Conference on Land, Real Estate
and the Economy

World Bank Staff

[1998 / Part 2 of 2]

Principles of Regulatory Design

To improve upon "failed" markets in both practice and principle -- to capture the benefits discussed above -- countries must follow certain general principles. They must apply the principles of cost-benefit analysis to regulatory choice to develop an efficient system. Designing regulations that improve upon a failed market makes large demands on regulators, who must know a lot about market conditions, the nature and size of externalities, and specific effects of the regulations. They must deal with interaction and adding-up effects and must untangle the incidence of the regulatory burden.

Fairness is also important in good regulatory design. Urban regulations have profound distributional effects. Experience suggests that many bodies politic will accept systems that generate significant wealth transfers as long as the public perceives that those adversely affected are not chosen systematically and that remedies exist for extreme negative effects on wealth. In the U.S., for example, zoning changes that reduce the value of some properties and increase others are broadly (not universally) accepted, as long as the process of determining winners and losers is perceived to be roughly fair and as long as compensation is available to those with the largest losses (when regulatory changes leave property essentially valueless). Concepts of exit and voice are extremely relevant to the design of a regulatory system for real estate. "Bad" regulatory systems, like any "bad" policies, can be disciplined by exit (people leaving) and by voice (people complaining, or bringing political pressure to bear). By virtue of land's fixed location, exit is less of an option for real estate regulation, and voice, or political participation, is particularly important.

Whether the political process should follow the majoritarian model or a special-interest model is debatable. Fischel contends that interest-group politics at higher levels of government offer more protection to owners of assets that are inelastic in supply and thus more vulnerable to regulatory takings.

Transparency is highly desirable in a regulatory regime, as in other public endeavors. Regulatory systems that are well understood by participants and citizens -- both in the details and in the overarching "rules of the game" -- tend to be perceived as fair and command more political support. And transparent systems by their nature generate less unnecessary risk for developers.

Those are general design principles. Unfortunately, there are fewer absolutes about appropriate packages of specific regulations for a prototypical city. Malpezzi found it easier to assemble a list of regulatory "don'ts" than "do's":

Regulatory Do's

Plan trunk infrastructure and an installation schedule. As much as possible, such infrastructure should be appropriate for current and likely future development locations, as revealed by the market. Well-designed impact fees can finance such infrastructure.

The prerequisites are property rights, cadastres, secure tenure, and fair adjudication.

Cost-benefit principles should be used to examine proposed regulations. Quantifying benefits -- even approximately, with likely bounds, when precise figures are unavailable -- is far superior to making a regulatory judgment with no such quantification. Every regulatory decision imposes real costs and confers some benefit; better to measure with error than not to try. Every regulation put in place reflects an implicit judgment about costs and benefits. Put those judgments to the test. If necessary undertake "regulatory triage": separate regulations into (1) those whose benefits clearly exceed costs and strengthen and enforce them; (2) those whose costs clearly exceed benefits and remove or reform them; and (3) a middle category, of those for whom the net cost-benefit is known too imprecisely to be confident of the need for change. In many if not most cities, an initial focus on (1) and (2) will keep regulators busy enough for some time, and will yield significant returns.

Consider fairness, political feasibility, and efficiency in the design of regulatory regimes. Real estate regulations have powerful distributive effects.

Consider the law of unintended consequences (see the Korean case, discussed in Green Malpezzi and Vandell, for one cautionary tale).

No regulation is so well drawn that it never needs change, or variances. Allow for exceptions and changes, in a transparent process.

Corner solutions are rarely the best.

Outright prohibitions -- for example, on development within a large greenbelt -- are rarely an efficient way to seek regulatory benefits. Encourage negotiated outcomes.

Use impact fees, set to approximate the (formerly) external costs of development.

Push decisions down to the local level, where possible. But push decisions up, where insiders have an inordinate say at the expense of outsiders.

Solicit feedback from a wide range of actors, developers, and community representatives. Voice is important.

Provide a range of options suited to the income, preferences, and culture of the city's inhabitants. Standards must fit local conditions: income, density, available materials, soil, and topography. Forget VIP pit latrines in dense, middle-income cities. Forget Western-standard sewer systems in small, low-income settlements.

