Third World Intervention

A New Analysis

David Smiley

[1998 / Part 2 of 2]

CHAPTER I

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 nor 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 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.

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 ~ue to differences in institutions, and that capital of all forms is being massively squandered by third world institutions. Recently, Milton Friedman asserted 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 would be to disappear. 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. Nor is it the only concern of the huge network of international, national and local indigenous activities called NGOs. Volume three of The Oxfam Handbook of Development and Relief gives some idea of its size and scope. And the World Bank (1997:113-116) suggests that, in a world of collapsing states, NGOs now 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 PRIVATE INVESTMENT

In cases where many competing investors have negotiated with many competing regional and industrial seekers of investment, as in China, Foreign Direct Investment (EDI, 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 (esp. 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, also raising land rents there. 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 raises three important issues: the taxation of the TNC monopoly, the taxation of the domestic private monopoly, and the funding of domestic public projects.

• (a) 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, as a legitimate target of taxation, remains immobile and highly visible and within the country.
• (b) 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.
• (c) 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 h 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	Helps 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 Require collateral, therefore regressive
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.

• (a) Private consolidation of land holdings 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.
• (b) 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.
• (c) 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.
• (d) Tenancy reform is easily circumvented and, in any case, excludes the most important target group for land reform: the landless laborer. Rent remains privately monopolized.
• (e) 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.

DEBT MANAGEMENT

Debt has not only had a devastating effect on third world countries, but has impacted donor countries as well (See for example Susan George's "The Debt Boomerang"). The extensive analysis of third world debt and first world strategies for its management has generated a very 1arge 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, ~;as 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 lan4 rent (Clark, 1957:637, Todaro, 1989, 1997). The public collection of this land rent, by a land value tax, 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.

Nor are the Asian Tigers immune from debt. Agrarian land redistribution undoubtedly kick-started their economies back in the fifties (and in China, after 1978). But, as they grew rapidly and industrialised, so did untaxed values in non-agricultural land. 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 all 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 which was needed, that foreign aid appeared essential for what Rostoff called economic takeoff.

The quicksand. Unfortunately, if Boone is to be believed, most Ok 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 (Susan George, "The Debt Boomerang").

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 rev~nue 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 on1y 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. (For example 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 become clear in the section on Green taxes.

CONFLICT RESOLUTION

There have been three main international responses to territorial conflict. First, by 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, by largely unsuccessful mobilizations intruding into dynastic struggles over monopolies of territories and natural resources, and attempting to rearrange these monopolies. And third, by 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.

CHAPTER 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 institution';, particularly landed institutions, may affect the behaviour 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, one author even suggesting that the entire USA federal budget was the object of rent seeking. 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 for example, standard economics texts on monopoly, and rent seeking analyses such as those of Brooks and Heijdra 1989, Tollison 1995, etc.).

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 :he 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 economics, 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
Per capita income growth	Below zero	8% p.a.
Level of capital investment	Low	High
Domestic savings	Low	High
Foreign investment	Debt bonded	Paid back
Productivity of capital	Compromised	High
Population growth rate	High	Low
Levels of inequality	High	Low
Human capital (skills) investment	Low	High
Conflict and civil collapse	Endemic	Rare
Land reform	None	Agrarian only
Rural poverty	Endemic	Rare
Urban poverty	Endemic	Increasing
Land speculation	Endemic	Urban
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 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 ~tility, 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 (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 into production.

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 ha~ 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 :n 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 is almost certainly true for the West, although governments do not measure land's share of GNP. 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 po.3t-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.

TAXATION PRINCIPLES. Taxes are evaluated according to their effects upon efficiency (what burden does a tax place on the production of goods and services? Does it encourage or discourage optimum use of the factor being taxed?), equity (does the tax make the poor better or worse off?) and simplicity (is the tax easy to collect and hard to avoid?). All taxes except land value taxes (LVTs) discourage production. A LYT encourages production by forcing idle resources into production.. LVT is a simple tax to collect and, especially in the third world, a highly equitable tax.

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:

• (a) Produce land value maps, identifying each parcel of land, its owner, and a valuation of land content of each parcel. Review periodically.
• (b) Calculate the annual value, the economic rent. For example the annual rent of land valued at $10,000 would be $700 p.a. for a discount factor of 7 percent.
• (c) Collect this annual value immediately or gradually as appropriate. Collection at the full value 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 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 fall 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 partially implemented in many countries, the taxable rate is usually very low and government revenue is supplemented by other, less efficient taxes.

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 and marginal product, 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 have been well tested in local government land taxes for about 100 years in countries like Denmark Canada, New Zealand, Australia, and in some American cities. In South Africa, Capetown is preparing to introduce LVT. In 1991 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 has characterised subsequent Russian restructuring suggests 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 he 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 ~"o Japan, Taiwan, South Korea, and China have all, with strong internal or external direction, successfully implemented land redistribution programs. Finally, 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."

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 success of a Peruvian NGO in registering property titles. The report cites professional stakeholder monopolies such as lawyers' associations as the main opponents of the reform.

Exemptions and deferment. Some local governments in the West allow exemptions, and deferred payment in cases of hardship.

GREEN TAXES. Unlike LVT, 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.

Green Taxes. The mechanics of the taxation of natural resources, though complex in dealing with a variety of pollution sources, and a variety of renewable and non-renewable resources, is now emerging rapidly. Global concerns over the environment have led, via environmental economics, to the development of instruments for the taxation of natural resources, often referred to as "Green taxes", since common ownership rights in these natural assets are being increasingly recognised. There is no agreed term covering both land and natural resources, the default descriptor being land. Land usually refers to land surface, and natural capital usually refers to natural resources. Natural opportunities implies the opportunity costs of use and misuse of land and natural resources.

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 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, arid 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 .3ocial 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 extension of neoclassical economics so that it can say something useful about conflict resolution, international justice, and intergenerational justice.

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
Income growth	Negligible effect	High income growth
Capital growth	External dependence	Internal sources
Debt	Bondage	Unecessary
Productivity	Negative	High growth
Rent seeking cost	Increased	Decreased
Dead weight loss	Increased	Decreased
Population growth	Negligible effect	ZPG via income growth
Inequality	Increased	Decreased
Education	Unaffordable	Affordable
Conflict resolution	Negligible effect	Via income growth
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 almost an 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 absorb resource inflows, block growth and maintain inequality. Explanations of this behaviour, using rent seeking theory, were advanced in chapter two.

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 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 accommodate 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 on the particular third world problems of debt, the environment, and political conflict?".

5-FACTOR MODEL	INPUTS	RETURNS/OUTPUTS
Labor	All human productive input/td>	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 (debt repayment, political maturity, and ecological sustainability), as shown in the following table.

TEST RESULTS	LDCs	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 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 over 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, H, and I.

CHAPTER 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.

CHAPTER 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 & RECOMMENDATIONS

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 ir1creasing, total factor productivity, i.e. the ability to convert capital investment into growth. Excluding Chir1a 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 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 ·zo 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 modeling. 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 ~and 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:
   
   http://habitat.unchs.org/home.htm
   
   http://unhabitat.org/partnerslindex.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.

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