incidence of the LVT is now on the landowner, though the burden is on the TNC.
  3. Revenue from LVT is usually thought of in connection with local government. But the high percentage levels advocated in this report would provide revenue for central as well as local government budgets. In addition to domestic and foreign private investment projects, governments invest in projects where market failure is clear, for example in infrastructure development. In some countries, where government projects extend far beyond the boundaries of market failure, investment can be very large. It is argued in this report that government project funding from LVT revenue would be far preferable to revenues from less efficient local taxes or from the foreign loans which have caused such enormous debtor problems.


DOMESTIC WELFARE PROGRAMS.


Many third world domestic welfare programs may have unintended consequences (World Bank, 1997:table 3.1, summarised here). But foreign domestic welfare programs, for example involving farm subsidies within the Common Agricultural Policy of the European Union, may also have unintended consequences for the third world, also shown in table 3 below.

WELFARE
INSTRUMENT
RELEVANCE TO THE
THIRD WORLD
DOMESTIC PROGRAMS
Cash assistance Unsuited to poor countries
Food subsidies Distortionary and regressive
Housing subsidies Often regressive
Energy subsidies Help urban poor but distortionary and
environmentally damaging
Public works Appropriate for transient poverty
Credit-based programs Require collateral, therefore regressive
FOREIGN IMPACTS
European CAP Exports bankrupt third world farmers
Restricts imports from the third world
USA farm protection Export subsidies bankrupt third world farmers
Table 3. Domestic responses to welfare problems.


LAND REFORM.


The economic implications of five strategies are considered here. Many case studies are found in Bird 1974, King 1977, Todaro 1997, and Warriner 1969.
  1. Private consolidation of land holdings. This can lead to economies of scale in competitive situations or, more usually, to diseconomies of scale where the landowners are in a monopolistic or non-competitive situation as, for example, in much of Central and South America. When private consolidation is finally seen as a problem rather than a solution, other land reform methods are sometimes tried.

  2. Redistribution of land. Here land, and therefore its rental value, is redistributed. But even if this redistribution is initially equitable, it becomes inequitable in time as comparative advantages diverge. Unless population densities are low, considerable initial success is often followed by fragmentation and diseconomies of scale, and even to a return to the private consolidation and privileged class structures which redistribution was intended to remove, as has happened in Latin America and is starting to happen in China.

  3. Public consolidation. In nationalisation and collectivization, land is arbitrarily socialized. This reduces income inequalities but only within any one collective, since different collectives have different comparative advantages in land. In all cases gains from economies of scale are offset by loss of personal production incentives and inefficient allocation of resources.

  4. Tenancy reform. This is easily circumvented and, in any case, excludes the most important target group for land reform: the landless laborer. Rent remains privately monopolized.

  5. Other legislative or administrative devices. There are sets of reform legislation such as ceilings on rent and farm sizes, ceilings and floors on agricultural prices, and floors on wages, etc., proposed by reformers but usually drafted by the establishment in ways which make them easy to evade or block. Wherever they have been implemented, the poor have suffered unintended consequences which should have been predicted by standard supply and demand analysis. For example, rent control can be shown, in supply and demand diagrams, to reduce supply thus evicting some and reducing standards for others.
With the exception of land redistribution, conventional land reform has been a failure. But land redistribution is necessarily confined to rural land, and does not encourage scale economies, limitations not shared by LVT. King (1977:18,19) claims that “There is a body of theory with considerable following amongst economists that land reform could be brought about automatically by indirect measures such as tax reform thereby avoiding the high costs of conventional land redistribution programs.”


DEBT MANAGEMENT.


Debt has not only had a devastating effect on third world countries, but has impacted donor countries as well (See for example George, 1992). The extensive analysis of third world debt and first world strategies for its management has generated a very large literature which is relevant here only in one regard, that of its implicit assumption of two-factor, labor-capital, representations of borrower economies. This assumption, challenged elsewhere in this report, has apparently obscured the fact that many third world countries, though appearing to lack domestic resources for economic development, can consume as much as 50 percent of GNP in unearned and untaxed land rent (Clark, 1957:637, Todaro, 1989, 1997). The public collection of this land rent, by a land value tax – recognizing land as a vital third factor in economics - , would have provided development funds far in excess of those provided by aid, making loans, and therefore debt, and therefore the debt crisis, completely unnecessary.

Reports of the 1990s Asian economic collapses and civil disturbances have cited land speculation, channelled through their banking systems, in every case. For example, Indonesia’s burst property bubble has left its banks with $7 billion in defaulted property loans. These lie uncomfortably alongside the country’s foreign debt, almost twice the average for the region. Fungibility, the substitutability of aid for different purposes, is indeed a rubbery concept. But, whatever the sources of speculative investment, effective LVT would have removed incentives to speculate in land.

Third world debt is taken to mean external or foreign debt. The origins of debt lay in the desire for economic growth. But government revenue from porous and inefficient tax systems was so far below that needed that foreign aid appeared essential for what Rostoff called economic takeoff.

The quicksand. Unfortunately, if Boone is to be believed, most of this aid went, in good times, into unproductive prestige projects, real estate speculation and general misappropriation and, in bad times, into capital flight and Swiss bank accounts. For example, 50 percent of the 1972 Nicaragua Earthquake Reconstruction Loan was absorbed privately by the first family, and perhaps most of the remainder went into what is now called crony capitalism. Todaro (1989, chap. 13) presents a hypothetical balance of payments table for a typical developing nation. By far the largest entry under Current Account is ‘Debt Service Payments’. By far the largest item under Capital Account is ‘Resident Capital Outflow’. This is described as capital flight and is dissected into private overseas investment in securities and real estate, usually in anticipation of local devaluation. Regrettably, Todaro’s table does not dissect local investment, though elsewhere he cites examples of local urban and rural real estate speculative investment, privatisation, so to speak, of public capital inflows.

The boomerang. However, debt has two faces. There are penalties for donor countries, including undesirable increases in global warming, drug imports, bank bailouts, illegal immigrants, armed conflicts, and also reductions of export earnings (George, 1992).

Solutions. So, what are the solutions to third world debt? Here are four:

  1. Reschedule loans (including forgiveness). This reduces punishment of the innocent, but also of the guilty, and does little to reform the actions of corrupt borrowers or irresponsible lenders.
  2. Default on loans. This reduces punishment of the innocent, though their country loses credit rating as a result. It may make donor banks more responsible, or they may pass punishment on to the taxpayer.
  3. Legal repudiation of debt. This would be appropriate in cases such as when “a transitory dictator absconds with money borrowed in the name of the people leaving its repayment for future generations of that nation” Tideman (1993) This would preserve borrower’s credit rating but it does imply the creation of an international tribunal to hear and decide cases on behalf of the debtor population. Similarly, the newly established International Criminal Court at the Hague should have the power to try the ‘transitory dictator’ for his international crime.
  4. Self-help. Reduce the need for loans and provide adequate revenue for debt servicing, inter alia, by LVT.


STRUCTURAL ADJUSTMENT.


These programs are, essentially, attempts to reform what Olson (1982) has described as the dense network of opaque and intangible components of collusion and corruption which causes economic sclerosis. This task is immense, as the Word Bank and the IMF well know. The prevailing strategy is structural adjustment, but although the need for it is widely accepted, SAPs have been heavily criticised, primarily on account of adverse equity outcomes. Accordingly, this report advocates a complementary reform which not only removes these objections to SAPs but represents a major structural adjustment program in its own right.


CONSERVATION.


According to Tietenberg (1996:57).“...environmental problems arise because of a divergence between individual and collective objectives”. These problems can be solved “...by realigning individual incentives to make them compatible with collective objectives. As self-evident as this approach may be, it is controversial”. Similar statements could be made about land . Though land, as a taxable source of revenue, is generally thought of as sites, it shades into natural resources as part of a physical entity which can be taxed heavily without distorting production incentives while at the same time contributing to distributive justice. Examples include moorings, surface and ground water, communications and broadcasting frequencies, energy (wind, solar, tidal, hydro, hydrocarbons, nuclear, etc.), minerals, forests, fisheries and other species, etc. (See Gaffney in Harrison, 1998 and, 600 pages on resource taxation in Tietenberg 1996). Similarities and differences between environmental resource taxes and land taxes will be clarified in the section on Green taxes.


CONFLICT RESOLUTION.


There have been three main international responses to territorial conflict. First, appeal to rules derived from the UN Universal Declaration of Human Rights. In conflict situations, nearly all of its 30 rights depend upon article 17 which assumes private property rights to the rent of the natural opportunities being contested. Second, largely unsuccessful mobilizations intruding into dynastic struggles over monopolies of territories and natural resources, and attempting to rearrange these monopolies. And third, a backup for the failure of both in the form of trade sanctions which seem more likely to delay rather than advance the evolution of the politically stable state.

Although these three responses remain short term necessities, more fundamental responses in terms of the nexus between poverty, human rights and land rights are desirable and are therefore discussed in appendix B. Finally, if conflict is seen as a response to poverty, then long term conflict resolution is therefore seen as primarily dependent on strategies for equitable economic growth.


SUMMARY.


We have now assembled critical analyses of the main forms of Western intervention into the third world. Neoclassical economics as applied here has not well explained the responses of third world institutions to these interventions.


CHAPTER 2. A GEOCLASSICAL SYNTHESIS.


Can neoclassical economics, with its emphasis on efficiency outcomes of capital-labor models, be adapted to explain equity as well as efficiency outcomes where institutions, particularly landed institutions, may affect the behavior of capital and labor? We approach a possible adaptation of neoclassical economics by way of theories of institutions, rent seeking, and taxation.


INSTITUTIONAL FAILURE.


Political theories apply normative analysis to institutional structures, while economic theories apply quantitative analysis to the delivery of private and public goods and services within these structures. For simplicity, these institutional structures are referred to here as the state. The World Bank, at the nexus of politics and economics, has tabulated some of the functions of the state (1997:27), adapted as follows:

Functions of the state.