Development regulation must follow the market. New towns and large public development projects have real risks. (Shanghai is learning this at great cost, as the public sector pushes a large second center development located in the wrong place).

Plan for the provision of local services, such as schools, clinics, and fire and police departments.

Regulatory Don'ts

Don't import a foreign system whole. Do study foreign systems for ideas but in the context of local conditions. Ghanaian building codes have often forbidden building in indigenous materials ("swish," or rammed earth) even though well-maintained houses of such construction can last for over a century.

Don't build unnecessary roadblocks to redevelopment and densification. New construction on the fringe is important, but so is redevelopment and infill, which are not as noticeable and are sorely neglected by many cities.

Don't make codes overly detailed and inflexible but do set performance standards. (For example, "a fire door in an office building must test to withstand a fire of 2000 degrees for 15 minutes," but not "all fire doors must be 2 inch steel.")

Don't rely on rigid quantitative targets for development when setting infrastructure or land conversion guidelines. In market economies, from peak to trough of the development cycle can easily be 3:1 or greater.

Don't prohibit small lots or large lots. Rather, regulate or tax to implicitly price lots to cover the externalities generated, and let the market decide.

Don't adopt large greenbelts. Scattered parks are better. Buy the land for parks rather than prohibit the development of private land.

Don't institute rent controls, on residential or commercial property. The conditions under which they yield net benefit are virtually never obtained in practice, and once in place they are extremely difficult to remove or reform.

Don't tilt profitability away from the middle and low end of the market by imposing differential costs. Large-lot zoning, excessive land use standards, and the like have this affect around the world.

Don't neglect commercial and industrial development and associated infrastructure.

Don't limit land purchases or development rights to favored developers. Auction land and its associated development rights.

Jeff Smith asked Steve Malpezzi: When government arrests a bank robber, which was the "intervention" -- the robbery or the arrest?

REAL ESTATE IN TRANSITION ECONOMIES

Michael Lee (USAID) said the USAID program run out of Warsaw has essentially been supporting the development of a modern real estate market in Poland: the real estate professions, housing finance, local government, and developers. It has been a good environment to work in. He was disappointed not to see posts from conference participants in central Europe and more discussion about experience in that part of the world.

A. Nassau (World Bank) said a lot of information was available through the Russian Housing project and especially through USAID's Housing Reform Project, led by the Urban Institute.

J. David Stanfield said he, Malcolm Childress, and Artan Dervishi had just finished a paper on the emerging structure of urban land markets in Tirana, Albania (IMMOVABLE PROPERTY MARKETS IN METROPOLITAN TIRANA, ALBANIA, Land Tenure Center, University of Wisconsin). The project was well into the phase of sorting out the various forms of ownership of real estate, and who has acquired what interests since the privatization programs began in 1993. In urban areas, for example, apartments have been privatized to all adult people in the apartments as of the date of the privatization contract, which makes some children over 18 years old owners and other, younger children not owners. This is probably going to lead to all kinds of intrafamily conflicts. Another problem has been the acquisition of year-to-year lease rights to urban space, especially for "kiosks," which are evolving into major construction sites. Zoning has gone out the window, needless to say -- exacerbated by informal settling on the urban fringe, where people are putting up houses without allowing for the installation of infrastructure. This "informal" energy was not tempered by the social and political chaos of the past year; it probably even increased as what was left of governmental land use institutions basically closed down. What they have, then, is a very active "market," an important construction sector, and a city that cannot cope with infrastructure maintenance, let alone expansion. All the while, the country is trying to figure out what is the proper role of government and what new institutions are needed to deal with the private property type economy while properly managing public spaces. The UN Economic Commission for Europe has been sponsoring an emerging network of people working on land administration issues in Western and Eastern Europe (MOLA). There is to be a workshop in early 2000 on urban land markets in Eastern Europe. Anyone interested in participating in such a workshop should let Stanfield know.

John Anderson, normally an economics professor at the University of Nebraska but currently working in the USAID-funded Fiscal Reform Project in Moldova, said part of his tax-advising responsibility there was to oversee the development of a market-value-based property tax system as part of the effort to decentralize government services and provide local goverments with stable revenue sources. Moldova has a land tax and a real estate tax, both legacies of the Soviet era, but neither tax is based on market value. They were designing a transition mechanism so Moldova could move to market-value-based property taxes. In urban areas of Moldova, housing markets are active despite the absence of a mortgage market. Flats are routinely bought and sold and average prices are reported in the popular press (not necessarily accurately). The prospects for a functioning market-value-based property tax developing are reasonably good. But although hundreds of collective farms have been privatized over the past several years, there have been only a handful of secondary sales of agricultural parcels, partly for lack of a credit market. Anderson, too, was interested in observations about the development of land and real estate markets in Eastern Europe.

