This is the fifth of five articles on public sector housing. In this article I draw upon the experiences of Hong Kong andSingaporeto discuss critical considerations essential for the design and implementation of a public housing program for the large and fast growing economy of MainlandChina. In particular, I focus on the role of public housing in sustaining economic reform and growth, providing insurance for the disadvantaged, and supporting broad based, market driven development that enhances social harmony and political stability.

 

The starting point for this discussion is a broad one: the transformation of the traditional agrarian society into a modern industrial economy like that seen inChinaover the past century. This transformation is a momentous event in the history of human civilization. Its impact is not limited to the economic sphere, but embraces every sphere – moral, social and political. It has global dimensions. It redefines the way we live and think. Without oversimplifying matters, it is useful to think of this great transformation as the breaking down of the old order and the ushering in of a new one.

 

Land Reform in China

 

In economic terms, stagnancy is replaced with growth. Industry displaces agriculture as the dominant economic activity. Land bound peasants with narrow specialized agricultural skills migrate into densely populated cities to become mobile versatile workers. Politically the transformation from peasant to industrial society entails the overthrow of the old landed ruling class, inevitably involving great convulsions and considerable violence. Few peasant societies, however, make a successful transformation to industrialization and many remain poor, repressed and traditional, or are stuck halfway between agriculture and industry.

 

For over a century,Chinahas struggled with the challenge of land reform which is an important part of the transformation. The Guomindang did not pursue land reform when they were in power on the mainland. After retreating toTaiwanthey took bolder land reform initiatives. The power of the landlord class on the mainland was only broken during the first 30 years of Communist rule, ending over a thousand years of land ownership structures. What the Chinese Communist Party accomplished was not merely a nationalist revolution, but a social revolution. The path towards building a socialist commodity economy with market driven industrialization was cleared.

 

China’s industrialization under Communist rule took place in two stages. In the first 30 years the ruling party adopted central command and planning, in the second 30 years it embraced a policy of openness and market reforms. Market driven industrialization took off with a vengeance when peasants were finally allowed to move into cities to become factory operators. The hukou system was quietly ignored to allow for urbanization on a broad scale. As a result, economic growth has soared for a miraculous three decades.

 

The Chinese economic miracle was the product of two events: first, a political revolution that swept away the old order, and second, an economic revolution that harnessed the enabling powers of the market. The process of industrialization is never a purely economic phenomenon, but a political economy challenge. The old order has to be cleared to make way for the new. Most transformations fail because the old order cannot be retired or because forced compromises result in half measures.Chinawas able to build on the success of its political revolution to make way for a smooth transition to a market system with minimal political barriers and resistance.

 

China’s industrial base is now quite impressive among emerging economies with large populations. The Table below shows that China’s percentage share of the industrial labor force, at 28%, is fairly high given its GDP per capita (in purchasing power terms) and is comparable to more developed economies like Russia, Mexico and Turkey. The 38% share of the agricultural labor force still leaves considerable potential to transfer peasants from agriculture to industry. And when this takes place further urbanization and city development will have to follow.

 

GDP per capita 2010 (PPP USD) Percentage of Labor Force in Agriculture Percentage of Labor Force in Industry
Russia

$15900

10%

32%

Mexico

$13900

14%

23%

Turkey

$12300

30%

25%

Brazil

$10800

20%

14%

China

$7600

38%

28%

Egypt

$6500

32%

17%

Indonesia

$4200

38%

13%

India

$3500

52%

14%

 

A Rebalancing Consumption Miracle

 

Today China stands at the crossroads of the next stage in its development. The 12th Five Year Plan has outlined a strategy to address the serious imbalances that have appeared after 30 years of rapid growth. The most critical imbalance is that created by a heavy reliance on investment growth. Private consumption as a share of GDP has dropped dramatically in the past 20 years to 35% while investment’s share has risen to 40%. Meanwhile, the sluggish global economy means that net external demand is likely to play a less important role in sustainingChina’s growth in the next few years. International pressure is also mounting against China to reduce its external imbalances.

