The Landlord State: Land Allocation as a Tool of Industrial Policy in China

A fundamental question of political economy is how states can foster economic growth. In practice, one key approach has been industrial policy, where governments actively support the development of targeted sectors of the economy. The East Asian miracle has furnished the poster children of successful industrial policy, most notably Japan, Korea, and Taiwan. All three countries used state control over bank lending to provide preferential financing to sectors that would likely not have attracted much investment, such as steel production, shipbuilding, or semiconductor manufacturing. Dr Saul Wilson, Assistant Professor of Political Science at Ashoka University, provides further insights into this concept by examining the use of land allocation as a tool of industrial policy in the context of China.

In the four and a half decades since China began Reform and Opening in 1978, its economy has grown at an extraordinary pace, catapulting China from poverty to the edge of high-income status. The state played an active role in this transformation through an industrial policy that helped promote diverse projects, such as the nascent real estate sector of the 1990s and the high-tech sector of the 2010s. While the Chinese state sometimes used the state-owned banking system to finance its industrial policy, preferential financing was often reserved for the least promising industries: struggling state-owned enterprises or deeply indebted local governments. China has instead turned to other tools of industrial policy, the most consequential of which is land.

The state owns all urban land in China, and local governments have been able to guide economic development through subsidies by allocating cheap land to the sectors they wish to promote. Moreover, because expensive residential and commercial real estate attracts investors, the state has been able to promote real estate investment by increasing prices. The state has used land allocation as a tool of industrial policy.

In his recent publication, “The Landlord State: Land Allocation as a Tool of Industrial Policy in China,” Dr Wilson argues that China nationalised urban land and began to sell it precisely because policymakers hoped to use it as a tool for industrial policy. State-owned enterprises sought state ownership over land, arguing that it would eliminate barriers to industrial development. While local governments began to sell “land use rights” to raise revenue, they also did so because foreign investors demanded stronger property rights.

Dr Wilson argues that once those land management institutions had been formed, they created new constituencies that captured the state’s industrial policy. In the early 2000s, the central government instructed local governments to stop offering land to the residential and commercial real estate sectors at subsidised rates. As land prices rose, investing in real estate became more attractive, both for real estate developers and (would-be) homeowners. Because local governments were selling the land, rising land prices meant higher government revenue.

A powerful growth coalition of local governments, real estate developers, and homeowners demanded continued support for the real estate sector. This growth coalition was powerful enough to incorporate almost all impacted parties. Initially, it came up against resistance from peri-urban villagers and urban homeowners, who were displaced en masse to make way for real estate projects. The growth coalition simply increased compensation for those displaced, buying a substantial degree of support. Local governments did so in part by borrowing from banks to finance land clearance. Local governments were ideal customers: they paid high interest rates, but everyone involved presumed that the central government would not allow them to default. Those facing displacement and the banking system joined the growth coalition, backing further investment in the real estate sector.

As a result, by the 2010s, the beneficiaries of earlier rounds of state industrial policy had largely captured the land allocation apparatus that was designed to allow the state to promote favoured sectors. Land was a powerful tool for industrial policy, but the way China wielded that tool created a growth coalition that pushed the country into a massive real estate bubble. Dr Wilson concludes that only by bursting that bubble has China begun to return to the use of land as a tool of industrial policy, with local governments once again seeing promise in the use of land to promote the “right” industries.

Reference Article: The Landlord State: Land Allocation as a Tool of Industrial Policy in China