Learning what was happening to real estate in Albania and Moldova might provide insight into the relationship between real estate and development, including the development of other markets, said Anthony Yezer. It seemed to him, for example, that institutional change that made more credit available for real estate development might not be an advance if credit markets themselves were not well developed. If depository institutions were not audited or if they took simultaneous equity and debt positions in projects, the efficiency of real estate development would probably suffer. The consequences for society of privatization and the establishment of title might depend on how well other markets were developed and how competent and capable accounting practices were. On the other hand, the availability of credit from informal sources for development of low-income real property might be adequate at some stages of development but not at others, as formal credit markets made funds available to higher-income borrowers at more attractive rates.

Responding to Omar Razzaz's request for more discussion on certain topics, Bob Buckley (World Bank), who was working on real estate issues in reforming socialist economies, said he found real estate issues in reforming economies interesting from a public policy point of view mostly because of their links to savings behavior and risk distribution rather than in terms of land ownership and taxation issues ß la Nic Tideman. The debate about privatizing housing is over, as far as he can tell. Much of the residential housing stock, and a good chunk (though by no means all) of the publicly owned urban land in most reforming socialist economies, has effectively been privatized. As Janor Kornai said, you only shift from communism once, and that shift has largely taken place, especially with respect to that issue. (It may still be an issue in places like China and Ethiopia). But the debate was interesting and Steve Malpezzi's comments nicely summarized many of the issues. Buckley now raised some other issues to provoke discussion and round out what he now had: a series of collected biases about the effects of different policies:

Imperfections in foreclosure laws. In Hungary (and reportedly Poland), the stock and the flow of car loans issued by private lenders significantly exceeds that of mortgage loans. Similarly, in India there has been securization of car loans but not of mortgage loans. Buckley guessed that this pattern of financial innovation had occurred because serious imperfections in foreclosure or related laws had made housing loans a form of consumer finance rather than into the lowest-risk and hence least costly way for households to issue debt (that is, as mortgages). If these imperfections were rectified, he expected households would prefer to issue mortgages rather than car loans to buy cars. Mortgages should be the low-cost way of smoothing consumption and cars are lumpy items that usually shouldn't be financed with a car loan. Were there other explanations for this observed pattern? He had heard some but didn't find them compelling.

Differences in foreclosure laws do lead to differences in housing finance activity, said Peter Colwell. He knew of one Middle Eastern country where it has been lawful to use strict foreclosure, but you couldn't evict the former mortgageor, who stayed on as a tenant and might not pay rent. What good was that? Colwell recommended the one- or two-page section of the introductory Kau and Sirmans textbook on the history of mortgage law. He suggested considering payment moritoria (such as the recent one in Pennsylvania).

There is substantial political debate in the United States on the issue of risk and homeownership, said Austin Kelly. One faction argues that low down-payment government mortgage programs set poor people up to fail, permanently damaging their credit ratings, and damaging the surrounding neighborhoods because of vacant, deteriorating, foreclosed houses. The other side argues that these programs enhance neighborhood stability by creating new homeowners, increasing demand, and helping to move successful borrowers into middle class investment and improved shelter. Kelly believed both sides were right. The question is empirical: Which effects are greater? With little guidance on the magnitude of the benefits of homeownership or the magnitude of the damage done by vacant buildings or bad credit ratings, he didn't see the issue getting settled soon. How this might play out in a developing or transitioning economy he left to others, except to say that the net effect must depend on where you are and how far you go. Moving from 0% loan-to-value ratios to 75% seemed safe enough (if a decent appraisal system or suitable alternative were in place); whether a move from 97% to 100% LTV would be beneficial was much more speculative.