 

China wants to sustain growth by stimulating domestic demand, which will entail promoting private consumption spending sufficiently so that its share of GDP increases. This is going to be very difficult. The numbers alone are a little worrying. IfChinagrows by 8% a year, consumption would have to grow by a little over 11% to raise the consumption share of GDP from 35% to 36% in one year. To do this in two years, consumption would have to grow by a little over 9.5% annually. To bring Chinese consumption in 5 years up to 40% of GDP consumption would need to grow by nearly 10% each year assuming a 7% annual GDP growth rate. To bring Chinese consumption in 20 years up to 50% of GDP, which is the low end for other high saving Asian countries and far lower than any other large economy inAsia, consumption would need to grow just below 9% each year assuming a 7% annual GDP growth rate. Consumption, in other words, must grow substantially faster than GDP for a sustained period for rebalancing even to begin to take place. To achieve thatChinawould have to accomplish another economic miracle.

 

Of course this will not be easy. Even under the most optimistic scenario, China’s rebalancing process will take many years before it can reach even the lowest consumption to GDP ratios achieved by other Asian countries. The retreat from investment-driven policies, which have been accompanied by too-low interest rates and an undervalued currency, will be a long process. In China, high corporate savings are the result of a transfer from household savings via low interest rates. The country’s growth strategies have basically forced households to subsidize investment and production, thus generating rapid economic and employment growth at the expense of household income growth. As long as the growth in household income is constrained, so is household consumption growth. Stimulating consumption will mean transferring income back from the state and corporate sectors to households.

 

Migrant Workers and Housing Pressure

 

The investment-driven policies are in part a legacy of the central command and planning structures that still survive to some extent.  Some of the investments made have probably been misallocated, contributing to a future gap between over-production and under-consumption. To correct this requires first of all a fundamental reform of interest rate management and banking governance. But this will take time and there will be a lot of political resistance, especially in the state and corporate sectors. It is unlikely to happen fast enough for consumption’s share of GDP to rise quickly.

 

Raising wages to boost household income is a move in the right direction, but that would reduce corporate savings. While this would be a highly desirable development, it has other political and economic repercussions. Corporations and the state sector would be faced with a loss of savings and would resist financial reforms to raise interest rates.China’s growth strategies basically force households to subsidize investment and production, thus generating rapid economic and employment growth at the expense of household income growth, and as long as the growth in household income is constrained so would household consumption growth.

 

Household savings also face pressures. Rapidly rising economic growth improves the standard of living, but can have a depressing effect when people contemplate life after retirement or the expansion of their family. Higher standards of living imply that the real value of household savings must be able to yield a return equivalent to those standards, otherwise the future quality of life will deteriorate. If households find this impossible, then there will be no incentive to increase consumption and people will try desperately to save. Unfortunately inChina’s repressed financial market this is likely to be the case for most households. Developing a social security system for retirement protection will take time and it will be more difficult to implement in the current financially repressed environment.

 

Cutting through this Gordian knot will be difficult. It is not a matter of economic understanding but of complex political negotiations among various organized interests. Economists are not trained to believe in miracles, much less to perform them. But ifChinahas to perform such a miracle quickly, where should she be looking?

 

Developing a nationwide public sector housing program could hold the key and it is a matter of top priority in the 12th 5-Year Plan. This is related to the goal of sustaining economic growth through continued industrialization. Such a goal entails moving more peasants out of agriculture into industry and cities, which worsens the pressure on housing.Chinatherefore needs to determine how it will cope with this pressure.

 

A Public Housing Market Stimulus

 

A massive public housing program of the type developed in Singapore could address many of the issues and hold promise of untying the Gordian knot in a way that is more effective and less difficult to implement compared to other initiatives.

