Rent-seeking with Chinese Characteristics

The world was led to believe Deng Xiaoping [1904–97])that China would adopt free markets, foreign investment and private ownership within a system of “socialism with Chinese characteristics”. Instead, because of the negligence of the Communist Party, the people of China were assaulted with a perverse model of state capitalism with rent-seeking characteristics. The latest “reform” drives China further down the road to an unsustainable economic process which will end in tears for the Politburo in Beijing.

Deng’s reforms were spell-binding: the world stood in awe at the phenomenal pace of change within China, as cheap labour and the freedom to trade on world markets transformed the cost of shopping in high streets throughout the world. But the story that was under-studied was the phenomenal scale of waste within China. That waste is symbolised by the ghost towns that litter the vast country: skyscrapers built but unoccupied, linked to the huge number of apartments that remain vacant in the portfolios of property speculators.

Underpinning that waste of capital was the illegal privatisation of the rents of land. Local bureaucrats, mayors and cash-rich developers conspired to dispossess people of the land they occupied so that the tracts could be converted into capital gains. This entailed much suffering for the peasant population, the corruption of civil servants and the diversion of the Chinese economy towards the culture of rent seeking.

Now China is about to embark on a new phase of so-called development, unlocking farmland rents for the benefit of big corporations – many of which are (of course) owned by Communist Party officials.

To facilitate industrial-scale farming, arrangements are being made to displace elderly farmers and the peasants who live off their traditional family plots. Their land, held in common by their villages, will be amalgamated into large estates suitable for capital-intensive agri-business operations. The outcomes will include

• displacement of working people from the land
• intensive cultivation and the chemicalisation of the soil
• fragmentation of the social solidarity that was perhaps the best legacy of the brutal Mao years, and
• further havoc in global markets, as western food suppliers are confronted by cost-cutting Chinese products.

Constitutionally, land is owned in common by the people, either through their villages or through agencies of the state The corruption of China’s reform programme stems largely from the failure of the Communist Party to ensure that the rents of that land remained in the public domain.

The new phase of privatisation – under a leasehold system – will further erode the ethic of sharing the fruits from common rights to land. Through what are called “land management rights”, a village may transfer “ownership” to a corporation in return for yearly payments. Those payments are the rents of land. Under this arrangement, the notion of equality of treatment is abandoned; and the scope for corrupt under-the-table payments to village officials will be extended.

CHINA needs to go back to the drawing board, to redefine the agenda set by Deng Xiaoping. In the main, this means redefining the fiscal system. The use rights of land do need to be reallocated, to secure optimum (economic and ecological) use. But at the same time, the common rights of all Chinese citizens, wherever they live in this vast nation, need to be protected. There is one way only to achieve this outcome: China needs to introduce an Annual Ground Rent, to collect the full value of land for the public purse.

As it happens, back in July, at a G20 meeting, reformist finance minister Lou Jiwei announced the introduction of a property tax as the government’s “next task”. But, the Financial Times reported on November 7: “This would be hugely unpopular with one of the Chinese Communist party’s most important constituencies – urban property owners”.

Early last month, Mr Lou declared that the government was “actively pursuing” property, income and environmental tax reforms.

Mr Lou has now been sacked.

Rent-seeking with Chinese characteristics continues its march forward.