Saving, mortgage credit, and investment. The imperfection in foreclosure laws, if it exists, said Buckley, could pose a serious problem for savings behavior because most of these countries have gone through so massive a privatization of housing stock that homeownership rates in several reforming economies now exceed 85 percent -- at a time when there is almost no mortgage credit. In other words, privatization transferred an enormous amount of unencumbered wealth that is now highly illiquid for lack of finance. These countries are trying to shift to fully funded pension schemes, safer banking, and fuller private sector development, and inattention to legal issues affecting mortgage finance impedes all of these other developments.

With homeownership and saving, it's tough to keep the macro and micro consistent, said Austin Kelly. You might wish to "liberate" the equity locked up in real estate through mortgage lending, for example, and millions of owners might respond by borrowing against their property and investing it in various ways. But unless you know the source of the mortgage funds, you don't know what you've done to the economy's aggregate investments. Kelly suspected one could make a case that adequate ownership and foreclosure rules could attract foreign capital into mortgage lending and that this capital would be much less "hot" than the typical inflows, which might be all to the good. But you have to be clear about aggregate sources and uses of funds and not just examine a very-partial equilibrium. It's tough to keep the dynamics consistent. Work Kelly did with Ron Krumm (Journal of Urban Economics 1990) showed that a U.S. household's savings markedly increased before buying a home for the first time, then markedly fell right after the purchase. Combining the befores and afters led to not much of a difference in the aggregate.

Reverse annuity mortgages for elderly homeowners. In several reforming economies many of the poor are elderly homeowners, said Buckley. With housing privatized, these people have wealth but often little income. Their inability to issue debt against their wealth creates social problems as well as problems with housing upkeep. In principle reverse annuity mortgages -- despite problems of adverse selection -- might be one of the most cost-effective ways of dealing with this dimension of poverty. He wondered if others had views about this possibility.

There could be beneficial distributional consequences from reverse mortgages benefiting elderly pensioners, but only if the incentives to kill the pensioners could be eliminated, said Austin Kelly. He asked if anyone knew if the many ugly anecdotes one hears from Russia in this regard were really true or occurred often enough to invalidate the concept.

German-style subsidized savings schemes. In many Central and East European economies subsidized savings schemes of the German type have been exported to encourage saving for housing. Apart from various design issues with these schemes, Buckley's view is that these savings schemes are largely a waste of resources. Why implement in reforming economies a system that will soon be obsolete in OECD countries? Once such a system was established, it would be difficult to move away from it and it would mostly lead to portfolio shifts among savings rather than to new savings. Did anyone want to argue for these schemes?

Condomimiums vs. coops. Buckled wanted to hear what people thought about condominiums vs. coops as a form of housing ownership. He doesn't understand the legal niceties but has a notion that a coop is much closer to buying stock in a unit and a condo is closer to buying a particular unit with detailed cost-sharing arrangements. He wondered how many complications and uncertainties there are about how a large number of participants share and assign costs: Who pays for roof repairs -- just those on the top floor? Would coop ownership structures be a more expedient path to quicker, more effective ownership?

Austin Kelly was told by a Bulgarian housing expert at an international AREUEA conference that because much of Bulgaria's housing was formally cooperative in nature, privatizing it meant simply terminating many of the resale restrictions. Instead of a coop resident being allowed to sell the apartment only at a regulated price to another worker at the same factory, the owner could now sell to anyone (possibly subject to board approval) at a deregulated price. As a result, coops were falling apart because people who were now owners in fact as well as law couldn't afford upkeep and repairs and the former support system (including factories) no longer helped with maintenance. Kelly was dubious about this because when times were relatively good, satellite dishes sprouted from the balconies (so much for being unable to afford tarring the roof). Getting agreement among co-operators always takes lots of head bashing but at the end of the day the argument "spend 1,000 Leva now or 100,000 Leva later" always seems to carry the day. He wondered if the lack of available financing might be a factor in the deterioration. Coop decisions are a public choice problem and it wasn't apparent to Kelly that profit-maximizing was always the result. If some coop members were cash hoarders and some were cash-constrained, the inability to finance repairs might prevent a majority from voting for cost-effective repairs.