  1. Overcoming imperfect information, e.g., by financial regulation.
  2. Addressing externalities, i.e., losses of utility inflicted on one party by the actions of another, e.g., by environmental protection.
  3. Protecting the poor, e.g,. by income redistribution, asset redistribution, and disaster relief.
  4. Regulating monopoly, e.g., by antitrust policy.
Institutional failure. The 1997 World Bank report also provides useful surveys of the causes, and methods of prevention of state collapse (pp. 158-169).

Institutional reform. The same World Bank report reflects a small but significant shift in emphasis away from intervention and towards self-help, by reform of the judiciary, the administration, and the financial sector, more local ‘ownership’ of structural adjustment programs, and by redistribution. The reforms proposed in this report complement these World Bank recommendations. For example:

  1. Financial regulation may be incomplete where speculative incentives are not addressed first. Tax structures which encourage property speculation may increase the amplitude, and possibly the frequency and duration, of business cycles.
  2. Environmental protection may be unaffordable without radical tax reform.
  3. Effective and long term protection of the poor may require a review of the uses made of neoclassical economics, for example: “Neoclassical models are strictly concerned with efficiency and do not address issues relating to equity. Income distribution is not considered to be relevant, and the theory is unconcerned with the distributional issues arising when all scarcity rents from national resources accrue to a few private owners.” (Todaro, 1997:354).
  4. Monopoly regulation may not be as effective as economic disincentives to acquire the economic rents which create monopolies. If institutions are viewed as repositories of historically accumulated economic rent, then their behaviour may be susceptible to analysis by rent seeking theory, and correction by the taxation of rent.


RENT SEEKING.


Rent seekers are those who aim to appropriate the unearned surpluses which economists call economic rent. This class transfer from society to rentier reduces social equity, and is also associated with four inefficiencies: a cost of initial rent seeking, a cost of ongoing rent protection, a dead weight loss of production and consumption, and a disincentive to innovate. These inefficiencies cause or are caused by opportunities for rent seeking and, in the third world particularly, usually inflict very large costs.

Scope of rent seeking theory. Though rent seeking theory evolved in the context of bribery associated with government intervention, research papers continue to extend its scope. This report takes the rent of land in imperfect markets, and of natural resources in all markets, to be examples of economic rent, and therefore susceptible of rent seeking analysis. Rent seeking of opportunity in land and natural resources is found often in economic problems, almost always in political problems, always in environmental problems, and almost always in the third world. Furthermore, the constraints placed upon these natural opportunities by rent seeking often have severe international and intergenerational implications.

Monopoly theory. Monopoly theory, upon which rent seeking theory is based, is usually illustrated in economics textbooks by a price-quantity diagram on which are shown lines for demand and marginal revenue intersecting with marginal cost. Derived from this diagram is a rectangle representing a transfer from consumer to monopolist, the economic rent of monopoly, and a triangle, the Harberger triangle, representing the welfare cost of the monopoly. The shapes and sizes of these rectangles and triangles are susceptible to the geometry of the diagrams used in monopoly theory and hence rent seeking theory (See standard economics texts on monopoly, and rent seeking analyses such as those of Brooks and Heijdra 1989, Tollison 1995, etc.).

Economic rent. Economic rent, usually represented by a price-quantity rectangle in monopoly diagrams, is sometimes also referred to as super-normal profit in monopoly theory.

Rent seeking costs. A rent seeker will expend money almost up to the size of the economic rent rectangle (or a larger, ‘Tullock’ rectangle in some circumstances). He will do this in period one in order to obtain the economic rent. And he will expend similar amounts in each subsequent period to protect this economic rent.

Dead-weight loss. The sizes of Harberger triangles are even more susceptible to the geometry of the diagrams. In theory, the triangle area should be half that of the rectangle. But representation is difficult here; for example, a factor in short-term fixed supply, such as land, might project a relatively small triangle. But there is a component of dead weight loss, difficult to represent diagrammatically, called the failure to innovate, which arises from the disincentives which monopoly inflicts upon an economy. The work of Olson, Boone, and others seems to suggest, for third world economies, where land tenure systems are often monopolistic, that the dead-weight losses must be enormous.


LAND REDISTRIBUTION AND THE TIGERS.


Since the Tigers have built successful economies on reforms including land redistribution, and in the process have been largely free of conflict, it may be appropriate to commence our diagnosis with a comparison of the general third world problem region with one representing a successful, if partial, solution to the land problem.

CHARACTERISTIC THIRD WORLD TIGERS
1 Per capita income growth Below zero 8 % p.a.
2 Level of capital investment Low High
3 Domestic savings Low High
4 Foreign investment Debt bonded Paid back
5 Productivity of capital Compromised High
6 Population growth rate High Near ZPG
7 Levels of inequality High Low
8 Human capital (skills) investment Low High
9 Conflict and civil collapse Endemic Rare
10 Land reform None Agrarian only
11 Rural poverty Endemic Rare
12 Urban poverty Endemic Increasing
13 Land speculation Endemic Urban
14 Sustainable environment Impossible Possible
Table 4. Comparisons of the Tigers with the third world.


TAX REFORM.


Conventional taxes are inefficient, inasmuch as they discourage production, and they may have uncertain distributional effects. For these reasons they generate extensive and complex legislation. They violate rights to some sort of private property, for example income. LVT and green taxes, on the other hand, leave property rights to ownership, use and enjoyment secure and undisturbed, essential for the efficient production of goods and services. They simply collect values which have been created naturally and socially, not individually. Because they maximise domestic, international and intergenerational utility, they are therefore efficient and equitable. LVT is single and simple. Green taxes are numerous and sometimes complex.

Taxation principles. Tax strategies and instruments are usually evaluated in regard to their efficiency, fairness, and simplicity, in accord with Adam Smith’s canons (For example see Gilchrist 1998, Stiglitz 1988, Sullivan 1996).

Efficiency. A tax is efficient if it does not place a burden on the production of goods and services, does not distort business decisions, and encourages optimum use of the factor being taxed. LVT is the only tax which encourages production, by forcing unused or underused land surface into production. In the particular case of green taxes, where optimum use of the factor may reflect environmental considerations, the tax is applied at the point of extraction (e.g., severance taxes) or at the point of consumption (e.g., gasoline taxes).

Equity. A tax should be fair in that it treats similar people similarly. The term equity often also refers to inequality and sometimes implies redistribution. In the West, a main objective of most tax structures is redistribution, to shift some income to the poor. It seems likely that, in the third world, low personal income tax and high consumption taxes are therefore inequitable. Given the low visibility of much personal income and the opportunities of capital flight, land has the advantage, to the tax collector, of being fixed, tangible and highly visible. And, given the relatively high percentage of GNP going to third world land owners as rent, and the inefficiency and inequity of existing tax structures, a heavy LVT would appear to be the best tax strategy there.

Simplicity. A tax should be easy to comply with, easy to collect and hard to evade. These requirements are met by few taxes in the West, fewer still in the third world. LVT meets all these requirements. Collection and evasion problems are generally large in all economies, especially in informal economies. LVT meets these requirements in any economy.

Criticisms of LVT. There are, however, standard neoclassical criticisms of Henry George’s single tax (for example see Sullivan, 1996:184-185), on which LVT is based, but with which it is often confused:

  1. “Its yield is insufficient for today’s government budgets.” This, in the West, is unascertainable since its governments do not measure land’s share of GNP (See Gaffney “An Inventory of Rent-Yielding Resources” in Harrison, 1998), nor do they measure the costs of taxing Labor and capital (See Tideman and Plassmann “Taxed out of Work and Wealth” in Harrison, 1998). But LVT does not preclude other taxes, it simply claims to be better. With regard to the third world, the development literature consistently suggests that ‘unearned’ agrarian land rent is equivalent to about 50 percent of product.

  2. “As the tax on land rent is raised, the price of land falls, this is confiscatory and requires compensation.” But all taxation is confiscatory, and it is more efficient and equitable to return socially created values to society than to tax private effort and initiative. Furthermore, LVT can lead to compensation by the reduction of less efficient taxes and, unlike all other forms of taxation, by the increased economic growth encouraged by LVT. Concerning property rights, with LVT land is not confiscated, property rights to ownership, enjoyment and use of land are undisturbed. It is argued in this report that most third world problems can be traced to monopolies in land and natural resources which, by a series of private confiscations throughout history, have put in place the hereditary and class structures which hold these economies so far from their production possibility frontiers. LVT does not legally challenge these structures, but would undoubtedly reform them.

  3. “A 100 percent land rent tax would reduce land value to zero. Therefore government valuers would no longer be guided by market prices.” This is debatable. If post-LVT land values reflect the NPV of future tax liability then land values never reach zero. Land markets are, in any case, far from perfect. Finally, conventional tax systems and their cumbersome legislative crutches do not seem to rely too heavily on market signals, even in near-perfect markets.

  4. “It is hard to separate a property’s capital value from its land value.” For urban and industrial land the comments in point 3 generally apply here also. However, estimation of city land values is carried out routinely in many Western local governments. In the third world, rural land remains a major source of wealth and its value is easily separated from that of capital. For example, average value of fixed farm assets (implements, equipment, grain storage, etc.) in rural India typically is a small percentage of the value of land.
Compensation. Theoretical criticisms of LVT sometimes imply that, where land is freely traded in a perfect land market, the introduction of a 100 percent tax on land rent would require compensation equivalent to the capitalised value of the rent being taxed. But land markets are far from perfect, especially in third world countries where initial endowments of land have often been preserved within traditional landed elites. Furthermore, governments often introduce new taxes with little compensation. The argument for LVT suggests that, where compensation appears just, that this be achieved by corresponding reduction in other, less efficient taxes. For the conservative land rent figure of 30 percent of LDC GNP used in the growth projections no direct compensation adjustment has been made. However, the results of the test projections suggest very large indirect compensations in the form of greatly increased economic growths.

Land Value Taxation. The objective of LVT is to increase production efficiency and distributive justice by publicly collecting land rent. LVT is implemented as follows:

  1. Produce land value maps, identifying each site and its owner, and estimate the land and rental value of each site. Reassess periodically.

  2. The market value of land equals the present value of the stream of rental income generated. For example, where the income stream is permanent, with an interest rate of 10 percent on a land value of 200, the rental income is 20 per annum (See Sullivan, 1996, p. 168).