 

One of the Singapore government’s first acts after independence was to pass the Land Acquisition Act of 1966, which conferred powers on the state to acquire land for any public purpose. The rate of compensation was set by statute and independent of both market conditions and the landowner’s purchase price. This exercise wiped out land rent increases for affected landowners, some of whom suffered actual losses having purchased their land at prices above the market value at the statutory date. Some such landowners even had to carry on with loan repayments for land which had already been acquired by the government.

 

Singaporein effect pursued land reform and broke up the old order of land ownership.Privatelandwas nationalized and redistributed to 80% of its less well-off citizens through its public sector housing program. It was a bold socialist vision to redistribute propertied wealth. However, the government also prudently preserved the capitalist market system by turning public housing units into private property that can be freely rented and sold on the open market.

 

This approach offers lessons for China. A market in public housing units is especially important for a country ofChina’s size because it would not restrict the mobility of the population as economic conditions in different cities and regions evolve over time.  Households could be given the option to either rent or purchase the unit. They could then be allowed to rent or sell their units on the open market after a period of time, say 5-10 years. Restrictions and additional levies upon sales should be kept to a minimum to encourage an active market in these housing units.

 

The central and local governments could provide a subsidy on the development costs and land values for all households in the public housing program. The rest of the cost of each unit could be borne by the resident, but the rent or sales price would be set at an affordable level. Working out a sharing ratio among the three parties would be an urgent policy issue.

 

Banks could also be involved by financing the development cost of the units in the first instance. Part of the cost would be recovered when the units were sold to households, which would take out individual mortgage loans to finance their purchase. These loans would become prime assets for banks given that substantial subsidies have been provided by the state. And these loans could be sold off to investment funds and insurance companies as securitized assets. This in turn would facilitate the growth and development ofChina’s financial system.

 

A market in public housing units would also provide property owners with a reliable asset to protect their savings for family formation, retirement, and leaving a bequest to the next generation, assumingChina’s economy continues to prosper and land values in cities continue to appreciate because of dense living conditions. A nationwide initiative to develop a public housing program would thus create the middle class needed to encourage consumption spending, which to date has played a secondary role in driving economic growth. Over time such a program would gradually displace the company provided quarters that are still an important legacy from the past so that a nationwide market for domestic housing could eventually emerge.

 

A Fair Transparent Allocation System

 

A broad based propertied middle class in the cities would also be a stabilizing political force for industrialization. The experience of Europe and North America over the past 150 years has shown that while industrial conflicts may arise in urban centers, the violence and animosity of these conflicts subside when social insurance and protection schemes are put in place to insulate workers from some of the market shocks. A public housing program would thus be a quick and effective means of stabilization.

 

The allocation of public housing units should be carefully managed. When substantial subsidies are being given out there is always room for disagreement as to whether the criteria are fair and whether they have been applied with fairness. Vigilance in the fair allocation of units will avoid fostering fresh grievances. It will also go far in enhancing the credibility of the government. It is not impossible to contemplate that a lottery can sometimes be perceived as fair in the eyes of the public.

 

It is worth noting the case ofHong Kongby comparison.Hong Konghas pursued many public housing schemes, some means tested and some not. But its approach has lackedSingapore’s bold vision. More importantly it has lacked a market mechanism that would allow housing units to be freely rented and sold on the market. Over timeHong Kong’s housing programs have become ossified and failed to meet the social and economic needs of the population in a rapidly changing economy.

 

Singaporehas succeeded in building a socialist commodity housing system. Its occupants see themselves as citizens of the nation and property owners of their property. They have a stake in the future prosperity of their economy.Hong Kong, meanwhile, has ended up with a dual system, where 53% of the households live in a capitalist private housing market and 43% live in a communist planned non-market housing sector. Society has become arbitrarily divided into haves and have-nots because of our public housing schemes. This isHong Kong’s self-inflicted tragedy and the source of our many deep seated structural contradictions. It is a society divided from within by generations of well meaning policy makers who nonetheless have failed to comprehend the long term consequences of their policy actions.

 

 

 

(5 of 5)

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