As for coops vs. condos, Kelly's experience was limited to the United States and he believed the choice of setting up a coop or a condo was largely a matter of local law, local acceptance, and local experience -- there were no intrinsic advantages to either form. In Bulgaria, local law about coops was well-developed, so Bulgaria chose the coop form. In the United States, coops are common in New York, Washington, and parts of Chicago and fairly rare everywhere else. When Kelly explained to an economist friend from Minnesota that he was buying a coop and explained how it worked, he said, after a moment's silence, "I suppose some lawyer told you that, and you believed him." Such attitudes would no doubt be reflected in liquidity and resale value. In Washington, at least, the differences in form between coop and condo don't influence what the board does. In principle, a condo owner owns his/her interior walls, but is restricted from doing anything with them that would damage other apartments (such as removing wiring or plumbing or cutting load-bearing walls). In a coop, the coop owns the interior wall and could in principle specify what colors to paint the wall or what kinds of crown moulding to install. Coops can also restrict who buys into the building (this is less of a problem with condos), but anti-discrimination law makes exercising this option dangerous, so it's rarely used. Both condos and coops can levy assessments to spend money on improvements in common areas, can provide utilities or make individual owners pay for their own utilities, can provide swimming pools for all residents or set up a club membership model, and so on. The legal forms are very different, but in practice there is little difference between the two forms of ownership. Financing is different in the U.S. -- with condos getting the better terms -- but this is probably largely a liquidity issue: There is about ten times the volume, and much more geographic diversity, in the condo market.

Limiting bank lending for real estate. Stiglitz has argued that limiting bank lending for real estate finance can be desirable for several reasons: (1) firms may have a higher savings rate than households so credit they are allowed to issue is more likely to be used to fund investments; and (2) speculative real estate investments, as we have seen in East Asia, can have spillover effects on the financial sector. Buckley tends to think that the first rationale tends not to be true in reforming socialist economies, where households, not (most existing) firms, are more likely to save and to have real savings that serve as collateral. As for spillover effects from speculation, he thinks development of a deeper long-term mortgage market would probably lead to development of the kind of appraisal profession that makes short-term speculative real estate finance less likely. In short, even if one accepts that financial policy should not be agnostic about who can borrow (Stiglitz's general view), Buckley doesn't think his injunction applies to encouraging long-term real estate finance in reforming socialist economies.

Bond finance or mortgage securitization. In Buckley's view, under most circumstances bond finance was preferable in developing countries because it was probably a lower-cost way of mobilizing resources for mortgages and was easier to do than securitization. Mortgage securitization, to some extent, was generated by idiosyncrasies of the U.S. system, idiosyncrasies that don't usually apply in developing or reforming economies. What did others think?

REAL ESTATE'S LINKS WITH THE ECONOMY

Mark Shroder had asked why real estate bubbles were a problem -- why we cared -- and several participants had responded (see Summary 3). Austin Kelly said why we care depends partly on who we are. We might care because

a) There is a real estate industry that gives grants to study the issue.

b) We care about macroeconomic stabilization generally and real estate is a big part of the economy that might explain much macroeconomic fluctuation.

c) There is general intellectual interest in what drives cycles, and real estate, as a form of asset with special characteristics (such as long production times), might help test theories.

Some forms of externality unique to real estate might cause real estate cycles to be somehow more inefficient than cycles generally.

The cynic in Kelly might choose a) as the cause of much academic research on the topic but b) through d) are probably more relevant as discussion topics. And the one you choose depends on who you are. Macroeconomists might focus on b) theoreticians on c), and development specialists on d), with some attention to b) as well. Kelly entertained the possibility that real estate might be big enough to seriously influence broader economic concerns -- single-family foreclosure may have deepened and prolonged the Great Depression, for example (although leverage was much lower in the 1920s than it is today) -- and highly leveraged borrowers in the oil patch may have seriously affected that region's economy. But much attention is paid to cycles in office markets and it's hard for Kelly to accept that a glut of office space in Seattle can seriously affect the Pacific Northwest's real economy. It's just too small a factor of production. Perhaps d) explains our interest. How much was the late '80s recession in Texas, for example, exacerbated by local governments borrowing to pay for infrastructure, assuming that future tax revenue from all those successful projects would cover the debt service? For all practical purposes, local governments make themselves partners in real estate developments (residential subdivisions, office parks, and so on) by committing for infrastructure before it's known if the project will be successful. If the project fails, the local government is as much on the hook as were the project owners or financiers. Of course, this could be handled by making developers pay for infrastructure up front, but that runs counter to notions of local economic development.