  3. Tax this rental income immediately or gradually, fully or partially, as appropriate. Full collection might, depending on critical assumptions, reduce the price of land to zero. If this is the case, there are arguments in favour of raising the tax rate to something less than 100 percent of rental value, in order to retain some measure of market price to guide government valuers.

LAND RENT THEORY.

The origins of land rent theory, as with many other economic theories, can be traced back to the work of Adam Smith, Malthus, Ricardo and J.S. Mill.

Ricardo’s extensive land rent model. When land was not scarce it had no price, no rent. As population increased and people competed for scarce land it acquired a value according to its relative quality and the number of people wanting it. This quality may be the fertility of agrarian land, the value of land associated with natural resources, or the positional value of any sort of land. Ricardo demonstrated how the quality of different land determined its price, its rent. In Ricardo’s model he moves his first farmer onto good land yielding, say, $1000, average annual return to labor then being $1000. The second farmer to arrive now has to move out to poor land yielding say $800, average return to labor through competition being now $800. The first farmer has now acquired a surplus, an economic rent, of $200, and this process continues, in the absence of technological change, until return to labor falls to subsistence. For descriptions of Ricardo’s model and the ‘leftover principle’ of land rent see Sullivan (1996:169-182).

George’s single tax theory. In this theory, Ricardo’s surplus is now no longer privatised but becomes government revenue through LVT. In its pure form, this theory implies both a minimum and efficient size of government. Though implemented in many countries, the taxable rate is usually very low and government revenue is supplemented by other, less efficient taxes. Ideally, the only tax is on land value, removing taxes from labor and capital.

Samuelson’s (1964:727) intensive land rent model. An absentee landlord owns a fixed area of land worked by 100 people. Since other land is available for free there is no rent. The population produces $10 a day each, the wage they pay themselves. When the next person arrives the land is more crowded, average labor output goes down, and therefore the new competitive wage level is now, say, only $9. Total output is now $1009, but total wage is now 101 @ $9 = $909. Rent takes the remainder, $100. As population increases land rent rises and wages fall, in theory to zero, in practice to subsistence. Samuelson’s model shows how the quantity of population on the same land determined land’s rent.

In a variation of this model, referred to in the earlier discussion of enclaves, population is fixed, but moved into a progressively smaller area. In similar fashion, rent rises and wages fall, to subsistence or to a level at which the population is persuaded to work for wages, for example in an enclave sector.

General equilibrium. Samuelson extends his model to show the effects of substituting capital for scarce land, and of technological change in improving capital efficiency. Labor-saving technology will raise rents faster than wages. Land saving technology , e.g. the Green revolution, will raise wages faster than rents but the distribution of wages will be skewed away from the poor. These are examples of changes in one factor market making changes in another, the subject of general equilibrium theory.

LVT PRACTICE.

In the West, a low tax rate version of LVT has been well tested in local governments for about 100 years in countries like Denmark Canada, New Zealand, Australia, and in some American cities. In South Africa (where Johannesburg taxes land values, Capetown is preparing to introduce LVT. Several Nobel prize-winners in economics (Solow, Modigliani, Tobin, et al, 1991), advising on the restructuring of the Russian economy, warned “Do not follow the West in allowing the rent of land to fall into private hands.” The widespread corruption, rent seeking, and negative economic growth which have characterised subsequent Russian restructuring suggest that this advice was not taken. Had the reforms there commenced at a much simpler and more fundamental level, perhaps the outcome would have been rather different. However, it has been reported recently that Estonia, Slovenia, Latvia, and the Czech Republic have installed or are planning to install LVT (Economist, 1998a:82). In 1868 Japan used LVT as a basis for modernization. “To establish the basis for a sound fiscal system, the government undertook a land survey, established titles, and implemented a land tax payable in cash.” (World Bank, 1997:150). The tax levied was the equivalent of 50 percent of produce. After World War Two, Japan, Taiwan, South Korea, and China have all, with strong internal or external direction, successfully implemented land redistribution programs.

Fiscal scope. Banks (in Harrison, 1998:124) calculates a normal land rent of 22 percent of Britain’s GNP, and an equivalent, but probably very conservative, figure of 10 percent may be calculated (p.73) for USA. For the third world Todaro suggests percentages of produce of 50 to 80. Clark’s (1957) data for agrarian societies clusters around 50 percent. For LDCs as a whole, a conservative figure of 30 percent is used in the model calculations.

Implementation (political). Bird (1974:288, 292) suggests two approaches. “Major changes in tax systems usually take place after acute crises such as wars, depressions, or revolutions. All-or-nothing alternatives make strategic sense only when one either expects or hopes for a radical change in the values of government.” This describes a large number of contemporary situations, and opportunities, a far larger number than Bird wrote about in 1974, which are now facing the World Bank and the IMF. Bird’s second approach, data gathering and research, is also the subject of recommendations in this report. “There are good theoretical reasons to support a continued piece-meal approach to tax reform. One such reason is the effort involved in obtaining information and reaching a decision.” Of land taxation Bird (1974) says “What we have, then, is an example par excellence of an important policy and research area in which there has been almost no research of any sort, so that policy is based on textbook generalisations.”

Implementation (procedural). Based on experience in Denmark and Britain, Banks (1998:127) suggests that a national land valuation would take about two years, including appeals. A World Bank report (1997:101) describes the difficulties of a Peruvian NGO in registering property titles. Professional stakeholder monopolies, such as lawyers’ associations, were among the obstacles to reform.

Exemptions and deferment. Some local governments in the West allow exemptions and deferred payment, in cases of hardship in paying land value or property taxes.

GREEN TAXES.

From global concerns for the environment has emerged a concept of collective responsibility. This has led to the development of environmental economics, embracing regulatory instruments (favored by lawyers) and taxation instruments (favored by economists) both intended to curb our use of natural resources. The mechanics of the taxation of natural resources, “green taxes”, though complex in dealing with a variety of pollution sources, and a variety of renewable and non-renewable resources, is now emerging rapidly. There is no agreed term covering both land and natural resources, the default descriptor being land. Land usually refers to land surface, with natural resources lying above and below this surface. Sometimes the term natural capital is used to distinguish natural resources from physical capital and human capital. and natural capital usually refers to natural resources either side of this surface. Natural opportunities imply the opportunity costs of use and misuse of land and natural resources.

Green taxes and LVT. Environmental economics, which includes green taxes and environmental regulations, has grown up largely independently of LVT. LVT and green taxes have important differences. LVT is levied on the surface of the globe, green taxes on natural resources lying either side of this surface. Environmental economics now has a well-developed research base for treating extremely diverse media (For example see Tietenberg 1996, Todaro 1997). In contrast, LVT’s research base, though addressing an extremely simple medium, is almost entirely undeveloped beyond the analysis of the split tax (taxing land separate from improvements) in Western local government. Of third world land tax reform Bird (1974) says “...there has been almost no research of any sort, so that policy is based on textbook generalisations.” The objective of LVT, (for indeed it is the only tax which does so,) is to encourage production; that of green taxes is to discourage levels of production perceived as creating negative externalities such as pollution and resource depletion. The target of LVT is a simply defined site; the targets of green taxes are numerous and complex (For example see Tietenberg 1996, Todaro 1997).

But LVT and green taxes also have much in common. They both tax social goods in relatively fixed supply, and both have important international and intergenerational implications, directly for the environment, indirectly in the case of LVT. There seems to be a strong case, on both efficiency and equity grounds, for a theoretical synthesis between LVT and green taxes and, through this, the correction of neoclassical economics so that it can say something useful about conflict resolution, international justice, and intergenerational justice (by restoring land as an independent, major factor of production – not a factor integrated into capital.)

The objective of green taxes is to decrease production to a level consistent with environmental and sustainable development targets. Thus green taxes, which might otherwise hasten the depletion of natural resources, may be postponed to the point of extraction (e.g. severance taxes)or point of use (e.g. gasoline taxes). As with LVT, a social benefit which exceeds the private benefit of scarce resource consumption generates a consumer surplus. As with LVT there are positive contributions to international and intergenerational justice. The collection of green taxes is generally more complex than that of LVT.


INTERVENTION? OR SELF-HELP?


We commenced this report with a review of the main third world problems of economic stagnation, poverty, migration, and political and environmental violence. We then evaluated the failures and unintended consequences of Western intervention. Next, we sought explanations in rent seeking theory and the role of land in economic rent. This led to an examination of a self-help strategy the characteristics of which are now compared with those of intervention strategies in Table 5.

ATTRIBUTE INTERVENTION SELF-HELP via LVT
1 Income growth Negligible effect High income growth
2 Capital growth External dependence Internal sources
3 Debt Bondage Unnecessary
4 Productivity Negative High growth
5 Rent seeking cost Increased Decreased
6 Dead weight loss Increased Decreased
7 Population growth Negligible effect ZPG via income growth
8 Inequality Increased Decreased
9 Education Unaffordable Affordable
10 Conflict resolution. Negligible effect Via income growth
11 Sustainability Negligible effect Via income growth
Table 5. Intervention or self-help?

On the basis of the analysis so far, there appears to be a strong case for LVT. But, for development economics and welfare economics, LVT is an almost entirely new politico-economic product, carrying with it two obligations. One is to construct and test a model of this product, about which the remainder of this chapter is concerned. The other, assuming the tests are supportive of LVT, is to consider the strategic implications, about which chapter three is concerned. We start, as always with a new product, with a model.

In chapter one the main economic characteristics of the third world were found to be very low income, negative growth of that income, and increasing disparity in the distribution of that income. These characteristics were found to be associated with problems of chronic debt, environmentally unsustainable development, armed conflict increasingly leading to state collapse, and unprecedented rates of human migration. In chapter two it was found that conventional palliatives offered by the West assumed a two-factor, labor-capital economic model. It was found that this assumption was quite inappropriate to economies where landed institutions can usurp resource inflows, block growth, and maintain inequality. Explanations of this behaviour, using rent seeking theory, have been advanced.

Accordingly, we now proceed with the construction and testing of an economic model which places land and natural resources alongside labor and capital, but with characteristics of reproducability quite different to those of capital and labor. The rent seeking effects of a fifth factor, institutions, are articulated only with land and natural resources, this model not being a general equilibrium model (see a relevant example of Computerised General Equilibrium, or CGE, in Tideman and Plassmann, in Harrison, 1998)). The model is, in fact, extremely simple at this stage, in view of the exploratory nature of a research project confronting so many social science disciplines.


A GEOCLASSICAL GROWTH MODEL.


We need to integrate Land, natural resources, and rent seeking institutions within the labor-capital neoclassical economic model.

Construction. Appendix E contains details of the construction of such a five-factor model, summarised in table 6 below. We need to use this model to answer questions such as: “What effect might alternative development strategies have upon economic growth generally, and third world problems of debt, the environment, and political conflict in particular?”.

5-FACTOR MODEL INPUTS RETURNS/OUTPUTS
Labor All human productive input Wages
Capital Products used in production Interest
Land The surface of the globe Land rent
Natural resources Either side of globe’s surface Resource rent
Institutions Rent seeking Economic rent
Table 6. Five factor model.

Testing. Appendix E also contains details of the testing of four development strategies (no reform, structural adjustment, land redistribution, and LVT). Each strategy is simulated for a number of years until it reaches incomes thought to be associated with three targets (financial, political, and environmental stability), as shown in the following table.

TEST RESULTS Less
Developed
Countries
India China LVT
Year at which reforms commence never 2010 2010 2010
Year at which debt is repaid (financial stability) 2103 2022 2015 2013
Year of political maturity (political stability) 2631 2088 2041 2027
Year of ecological sustainability (environmental stability) 2805 2110 2049 2032
Table 7. Test results.

Evaluation. The results appear to endorse a strategy with potential to contribute to solvency, conflict resolution, and sustainable development. It must be stressed, however, that the test runs do not intend to offer any particular prediction, only the observation that the superiority of LVT holds for a range of assumptions. Two of the test runs attempt some estimate of the costs incurred by the four strategies, and some notes on cost benefit analysis are included in appendix E. The three test runs are reported in appendices G.


SUMMARY.


We have tried to explain the failure of conventional intervention strategies in terms of institutional sclerosis and the rent seeking activities which seem to cause it. We used the example of the Tiger economies to illustrate the particular role of land reform within institutional reform generally. We then referred to taxation principles and theories of land rent to assess the role of land taxes and green taxes in institutional reform. Finally, we described the development and testing of a rudimentary geoclassical model of third world development.


CHAPTER 3. SOME STRATEGIC IMPLICATIONS.



IMPLICATIONS OF TEST RESULTS.


The test results suggest huge differences in the times and costs involved in meeting the three targets. These differences are so surprising as to suggest a critical review of the underlying assumptions. Appendix F contains potential criticisms of the methodology, and responses to these criticisms, for example: the models are too simple, growth projections are too pessimistic without reform and too optimistic with LVT, LVT revenues would also be unproductively consumed, LVT would be politically and administratively difficult to implement, etc. These potential criticisms, and indeed the whole report, require more extensive and expert evaluation than we have resources for, evaluation which we now anticipate from the organisations targeted.

It should be stressed again here that the projections follow from the assumptions made. One of these is that, in the benchmark, the LDC region, no reform takes place. But it seems likely to us that the third world will continue to decline to a point at which political barriers to SAPs and LVT (seen as complementary) will eventually be removed.


COMMON INTEREST.


It will be clear from the documents with this report that a number of NGOs, unilateral government aid agencies, and corresponding organs of the UN, the World Bank, the IMF, and the OECD are recipients of this report. There are three reasons for this:
  1. Third world problems now attract not only active intervention for economic development, but also reactive intervention to humanitarian emergencies, to political violence, and to environmental damage. Since all these ultimately concern property rights in land and natural resources, there appears to be considerable scope for coordination and cooperation between apparently separate Western initiatives.

  2. The organizations targeted by this report represent an extraordinarily wide range of professional field experience and head office research which we hope will be brought to bear on evaluating the arguments and proposals put forward in this report.

  3. Should this evaluation lead to specific proposals for LVT feasibility studies, or simply to the modification of existing strategies in response to this evaluation, these evaluations and responses would be of interest to other recipients of this report.


SUMMARY.


If the arguments advanced and demonstrated here contain any validity, then the organisational implications of this report require wide attention and expert appraisal. Some recipients of the report will be non-economists, and some who are economists will be familiar with development programs derived from neoclassical labor-capital models of economic growth. Though the concepts of LVT appear simple to us, we have found that the pervasive Western two-factor economic culture makes it difficult for lay people, professionals, and even academics to grasp immediately the implications of LVT, even for countries where land monopolies are already recognised as part of the problem. Accordingly, the main chapters have been preceded by a substantial, non-technical introduction, and will now be followed by a set of technical appendices.


SUMMARY, CONCLUSIONS and RECOMMENDATIONS



WESTERN INTERVENTION


Western intervention was found to have pumped capital of all kinds into the third world for half a century with the apparent effect of reducing, instead of increasing, total factor productivity, i.e. the ability to convert capital investment into growth. Excluding China and India, per capita income growth has now been negative for some 15 years. Neoclassical economics cannot explain this, nor does it offer a theoretical framework useful for analysing other third world problems such as territorial and environmental violence. Models are needed of the behaviour of those institutions which drag economies far away from their production possibility frontiers.


EXPLANATIONS


Explanations of this behaviour were then found in rent seeking theory, specifically the diversion of productive investment towards rent seeking expenditure, the transfer of economic rent from the economy to the rent seeker, and the reduction of total factor productivity by the dead weight loss created. States vulnerable to excessive rent seeking appear to be those whose property rights are monopolised, as in many agrarian and oil rich economies, or those where property rights are volatile, as in the transition economies of Eastern Europe or the fragile polities of Africa, or in those economies where rapid industrialisation has led to rapid growth in urban land values. To illustrate the latter, in the lead up to the ‘Asian meltdown’, untaxed property speculation accounted for up to 55 percent of bank lending in the region.


EFFECTIVE INSTITUTIONAL REFORM.


Structural adjustment has been found to be difficult and slow, facing as it does a very wide range of complex economic rents, extracted from assets of low visibility and high mobility, in a dense network of collusion and corruption. LVT faces only one type of economic rent extracted from a single, immobile, and highly visible asset, offering a short cut to reform and a revenue to help offset the costs and hardships of structural adjustment programs. Western theoretical criticisms of LVT were found to be generally inapplicable to the third world. And in practice, land rent, as an example of economic rent, was found to consume a larger proportion of GNP than in the West.


MODELS OF REFORM.


Projections of present growth rates were compared with those arising from SAPs, conventional land redistribution, and LVT. Three targets were set, debt repayment, and the income levels associated with political stability, and with sustainable development. Some measures of the costs of political conflict and environmental losses were used to calculate the accumulated burdens in each projection. The results of the model tests do not suggest any particular prediction, only the observation that both the need for higher growth to achieve solvency, political stability, and ecologically sustainable development, and the superiority of LVT in achieving this higher growth, were shown to be significant for a range of assumptions.


CONCLUSIONS.


Given the power of the market mechanism to ration scarcity and encourage substitution, and given the apparently unlimited potential of technological development, there should be no limits to the economic growth seen as necessary to solve problems of debt, poverty, political collapse, and environmental degradation. But this growth seems likely to remain negative in the absence of a carefully designed combination of structural adjustment and taxation reform. These are seen as complementary and co-dependent. Structural adjustment programs may have to depend on tax reform, and tax reform may have to depend on aid conditionality


RECOMMENDATIONS FOR AID AND DEVELOPMENT ORGANISATIONS.


  1. Evaluation. That evaluations of this report are shared, and any subsequent research coordinated, across government and non-government organisations.

  2. Research budgets. That budget allocations are adjusted, pro tem, away from large projects abroad and towards research at home on the unintended consequences of strategies which do not explicitly and quantitatively model the effects of rent seeking in land and natural resources.

  3. Data gathering and modelling. That relevant experience be used to develop educational and implementation tools appropriate for field trials. Considerable documentation exists for failed land reform programs, the successful Tiger land redistribution programs, established local government land taxing systems, and the recent LVT implementations cited earlier. That the World Bank adapt the methodology for calculating growth multipliers and poverty-reducing allocations (reported in Economist, 1998d) to evaluating the potential contribution of LVT to good economic policies.

  4. Conditionality. That UN and government organisations move towards making existing debt rescheduling, and all future aid, conditional on approved plans for local LVT programs.

  5. NGO research. That international and local NGOs, under the auspices of an appropriate arm of the UN, be encouraged to accumulate and share appropriate data and case studies regarding, for example, the establishment of land titles, historical and contemporary land tenure systems, land ownership patterns, values of actual and imputed land rent, etc. Guidelines for this process already exist, see for example the United Nations Habitat II Action Agenda of June 15, 1996, Sections 75 and 76 (Habitat II, 1996). Draft guidelines may be viewed on Habitat websites:
    habitat.unchs.org/home.htm
    unhabitat.org/partners/index.html

  6. NGO implementation. That international and local NGOs, given their continuing local involvement, are given some share of responsibility in all UN projects, but especially those projects concerned with the reform of the most local of all factors: land.


REFERENCES


Akehurst, M. 1987, A Modern Introduction to International Law, London, Unwin Hyman.

Andelson, R. 1991, (ed.) Commons Without Tragedy, London, Shepheard-Walwyn. Bird, R. 1974. Taxing Agricultural land in Developing Countries, Cambridge, Harvard University Press.

Ayittey, G. 1998, Africa in Chaos, New York, St. Martin’s Press.

Boone, P. 1994. The Impact of Foreign Aid on Savings and Growth, Working Paper, Centre for Economic Performance, London School of Economics, (October 1994).

Brooks, M., and B. Heijdra. 1989. “An Exploration of Rent Seeking”, Economic Record, (March 1989).

Brown, L. 1994. State of the World 1994. Worldwatch Institute. New York: Norton.

Clark, C. 1957. The Conditions of Economic Progress, London, MacMillan.