Omar Razzaz had asked for more discussion on the relationship between real estate and the productivity of workers, households, and firms. As K Lee saw it, Razzaz was suggesting a need to look at the left-hand variables of the equation (with land being on the right-hand side). As part of the Bank's new urban strategy, it is beginning to address the productivity of cities, so it is time to pay attention to these relationships, especially involving the productivity of firms (formal and informal, large and small, manufacturing, commercial, and others).

Anthony Yezer had said that one challenge for developing countries would be finding a mechanism to allocate land between development for residential real estate, commercial and industrial real estate, and all other purposes, including roads, infrastructure, and public buildings. K Lee agreed. The Bank's urban operations had until now focused almost entirely on residential land use; within the Bank there was almost no cumulative operational experience with nonresidential land use. A conference such as this could serve as a forum for such topics as the work William Doebel did on how mixed land use affected the generation of income and employment in low-income areas of Indian cities. That kind of coverage might help to redefine the Bank's role in real estate at both microeconomic and macroeconomic levels.

REAL ESTATE AND ENVIRONMENTAL RISK

David Sevington asked if anyone sees environmental issues playing a pivotal role in investment risk in land and real estate, and what possible influence environmental and financial economics might have in the future. Mason Gaffney responded that everyone -- especially buyers of, and lenders on, U.S. land subject to cleanup requirements -- sees environmental problems posing an investment risk. Bob Thompson said that contamination and similar environmental issues play a role in any sensible evaluation of investment in land, whatever its use, but especially commercial uses. Not a pivotal role, in his experience in the U.K. He was told the other day by an industrial investor that most contamination issues were solved by scraping off the topsoil and putting down a slab of concrete -- and U.K. investors saw off the proposals for a contaminated land register under the last administration. Thompson feels we are likely to see a class action one day aimed at particular contaminators, such as the chemical industry, which could well include land owners, which might make the issue pivotal.

Those interested in environmental liability, said Austin Kelly, could search the word "brownfields" at , to find ten or so reports on environmental contamination. It is often claimed, he said, that, in the U.S., contamination of old industrial sites renders them essentially useless and fosters the move of new or expanding industries to uncontaminated suburban or rural sites. Kelly strongly suspects this is right but is unaware of any serious attempt to quantify the effect.

ADMINISTERING LAND MARKETS

Robin Malloy had written (Summary 3) that Houston, the fourth largest U.S. city, was basically controlled by a web of private reservations, servitudes, and covenants. Peter Colwell asked, Who pays to enforce those private covenants?

CONCENTRATION OF LAND OWNERSHIP

Responding to a post from Mason Gaffney (Summary 3), Peter Colwell said that Gaffney seemed to be arguing that farm size was insensitive to scale economies until about 1936. Colwell had seen data (not Lorenz curves and Gini coefficients) on average farm size that suggested otherwise but he would take Gaffney's point and speculate about what might have happened. Assembling land is expensive, so it doesn't proceed rapidly or continuously, even if scale economies suggest it; it occurs in fits and starts. What might have set it off before 1936 was the Depression. There was a lot of REO (real estate owned by institutions) as a result of mortgage defaults and foreclosure so the institutions assembled larger farms simply by doing foreclosures and presumably didn't always subdivide them again when they sold them.

Getting back to Ireland, Colwell asked why Ireland had for so long been the poverty capital of Europe. That is no longer true -- Ireland is on a fast track -- but what was wrong for so long?

One reason for Dublin's present affluence, said Mark Heywood, is that Ireland has been a very substantial recipient of EU grants. But that doesn't explain what was wrong for so long.

Mason Gaffney had given many examples of concentrated ownership of urban land (Summary 3). Peter Colwell said he realized there was concentration in things like the Irvine Ranch property, but housing is the real story and almost everywhere housing is associated with diffusion of property ownership -- that is the whole point of subdivision. Later in the discussion he realized it was possible for both of them to be right. Gaffney had said the Gini coefficients didn't change much until about 1936 and Colwell had said that concentration of rural land was continuing but ownership of urban land was becoming more diffuse during the period in which Gaffney believed there was no change. Colwell drew two Lorenz curves that produce equal Gini coefficients but reflect radically different distributions, which might reflect what Colwell was talking about.