Daily Telegraph 1994. “Blueprints for survival fail to save the World Bank” Daily Telegraph, London, (Sept. 20, 1994).

Earthscan. 1996. “The Future Population of the World”, cited in the Sydney Morning Herald (Oct. 9, 1996).

Economist. 1995a. “Consciences and Consequences” and “Ethical Shopping: Human Rights.” (June 3, 1995).

Economist. 1995b. “The Natural Resources Myth, Ungenerous Endowments.” (December 23, 1995).

Economist. 1998a. “Eastern Europe meets Henry George.”, a survey of recent plans to implement land value taxation, (February 28, 1998).

Economist. 1998b. “The War over Poverty” (April 25, 1998).

Economist. 1998c. “An Invaluable Environment” (April 18, 1998).

Economist. 1998d. “Making Aid Work”, a review of the World Bank book “Assessing Aid: What Works, What Doesn’t, and Why”, (November 14, 1998).

George, H. 1979. Progress and Poverty, New York: Robert Schalkenbach Foundation.

George, S. 1992. The Debt Boomerang,

Gilchrist, N. 1988. Land Value Taxation, Sydney, New South Wales Henry George Foundation Ltd.

Habitat II, 1996. Global Conference on Access to Land and Security of Tenure as a Condition for Sustainable Shelter and Urban Development. New Delhi, India, 17-19 January, 1996.

Harrison, F. (ed.) 1998. The Losses of nations, London, Othila.

King, R. 1977. Land Reform: a World Survey, Boulder: Westview Press, 1977.

Mahratta Chamber of Commerce and Industry, Industrial and Commercial Directory of Pune, Fourth edition, 1990, 37.

Mankiw, G. 1995. “The Growth of Nations”, Brookings Papers on Economic Activity, 1:1995.

McCoubrey, H. and N. White, 1996, Textbook on Jurisprudence, London, Blackstone.

Mill, J.S. 1873. “Autobiography”.

Murrell, P. and M. Olson, (1991), “The Devolution of Centrally Planned Economies”, Journal of Comparative Economics, 15, 239-265.

Olson, M. 1982. The Rise and Decline of Nations, New Haven, Yale University Press

Olson, M. 1996. “Big Bills Left on the Sidewalk: Why Some Nations are Rich, and Others Poor”. Journal of Economic Perspectives, V10, N2, Spring 1996, 3-24.

Parsons, K. 1984. “The Place of Agrarian reform in Rural Development Policies” in Studies on Agrarian reform and Rural Poverty, FAO Economic and Social Development Series No. 27, Rome, Food and Agricultural Organization of the United Nations.

Red Cross. 1996. World Disasters report 1996. Oxford: Oxford University Press.

Samuelson, P. Economics, New York: McGraw Hill, 1964

Solow, R., F. Modigliani, J. Tobin: Letter to Mikhail Gorbachev, in Land and Liberty, Jan/Feb 1991, 12,13.

Stiglitz, J.E. 1988. Economics of the Public Sector, New York: W.W. Norton.

Sullivan, A. 1996. Urban Economics, London, Irwin.

Tideman, N. 1993. “The Legitimate Repudiation of a Nation’s Debts”. Eastern Economic Journal, V.19, N.3, Summer 1993.

Tietenberg, T., 1996, Environmental and Natural resources economics, New York, Harper Collins.

Todaro, M., 1989. Economic development, New York, Longman.

Todaro, M., 1997. Economic development, New York, Longman.

Tollison, R., and R. Congleton (eds.),(1995), The Economic Analysis of Rent Seeking, Brookfield, Edward Elgar.

UN, Global Report on Human Settlements: An Urbanising World. United Nations Report, cited in the Sydney Morning Herald (Nov. 7,1995),11.

Warriner, D. 1969, Land reform in Principle and Practice, Oxford, Clarendon Press..

World Bank, World Development Report 1991. Oxford, OUP, 1991.

World Bank, World Development Report 1992. Oxford, OUP, 1992.

World Bank, World Development Report 1995. Oxford, OUP, 1995.

World Bank, World Development Report 1997. Oxford, OUP, 1997.


APPENDICES.



APPENDIX A - ECONOMIC GROWTH THEORY.


Economic growth, in this report, is taken to mean the medium-term average annual change in per capita GNP (Gross National Income). Investment in growth is taken to be that part of national income, including foreign borrowings, which is not consumed, the whole being called SAVINGS. Economic theories of growth have, up to now, been unsuccessful in predicting the economic behaviour of nations. Mankiw, a world authority on economic growth, concludes his Brookings paper (1995) with the assertion that the return to capital is not one-third of GNP as was commonly thought, but two-thirds of GNP (this depends on definitions of human capital and presumably relates only to Western economies). Members of the discussion panel, after labelling it a landmark paper, which it was, then proceeded to disagree with it. So, what is the neoclassical growth model, and what are the possible reasons for its failure to predict economic performance, particularly in the third world?

The neoclassical model. Differences in the economic growth of countries are not well explained by neoclassical economic theory. The traditional economist’s prescription for economic growth, at the start of the third world development period, was capital injection. Poverty was the domain of politics, not economics, but the effects of growth were expected to “trickle down” to the poor. Thus, one of the first growth models applied to the third world emphasised the accumulation of capital and the efficiency of its use. Since it was assumed that industrial capital investment would attract unemployed labor from the bush into new urban productive opportunities, labor was included in the formula:

ECONOMIC GROWTH = (SAVINGS) x (CAPITAL EFFICIENCY) x (LABOR)

This Harrod-Domar model was to be the engine, and the Marshall plan for European recovery its vindication. Thus a Western, neoclassical scheme, conceived entirely within an industrial, capital-intensive region with well-developed public sector and market institutions, was transplanted into an agrarian, labor-intensive region characterised by poorly-developed public sector and market institutions.

For reasons discussed in appendices B, C, and D, it did not work. It was later recognised that the formula would better indicate performance if the growth of the labor supply was excluded, thus something like the following modified growth function has been used since.

(PER CAPITA ECONOMIC GROWTH) = (SAVINGS) x (CAPITAL EFFICIENCY)

Failure. The continued failure of capital transplantation then led to a search for explanations. Over-population? No. Some of the richest countries have dense populations. High population growth? Possibly, but this is correlated with poverty, the solution to which is also elusive. Poor endowments in natural resources? No. Some of the least well endowed countries are the richest, and nearly all oil-rich countries actually have negative economic growth. Low investment in human capital? Yes and no. In 1997 the author bought a carpet in Turkey. The shopkeeper had a masters degree in economics. His assistant, with an engineering degree, was planning to emigrate. Low capital efficiency? But how can this be? Economic theory suggests that the marginal product of capital, the efficiency of each extra dollar of investment, is high in low capital countries. And textbook tabulations in the early development decades did confirm that poor countries had lower incremental capital-output ratios (higher marginal capital efficiencies) than rich countries did. It was even suggested that these ratios were roughly constant for any one country.

Capital productivity. But equivalent calculations today, for example dividing recent per capita GNP growth by savings to obtain a measure of capital efficiency, indicate a huge deterioration, the efficiency of capital investment in the third world now being negative. Within the framework of neoclassical theory this is quite absurd, as already suggested by Boone (1994) and forcefully articulated by Olson (1996). Clearly, capital efficiency here cannot be explained in terms of the marginal product of additions to physical capital, or even of human capital, and marginal product is irrelevant to natural capital such as land the supply of which is often taken to be fixed.

Total factor productivity. In appendix E, where the construction and testing of a Geoclassical growth model is described, the term Total Factor Productivity (TFP) is used as a surrogate for capital efficiency. TFP makes no assumptions about the kind of capital in which savings are invested. TFP simply reflects the sum of the leakages, caused by rent seeking, from all inputs such as capital, labor, land and natural resources, from the production process itself, to the distribution of national income in total and between the factors. To continue to multiply TFP by savings is justified since, in the short term, factors other than savings (additions to capital) are fixed. What is not possible at this point in time, and for which research is urgently needed, is to ascertain the probable impacts upon both savings and TFP of the different kinds of reform - structural adjustment, agrarian land redistribution, and LVT.

Key references. Boone 1994, Mankiw 1995, Olson 1996, Todaro 1997.

Summary. Neoclassical growth theory has been extended to recognise human capital and ideas of endogenous growth. But it needs to incorporate land and natural resources and, most importantly, rent seeking theory in order to model the behaviour of non-reproducible factors, and the institutions which are dragging their economies so far from Olson’s production possibility frontiers.


APPENDIX B - CONFLICT RESOLUTION.


There have been three main international responses to territorial conflict, by appeal to the UN charter of human rights, by peace keeping where territorial rights are violated, and by the application of trade sanctions.

Human rights. The first response fails because of the internal contradictions set up by article 17, the right to own property, within the Universal Declaration of Human Rights. This right may completely negate all other 29 articles, if not at least seriously compromising articles 1 to 5, 12, 13, and 22 to 26, if no distinction is made between private property in human products, and social property in the rent of land in monopolistic conditions, and the rental value of natural resources under all conditions.

The nexus between human rights and territorial rights is well illustrated in a single sentence from Bernard Shaw’s Fabian Essays. “Imagine a small island to which castaways swim as ships are successively wrecked on a nearby reef; eventually the earlier occupants will be able to present new castaways with the choice: be our slave, or keep swimming.” This parable illustrates the essence of what is now popularly called “exclusion”.

Territorial rights. The second response fails since the rearrangement and policing of political boundaries simply reinforces the origin of all conflict - political boundaries. Territorial restrictions on seasonal migratory patterns, for example in Africa, arise from the arbitrary geometry of European land demarcations. Territorial restrictions on trade damage resource-poor economies, explaining some of the conflicts of the twentieth century, “Where goods cannot pass, armies will”. Contemporary responses to conflict may also be at odds with programs of humanitarian intervention: “Overall, the military are very expensive; operate under unreliable and unpredictable political control; are usually inexperienced and unprepared for humanitarian missions; have communications problems with aid agencies and among beneficiaries; divert much needed funds from humanitarian budgets; and prevent aid agencies or commercial contractors from developing the capacity to respond at lower cost.” (Red Cross, 1996:81).

Sanctions. The third response fails since sanctions invariably damage those least well endowed with human rights or property (Economist, 1995a: 13, 58).and seem more likely to delay rather than advance the evolution of the politically stable state.

Case study. A corollary to Bernard Shaw’s parable can be constructed by considering the displacement of a population into a progressively smaller and less productive land area, until some objective is achieved. In colonial history, perhaps culminating in Apartheid, the objective was often to secure a supply of labor at an advantageous wage rate. Contemporary examples are now usually given the political label ‘ethnic cleansing’. On the two main stereotypical explanations, that ethnic cleansing is entirely a legacy of colonialism, or entirely a legacy of subsequent independence from colonialism, this report holds no opinion, only the suspicion that disputed rights to opportunities in land and natural resources underlie every single case. The case study selected here is that of the Palestine land occupations which, in the case of Gaza, is thought to have raised unemployment there above 50 percent and reduced incomes to around $600 per annum. Although the technique used is no different to that used in colonial history, this Palestinian land problem has three quite unique characteristics of extraordinary importance:

  1. The plaintiff is represented by a major world religion perceived by the West to be associated with an entirely new form of grievance redress.

  2. The plaintiff and its representative form a unique polity of religious and state cohesion, a structure never fully understood by the West. What the West does understand are Islam’s above average rates of population growth, and of youth unemployment, and the decline in per capita income.

  3. This economic decline (refer to paragraph ‘Dead Weight Loss’ in appendix C) is likely to be accelerated by short term sanctions and long term effects of technological substitution within the energy industry. This decline might be expected to lead to two outcomes:

    1. A dramatic increase in the level of weapons technology used in redressing contemporary external grievances and in distracting attention from new internal grievances arising from economic hardship.

    2. Socio-economic collapse, as in many states in Africa.
The defendant, the rest of the world, appears only now to be waking up to the implications of the first characteristic and has not yet worked through the implications of the second and third characteristics. This case study has been selected here to apply a form of analysis to outcomes 3a and 3b which the author has not found anywhere in the relevant literature. Because of the political complexity of a confrontation which appears to have baffled the whole world, the two outcome analyses are put here only as tentative indications of possible benefits of the UN-led research programs advocated elsewhere in this report.

Outcome 3a. If, as much of the literature suggests, the grievance concerns the occupation of Arab lands, then, whether this occupation is legal or not, a reform in which the rental value of this land is shared, via land taxation, between occupier and occupied would, clearly, remove the economic source of the Palestine problem and reduce the risks associated with world-wide responses to this problem. The ownership of land, legal or illegal, becomes irrelevant.

Outcome 3b. It is argued in this report, that third world political stability depends, inter alia, upon the removal of poverty by sound economic growth, and that this growth can be hastened by LVT. To the extent that this argument is valid, a reform in which the rental value of the land and natural resources within the states representing the plaintiff was collected as public revenue instead of, as in most states, privately appropriated, could be expected to reverse the present economic decline. This decline, given the huge investible surpluses of oil wealth, must be largely explained in terms of the rent seeking theory examined in appendix C.

Key references. Red Cross 1996, World Bank 1997.

Summary. The case study has been chosen to illustrate what appears to many as the nexus of the contemporary Islam-West confrontation, the occupation of Arab lands in Palestine, and to illustrate two strategies, one short term political, one long term economic, both derived from the same economic analysis. Palestine’s tiny population is contained, so to speak in a much larger one called Islam, itself contained in a much larger one called the third world, each experiencing rather similar historically diffuse grievances, similar economic decline, similar population growth and youth unemployment, and similar uncertainty over threats by technological substitution to their natural resource bases.

Warriner (1969), and to some extent King (1977) and Bird (1974), give detailed accounts of the distinctive feudal, Islamic and imperial land tenure systems throughout the third world. Bird and Warriner argue implicitly and King explicitly for the introduction of LVT. They, like many others, argue efficiency and equity. This case study attempts to illustrate a third reason for the introduction of LVT - conflict resolution.

Political stability, without which long term conflict resolution is impossible, appears to depend on halting the collapse of states into poverty and anarchy, and on measures which might offset extreme inequality within and between states. This is seen as depending both on a far more fundamental understanding of the relationships between conflict and the flows of values in land and natural resources, and on far higher rates of economic growth, than those achieved so far by conventional interventionist strategies.


APPENDIX C - MODES OF RENT SEEKING.


It seems that the costs to society, that is to say the sizes of the rent rectangles and dead weight loss triangles (see standard texts on monopoly theory), must vary with what might be called the mode of rent seeking, six of which are developed and analysed here.

  1. Coercive, as in conflict, associated with offensive and defensive costs. These costs and associated dead weight losses may be very much larger that the rents to be captured, since the rent seeker does not usually bear the full cost of the action. Costs may further exceed rents, depending on the relative contributions of irrational ideology and rational economic incentives to the strategies of the combatants.

    Positional advantage over natural resources such as minerals or oil, in the ground or in transit, is an incentive reported in almost every contemporary case of armed conflict. But coercive rent seeking is also historically important in explaining the establishment of what economists call initial endowments, and hence the roots of territorial conflict in the perceptions of those who ‘remember’ earlier endowments.

  2. Competitive, as in the political lobbying of government, in any economy. In competitive situations, the costs of rent seeking and subsequent rent protection will tend to equality with rent itself. Monopoly theory suggests than the dead weight loss is half the value of the rent. Competitive rent seeking, if unexposed to shock or reform, may shift endowments to the point where the mode becomes passive.

  3. Passive, as in traditional societies where rent, as a result of earlier coercive or competitive adjustments to endowments, now flows from society to rentier according to established custom, for example in traditional feudal and caste systems. As the accumulation of accepted customs reduces competitive bidding, so will it reduce competitive rent seeking, but not necessarily rent protection costs or the possible emergence of coercive rent seeking. Here, the dead weight loss associated with failure to innovate may be very large and land rent itself, as an example of economic rent, may consume 50 percent of GNP.

    But this mode may not be confined only to the third world. Olson (in ‘The Rise and Decline of Nations’, 1982) describes a phase in post-war Western history resembling a transition, via the growth of dense networks of collusion, to a passive, sluggish economic state. And Murrell and Olson (1991) have analysed and extensively quantified the same economic decline, but in the command economies of Eastern Europe, concluding that “This collusion generates an institutional sclerosis that is even more pronounced than that observed in market economies.”

  4. Structural, as in the restructuring of property rights systems associated with revolution or its reversal. For example, in the transition economies of Eastern Europe, new or greatly enlarged rents have arisen and been seized in this period of structural hiatus. Dead weight losses are, apparently, extremely high.

  5. Resource bonanza, as in the discovery of natural resources. Arising from strategic needs perceived by consumer states, rent seeking costs and the dead weight losses from monopolistic restrictions of supply may be very high. That similar losses are self-inflicted on producer states is not intuitively obvious, but convincingly demonstrated in ‘The Natural Resources Myth’ (Economist 1995b:101). See also the case study in this appendix.

  6. Resource depletion, as in shocks arising from the depletion or degradation of natural resources. Tietenberg (1996:57) uses particular examples of rent seeking to “illustrate the general economic premise that environmental problems arise because of a divergence between individual and collective objectives. This is a powerful explanatory device because not only does it suggest why these problems arise, but it also suggests how they might be resolved - by realigning individual incentives to make them compatible with collective objectives.”

    As natural resources become scarcer and more degraded, so will all the costs associated with resources rent seeking rise. But as technology creates substitutes and improves resource conversion efficiency, and as rationing by effective taxation instruments becomes increasingly accepted, so will all costs associated with resources rent seeking decline.

The following summary of these rent seeking modes, taking competitive rent seeking as a norm, can only suggest their relative values. There is insufficient evidence to apply these modes to the calculation of savings and TFPs for the projections of alternative strategies at the end of this report, though Murrell and Olson have effectively done this for the USSR. The case study which follows this table gives some indication of the power of rent seeking to reverse the benefits of natural resource bonanzas.

RENT SEEKING MODE COERCIVE PASSIVE STRUCTURAL BONANZA DEPLETION
Dead-weight loss &nbps; &nbps; &nbps; &nbps; &nbps;
&nbps;&nbps;Restricted supply V.high Low High V.high V.high
&nbps;&nbps;Failure to innovate V.high V.high High High V.low
Rent-seeking cost V.high Low High V.high Rising
Rent protection cost V.high Normal High V.High Rising
Table 8. Rent Seeking Modes.

Case study. Rent seeking theory can offer explanations of some counter-intuitive experience. For example, resource-rich countries might be expected to grow faster than those denied the benefits of natural resource bonanzas. Paradoxically, these bonanzas have been found to be negatively correlated with economic growth, apparently because rent seeking costs more than offset the benefits (The Economist 1995b:101). We can test this by examining, for example, the performances of oil-rich countries. The average growth in GNP per capita in Saudi Arabia 1980-1993 was minus 3.6 percent per annum, that of the United Arab Emirates was minus 4.4 percent (World Bank, 1995, Table 1). Indonesia appears to be the only oil-rich country posting positive growth in those 13 years, its subsequent collapse suggesting that some other factors were masking the accumulating effect of rent seeking.

Key references. Brooks and Heijdra 1989, Economist 1995b:101, Olson 1982 and 1996, Tietenberg 1996, Tollison 1995.

Summary. Rent seeking theory provides explanations of important non-productive economic behaviour which have not, apparently, found a place in Development Economics.


APPENDIX D - PROPERTY THEORIES


Considered in this report are those of environmental economics and LVT. In appendix E a simple neoclassical growth model is extended, by way of rent seeking theory, to accommodate these two theories, the resulting model being labelled ‘Geoclassical’. But land and natural resources have attributes different to those of capital and labor. They are relatively fixed in supply, mostly non-reproducible, and resemble rival and excludable public goods. They may be associated with international and intergenerational negative externalities. All this takes us beyond considerations of economic growth, to a nexus of economics, politics, and law, of private and social property and of distributive justice.