Responding to a post from Mark Heywood (Summary 3), Peter Colwell said he was unfamiliar with the argument about no scale economies in agriculture. Perhaps he should throw his planting stick at his neighbors' huge combines. There were some farms Colwell would break up and others he would not break up, although he would recommend changing the ownership of the larger farm and make it a corporation. In a formerly socialist economy, the citizens should have fully transferable shares and management must be responsive to the owners' demands. If you didn't have that, the next best thing would be to break the farm up even at the expense of scale economies. Deals should be struck that allow for the continued use and maintenance of large equipment.

Colwell's guess was that large farms were languishing and truck gardens flourishing, in the transition economies. Dividing a big farm into 25-acre units and demarkating and providing access to those units would be expensive and not an equilibrium division (that is, at great cost and over long periods of time, land assembly would be driven by the market). But if there is a breakdown in institutions, that kind of division might be the only way to get food on the table right now. That is truck gardening, not modern farming, however. Colwell was once involved with a "scheme" to break a 24,000-acre ranch in Central America into tiny parcels that would be sold to the locals (mostly Indians, plus a few Amish). Colwell was not enthusiastic about the idea. He felt the owners were trying to unload a loser of a high-scale operation, converting it into many small-scale losing operations.

Mark Heywood said he hadn't understood the argument about no scale economies in agriculture either and was being sarcastic in talking about the efficiency of breaking up agriculture's structure (which may not be obvious in e-mail). The scale of land reform in the former Soviet Union boggles the mind. Millions of people and hectares are involved. There is a myth that the reform is just about agriculture. Many western commentators and development agencies have approached the challenges simply from an agricultural perspective (the World Bank's support for land registration in Russia grew out of the agricultural program) but this is changing as realization dawns that it is really about land reform and that agriculture is just one -- important but low-value -- use. The Russian policymakers who created Land Code 1991 (in the days of the RSFSR) decided to give rural capital to rural people through two instruments, the Land Share and the Property Share, which offered all kinds of possibilities for restructuring. It is not at all clear that they intended to see both landholdings and farmholdings fragmented to the lowest common denominator of land ownership. He asked for Colwell's comments on a paper prepared for a wide audience and since translated into Russian. Colwell read it and essentially agreed with him. He said Colwell's uneducated guess about truck gardens was accurate. Truck gardening does flourish, with only higher value crops sold for cash (no processing required) and within reasonable range of markets. The major constraint on the regeneration of agriculture is capital, not land or labor. The successful truck gardeners have looked under their mattresses for money, pledged their belongings, borrowed from friends and family, and have had enough confidence in and control of their enterprises to invest in them. But to extrapolate from that does not seem to be the answer for the 80% of farmland still occupied collectively. Capital demands will eventually make farm restructuring come about; in the meantime, millions of landowners must prepare for the day. Their land share is the most valuable asset they are ever likely to own!

REDUCING POPULATION GROWTH

No discussion of land and poverty should ignore the denominator of the per capita income equation, GDP/population, said Max Kummerow. And land is finite so we should also consider the land/population ratio, whether the numerator is arable land, housing units, or natural resources generally. Population is the most easily controllable variable in the long run and reducing population growth is essential to economic development in poor countries. Most problems associated with land, land institutions, and land services are simpler with fewer people. Controlling population should ease such problems as housing, pollution, political repression, urban sprawl, and poverty. Reproductive behavior is an underdiscussed change agent in rich countries, said Kummerow, comparing, as examples, himself (middle class, Ph.D., employed, one child, born late in life) and Rosa Lee (subject of Leon Dash's prizewinning documentary -- poor, uneducated, a life on welfare, 8 kids by the age of 21, dead of AIDS in 1998). The rich get richer and the poor have children. Run those numbers forward two generations and America will be a poor country.

Joel Cohen, in his admirably cautious, excellent book, HOW MANY PEOPLE CAN THE EARTH SUPPORT?, says that because future changes in technology and population are uncertain, we cannot predict per capita food production or living standards. But the mathematics of compound growth make it clear that at current growth rates the maximum limit on human population should be reached within 50 to 100 years and possibly sooner. It all depends on how we want to live and in what sort of world, as well as on uncertain future technology change and how well we manage and share resources. Once population stabilizes, probably within our children's lifespan, societies will face Methusaleh's choice: low birthrates and long lifespans or high birthrates and short lifespans. About all demographers know for sure is that it is impossible at zero population growth (ZPG) to have both long lives and high birthrates.