Property. One difficulty with this term can be traced back to the replacement of classical three-factor, land, labor, capital economic models by two-factor neoclassical models where ‘land’, under the assumption that it was freely traded on a perfect market, was subsumed under ‘capital’. But private ownership of industrial ‘capital’ in the West seems to have improved productive efficiency and absolute (if not relative) social welfare, whereas private ownership of landed ‘capital’ in the third world seems to have greatly inhibited both. Marxist economic theory cannot explain the first, neoclassical economic theory cannot explain the second. The source of this confusion seems to lie in a property no-man’s-land, seldom visited by the theories of economics or politics, and clumsily interpreted by the law, wherever land rights are involved.

No-man’s land. Samuelson, clearly sympathetic to George’s land tax ideas, nevertheless regards their implementation as a political rather than an economic matter. A clue to this lies in General Equilibrium theory which proceeds unquestioningly from what it calls initial allocation, or initial endowment, though not without criticism. “For approximately 100 years Western neoclassical economic thought has developed within the premise that economists could take the social framework, the institutional order, for granted, as something which it was the professional responsibility of someone else to understand” (Parsons, 1984:24). And for approximately 100 years both Western and Marxist economic thought have merged land into capital and land rent into profit.

Distributive justice. Mill (1873), in anticipating the central problem of environmental economics, stated: “The social problem of the future we consider to be, how to unite the greatest individual liberty of action with a common ownership in the raw material of the globe”. Mill, who also anticipated LVT, may not have foreseen that common ownership of the rent of the raw material of the globe would be sufficient to lead to the taxation instruments with which modern Environmental Economics is now experimenting. These instruments, which tax natural resources either side of the surface of the globe, seek to ensure contemporary distributive justice as well as that between generations.

Equivalent theories of distributive justice, relating to private and social rights to the surface of the globe, lie in the notions that land values are created by society and should be returned to society as revenue (J.S. Mill), that poverty derives from land monopoly (George 1979), and that land rent is in the nature of a surplus which can be taxed heavily without distorting production incentives (Samuelson, 1964:541).

But, new theories of distributive justice, such as John Rawls’s “A Theory of Justice” and Nozick’s “Anarchy, State, and Utopia”, seem unaware of the special implications of landed property for distributive justice. It is only in LVT and in environmental economics that property rights in land are being reexamined and questions raised about the rights of one group to reduce the natural opportunities of another group, within nations, between nations and between generations. Recently, the term natural opportunities has been used by Professor Tideman of the Schalkenbach Foundation in the development of what may become a new, international and intergenerational theory of distributive justice in land and natural resources.

Summary. It does seem that it may be impossible to understand, let alone do something about, the disequilibria of Latin America, Africa and Asia with the blunted instruments of contemporary development theory. But it may be that better, reformist strategies can be assembled from components of the theories of institutions, of rent seeking and of monopolies.


APPENDIX E - A GEOCLASSICAL MODEL.


The failure of neoclassical models to predict the growth expected from capital investment in the third world was analysed in appendix A. These two-factor models did not include land and natural resources in ways useful to the analysis of third world problems, nor did they explain the effect of institutional rent seeking in holding economies back from their production possibility frontiers. Since it is clearly desirable to build a new five-factor model within the existing neoclassical framework, we start with definitions as consistent as possible with those of neoclassical economics. We then construct four stereotypical economies. Finally, we test these by predicting how long each will take to reach targets associated with solvency, stability, and ecologically sustainable development.

DEFINITIONS.

Land: The surface of the globe, measured as sites, catchments, zones, etc. Natural resources are often implied in the word land, but defined separately here. Land rent is the factor return to land.

Natural resources: The natural environment existing either side of the globe’s surface. Resources rent is the factor return to natural resources.

Labor: All human activity directed to the production of goods and services. The term wages is used to cover all returns, wages, salaries, bonuses, etc., to this factor.

Capital: Normally physical capital occupying land and providing productivity to labor, but also human capital defining investment in human skills, and sometimes natural capital equivalent here to the wider definition of land. Factor return to physical capital (and to some extent human capital) is usually measured as return on investment, or interest, an amount reflecting bank rate, inflation and risk.

Production: The process of combining input factors in order to produce goods and services and deliver them to consumers.

Distribution: This, in economics, means the return, the payment, to the factors land, labor, capital, etc. But the term distribution is also used, confusingly, to describe physical distribution of goods.

Utility: Maximising utility (akin to wealth or output) and providing fair shares to the factors, is thought to be the result of perfect markets. It is also thought that labor and capital are free to move in response to supply and demand. In practice society redistributes factor shares according to local and temporal perceptions of equity. Also, in practice, a large number of unproductive activities, which we have called rent seeking, reduce efficiency and equity, hence utility.

Confusions of terminology: The term rent is often used, confusingly, to describe a payment combining land rent and interest on capital, as in the rent of a property. Economic rent is in the nature of an unearned surplus, previously called supernormal profit, as in monopoly theory. Land rent is often, particularly in the third world, an unearned surplus equivalent to economic rent. The term profit also causes confusion, since it is a term used in accounting and politics but not in economics where normal “profit” is already accounted for as a cost of production in the competitive markets assumed in neoclassical economics. The terms capital and capitalism are also used confusingly, in finance and in politics. When used in a derogatory sense, an economist might equate capitalism with monopoly and profit with economic rent!! Finally, though land and land rent feature in microeconomics, and indirectly in environmental economics, they are very largely absent in politics, macroeconomics and development economics. Since land is frequently traded as a commodity in the West it is frequently confused as part of capital.

CONSTRUCTING THE MODEL.

As suggested in appendix A, we need to accommodate land, natural resources, and rent seeking activities within the neoclassical model.

The two-factor, labor-capital model. We commence construction by adapting the neoclassical two-factor, labor-capital model, and a simplified Harrod-Domar production function equating GNP growth with savings (GNP less consumption) and total factor productivity (TFP). For 1995 and 1980, TFPs are calculated from World Bank data for average growth 1960-1980 and 1985-1995, and savings for 1980 and 1995 (average saving data were not available). Neoclassical theory predicted, as did development reports at the time, that capital investment (from savings) in capital-poor countries would generate much faster growth than equivalent investments in capital-rich countries, since the marginal product of capital would be much greater. The TFP calculations in the table below indicate the reverse of this expectation.

PRODUCTION FUNCTION Per capita GNP growth = Saving x TFP
  Growth = Sav 1995 X TFP 1980 TFP change in TFP
Low (excluding China & India -1.40% 0.1 X -.140 0.143 -0.283
Middle income -0.70% 0.25 X -.028 0.152 -0.182
India 3.20% 0.22 X +.145 0.143 0.002
China 8.30% 0.42 X +.198 0.113 0.085
Table 9. Two-factor models.

Inadequacy of the two-factor model. The foregoing analysis suggests that:

  1. Economic rent is a transfer reducing equity.
  2. Markets cannot enforce productive investment of this rent.
  3. Dead weight loss reduces production efficiency.
  4. So far, this is straightforward monopoly theory. But its application via rent seeking to institutions, land, and natural resources, itemised below, is apparently new.
  5. The behaviour of Total Factor Productivity is very heavily influenced in the third world by institutions, particularly landed institutions.
  6. These institutions are, essentially, repositories of economic rent.
  7. Land rent receives a significant proportion of third world GNP.
  8. Natural resources rent can receive a huge proportion of third world GNP.
  9. Initial endowments of land are heavily skewed away from the poor.
The five-factor model. It would be convenient to have land and natural resources explicitly modelled in terms of economic rent, and institutions explicitly modelled in terms of rent seeking. Accordingly, our approach here is to build a five-factor socio-economic model incorporating labor, capital, land, natural resources, and institutions, while disturbing as little as possible of the microeconomic foundations of production and distribution implicit in the terms used in the following tables.

5-FACTOR MODEL INPUTS RETURNS/OUTPUTS
Labor All human productive input Wages
Capital Products used in production Interest
Land The surface of the globe Land rent
Natural resources Either side of globe’s surface Resource rent
Institutions Rent seeking Economic rent
Table 10. Five factor model.

In table 9 the first four TFPs are calculated from World Bank data on savings and growth. For the LVT reform strategy, the 15 percent growth rate is estimated as follows:

  1. Savings. In 1995 China saved 42 percent of GNP, without the revenue benefit of LVT. , For the LVT strategy the saving of 50 percent used here comprises two components: a conservative figure of 30 percent from LVT, and 20 percent from private savings plus revenue from all other taxes.
  2. TFP. China, with inefficient state-owned industries (SOEs) and a land reform limited to the agrarian sector, nevertheless grew at 14.2 percent per capita in 1992. Using a savings percentage of 40, typical of that time, China’s TFP must have been in excess of 0.35. A conservative figure of 0.30 is used for the LVT strategy.
The direct LVT effects, in removing dead weight loss and diverting rent seeking and protection costs in one major monopolistic institution, land, would have a knock-on effect in the disintegration of other monopolies. In providing a source of revenue for poverty alleviation LVT would also indirectly assist conventional SAPs in removing the adjustment pains which have made these programs so unpopular.

TESTING THE MODEL.

Full testing of the five-factor model is not reported here. Instead we use the growth rates derived above to answer the question: “What effect might alternative development strategies have upon economic growth generally, and on the particular third world problems of debt, the environment, and political conflict?”

We now project the time and the costs involved in reaching targets of debt repayment, and of levels of income at which sustainable development and stable governments might be affordable. We make projections for present economic growth rates, and for those associated with three reform strategies. We now subject this region to these four development projections:

  1. A benchmark projection of the LDC region which, because it includes India and China, has a positive growth rate of 0.4 percent.
  2. A large country which has experienced some structural adjustment, India at 3.2 percent per capita growth rate.
  3. A large country which has experienced land redistribution, China at 8.3 percent per capita growth rate.
  4. A land taxation program (LVT)delivering, say, 15 percent per capita growth rate.
All commence with a growth rate of 0.4 in 2000 AD. Strategies 2, 3 and 4 deliver their new growth rates after an implementation period. This period depends on the time to gain political acceptance, and the time taken to install the reform package. SAP is likely to be the easiest politically but the most difficult administratively, LVT might be administratively easier than redistribution but politically more difficult. For the simulations shown in appendices X, Y and Z implementation times for strategies 2, 3, and 4 were set at 10 years. alternatives of 5 and 15 years were tried, having little effect on the general conclusions.

The Debt Repayment Model (See Appendix J)..LDC external debt as a percent of GNP was 39.6 in 1995 (World Bank, 1997, table 17), equivalent to $432 per capita. The four strategies all rely on economic growth to discharge this debt by keeping consumption (income less saving) fixed. No interest is charged and no new loans are undertaken during the time elapsed.

The Sustainability Model (See appendix K) . projects GNP per capita growth, for development strategies 1, 2, 3, and 4, until the target income level is reached. In each simulation unsustainable development continues to this point in the future, “Green Year”, at which time the LDC region is assumed to be able to afford sustainable development. Four variables are involved:

  1. Population of LDCs grows, from 5.279 billion in 2000 AD, at a declining rate to 9.759 billion by 2080 AD, stabilising at that point (Earthscan, 1996, and World Bank, 1995).

  2. Sustainability. The West probably has the technical and market institutions capable of achieving sustainable development at present income levels. Though Western technology may eventually contribute to the solution of LDC environmental problems, there has been little evidence of effective technology transfer from the West in 50 years and even less of the transplanting of market mechanisms necessary to the application of this technology. So the simulations run from year 2000 until an income of $27,000, that expected in the West by 2000 AD, is attained. After a lead time in which reforms are implemented, alternative growth strategies proceed.

  3. Burden. For purely comparative purposes it would be useful to assign some value to the environmental burden which the third world inflicts on the planet. An arbitrary figure of one percent of per capita GNP is chosen to represent this cost. Adapting World Bank graphs and data (1992:40) it seems that some of these costs may have started to fall in the West at about half its present income levels. The per capita burden is therefore reduced after an income of $13,500 is reached, falling from one percent to zero when the target is reached. The burden is accumulated as “Cum. env. burden”. during the time elapsed in reaching sustainability.
The Conflict Resolution Model reported in appendix L also projects GNP per capita growth for the four growth strategies. The West seems to have achieved political stability at about half its present income levels. So the simulations run from year 2000 until an income of $13,500 is attained. After a lead time in which reforms are implemented, alternative growth strategies proceed. Annual conflict costs are progressively reduced, reaching zero when economic growth reaches the “political stability” income level.

Test results.

TEST RESULTS LDC India China LVT
Year at which reforms commence never 2010 2010 2010
Year at which debt is repaid 2103 2022 2015 2013
Year of political maturity 2631 2088 2041 2027
Year of ecological sustainability 2805 2110 2049 2032
Table 11. Test results.

In conclusion, the results, though generated by crude models using scarce data, and limited by many assumptions, appear to endorse a strategy of growth, both for its own socio-economic sake and for its contributions to solvency, conflict resolution, and sustainable development. The recommended strategy appears to have attributes of efficiency, equity and simplicity superior to those of many other strategies. Finally, in view of the failure of most attempts at global forecasting, it is important to stress that the simulations do not offer any particular prediction, only the observation that the superiority of LVT holds, for the tasks which were set, over a range of assumptions.

EVALUATING THE MODEL.

Though a Cost Benefit Analysis of the sustainability and conflict resolution models would be very difficult and require far more information than that available, a few comments are appropriate. The models suggest gigantic potential benefits from LVT. These would, of course, be very considerably reduced by discounting future benefits to Net Present Values (NPV). However, there are differences of opinion on the discounting, both of those environmental assets which may be non-reproducible, and of the value of human life. Also, some very large costs, loss of capital and loss of production from hostilities , have not been included. The estimation of the project costs are also difficult. Let us approach this indirectly. On peacekeeping alone the UN spends between three and four billion a year, and the world spends $1,000 billion on the military every year (World Bank, 1991:140). A tiny ‘peace dividend’ (World Bank, 1992) of a fraction of one percent would easily cover the full cost of the conflict resolution project. In practice, both projects would proceed, after evaluation, from design, education and training, through to the implementation of carefully selected cases. Political issues would soon become dominant. Vested interests would retard them. But any one of a number of quite possible major economic, environmental or political disasters could greatly hasten project acceptance.


APPENDIX F - A CRITIQUE OF THE GEOCLASSICAL METHODOLOGY.


The models are too simple. True. But those of neoclassical economics, computing growth from the marginal product of physical and even human capital, while ignoring land and natural capital, and the massive effects of rent seeking, have consistently predicted strong positive economic growth for those very economies whose growth rates not only declined, but became negative. The simplicity of the models presented here may be appropriate to what, at this stage, is essentially exploratory analysis. We hope they may encourage professional economists, for example in the UN, World Bank, IMF, and OECD to refine and develop further models, and may provide, for non-economists and field workers, an insight into the reasons why so many projects have been unsuccessful.

The normal growth assumptions are too pessimistic. No, they are not too pessimistic. For the benchmark, we have used the region defined as LDCs, whose positive growth rate is entirely due to the inclusion of two very large, robust economies, India and China. Without these, the Third World has a negative growth rate, and simulation targets would never have been met. We have not used contemporary growth data, though these would advance our argument. We have used instead average growth data over substantial periods, for 1980-1993 and 1985-1995, the latter figures being lower than the former. For 40 years development forecasts have been consistently optimistic while actual long term trends have deteriorated.

Yes, they are too pessimistic. They assume no reform takes place. But it does now seem likely that the third world economies will deteriorate to a point at which political barriers to SAPs and LVT (seen as complementary and for which the alternative, the Tigers’ land redistribution strategy, is expensive and unnecessary) will fall. The income target for affordable sustainable development, though apparently reasonable for today’s state of environmental technology, is unreasonably high for the long run. Resource substitutions and taxation instruments can be expected to bring down the price of conservation slowly but steadily.

The reform growth assumptions are too optimistic. Olson (1996) suggests that, were it not for institutional drag, the marginal product of capital (roughly equivalent to the TFPs used in this paper) for India should be 58 times greater than that of the United States (Olson, 1996:14). The TFP figure used here for the LVT economy is about three times greater than that of the United States. The high savings figure should be compared with China which regularly saves 40 percent of GNP with a relatively small land tax revenue.

If foreign loans get consumed not invested, would not land revenues also? Land tax revenues of say 30 percent of GNP would be much larger than foreign inflows and therefore harder to hide. Boone (1994) found that aid in excess of 15 percent of recipient GNP worked comparatively well. And land reform is much more local than foreign loans, and local “ownership” of reform programs is an important success criterion (World Bank, 1997:141).

But conventional taxation is also local. Why LVT? Actually, some conventional taxation is assumed to be necessary to the 15 percent growth rates projected. But third world economies rely heavily on what, in their context, are the least equitable of taxes, consumption taxes, on the least efficient, corporate and individual income taxes, and very heavily on customs duties. The latter presents a special difficulty for the IMF, insisting as it does on fiscal prudence while at the same time advocating the removal, in the interests of free trade, of a major contributor to fiscal prudence (Economist, 1998a:100).

Implementation of LVT is politically difficult. This is no more true than of other reforms. Early LVT experience occurred when the Meiji restoration kickstarted the Japanese economy. “To establish the basis for a sound fiscal system, the government undertook a land survey, established titles, and implemented a land tax payable in cash” (World Bank, 1997:150). Today, a heavy land tax, not necessarily as heavy as the 50 percent Meiji land tax, but one not limited to agricultural land, could be made a condition of all future international loans and the rescheduling of existing ones. Field workers in non-government organizations (NGOs) are already keenly aware of the land problem but, like the IMF, may be equating land reform with land redistribution. The latter precludes economies of scale and is obviously limited to agricultural land.

In 1991 30 American economists recommended LVT to Russia (Solow, et al., 1991). Subsequent events might have been quite different had the reforms there commenced with one which reduced rather than increased rent seeking. Recent LVT experience in Capetown, and in Estonia, Slovenia, Latvia and the Czech Republic (Economist, 1998b:82) could be shared, shortening the research, education and training component of implementation time. A major economic, political or environmental shock would, of course, further shorten it.

Land tax is confiscatory and taxable values are hard to measure. These criticisms apply generally to almost all taxation. The first of these West-oriented criticisms seem largely irrelevant to LDCs. Except for consumption taxes, existing LDC taxable values are probably harder to measure than land values. Rural land is easier to value than urban land inasmuch as capital structures represent a small proportion of total value. The measurement of natural resources values is very much harder, yet this is now recognized as essential to all environmental strategies. Advocates of LVT sometimes suggest a tax rate of less than 100 percent, in order to retain some market pricing.

Is Western-style development desirable or even necessary? Development Economics is driven by its own assumptions and ethos which should, perhaps, be occasionally challenged. This challenge has come from both ends of the political spectrum and from most of the world’s religions, most recently and most notably that of Islam. The question has also been asked by many field workers in the development industry who have had the opportunity to experience at first hand, and appreciate, non-Western ways of life. The question has also given rise to the articulation of concepts such as ‘Asian Values’. It is perhaps appropriate to end this critique of LVT by placing LVT into the above contexts.

  1. LVT contributes an efficient revenue base to support any type of economic, political, ideological or religious superstructure.

  2. LVT, in contributing to a fair and equitable polity, does not assume any necessity for economic growth, though it claims to be the most efficient and equitable way of achieving growth, where desired. LVT advances no opinion on income distribution other than that arising from social rights to the rent of land and natural resources.

  3. LVT has been used in this report to explore the achievement of objectives other than those of Western-style economic development, such as political stability and environmental responsibility. In this exploration only the economic contribution of LVT was compared with those of alternative strategies. But LVT, in taxing those who seek to monopolise the rent of land and natural resources would create of its own accord some powerful disincentives to ;; and territorial violence.


APPENDIX G – ECONOMIC GROWTH PROJECTIONS


[Position of computer printout]


APPENDIX H – RESPONSE FROM THE UNITED NATIONS FOOD AND AGRICULTURE ORGANIZATION


[Position of letter from the FAO]



http://www.earthrights.net/docs/smiley_thirdworldinterv.html