Classical economic theory makes growth a direct function of the labor force, ignoring, in simple form, the investment in human capital needed in a modern workforce. But countries with fewer children per family can invest more in capital goods (including human and physical capital) and less in child maintenance. Slower demographic growth takes pressure off land use and construction, freeing resources for other uses, and makes it easier to manage city planning and infrastructure. Resources freed from building more houses can create other capital projects, giving productivity increases that will increase per capita income. It makes a difference whether there are 200 million Americans or 300 million. At a minimum, it takes longer to drive to work, and domestic oil supplies last 20 years instead of 30. The fact that 1.3 billion Chinese provide a labor force that works for a few dollars a day affects prices and wages in the rest of the world. Congestion, crowding, and competition for resources affect prices paid, opportunities encountered pollution, congestion, and the daily quality of each child's life. As environmental limits are reached or surpassed, economists' tendency to abstract from the real underlying physical processes becomes less viable. Around the world, environmental damage reduces the earth's long-run carrying capacity for humans, reducing the diversity, stability, and beauty of our experience. Humanity can be viewed as performing experiments along the lines of "How much can we change the world and still have it habitable? How much pollution before we get sick? How many threads pulled out before an ecosystem unravels?" The pace of change is too fast; risks are too great and too poorly understood.

Unless we find a way to keep GDP increasing forever, limiting population growth is the only feasible long run solution to the economic problem. We must eliminate barriers to people having as few children as they wish. Most educated women who are free to choose have few children. Limiting fertility is technologically feasible and cheap and is the only anti-poverty program cheap enough to have a chance of success in the poorest countries. Moreover, limiting population may improve political freedoms and the value (and capital invested in) each individual. As part of development we must be realistic and accept limits on population growth, global resources, GDP growth, and consumption.

Economists must begin to design and endorse institutions that reduce population growth more quickly (for example, China's one-child policy and Singapore's two-child policy). Japan should relax about being in negative growth -- they are still rich -- and simply institute long run policies to get population and consumption down to where they do not have to import (and therefore export) so much. In the long run, increasing GDP is a dead end -- we run out of stuff on this small planet. But decreasing population is quite feasible and cheap. This used to be done through inhuman means: war, famine, and plague. Now fertility can be controlled using technology and economic incentives. Rather than continue trying to increase growth rates despite limited resources, we should choose to have fewer people to feed and house.

But a long-run no-growth target requires a major change in mind-set for economics. Classical economics assumes scarcity (but unlimited natural resources) and deals with it through efficient management of capital and labor. But scarcity is no longer inevitable in a world with birth control pills. Societies can collectively choose abundance by limiting population. A vision of limited population, no growth in production, but abundant per capita GDP is more appealing than digging deeper, cutting down more trees, taking more risks, and trying to maintain growth in a world of depleted moral and physical resources caused by growing population and consumption. Even if the current trend toward increasing world poverty could be reversed for a time by economic growth, the poverty problem will soon return if we do not accept the need for limits on population and consumption.

The social sciences must find a way to bridge the huge gap between the "objective" stance of science and the necessity for moral content in social science without returning to wars about religion. The objective pose (however illusory) helps direct attention to empirical evidence and keeps the tone of discussion cool -- at the cost of detachment about issues such as starving children, when detachment is a form of insanity. How do we get moral content back into economics without merely generating endless controversy? How can we combine emotion and reason and maintain civil discourse that leads to better understanding and action?

Caspar Davis agreed that the more ethical choice was creating paradise for a reasonable number of people rather than hell for an unreasonable number.

Roy Langston disagreed that reducing population growth was essential for reducing poverty. The history of Hong Kong and a few other formerly poor countries proves that if the rate of investment in physical and human capital can stay ahead of population growth, reducing population growth is not essential for development. Problems with land, land institutions, and land services are simpler if there are fewer people for a given amount of investment in physical and human capital. Intelligent reform of the tax system would dissolve problems of housing, pollution, urban sprawl, etc., much more quickly and reliably than mere ZPG, and would ultimately lead to a more felicitous result. If the rich get richer and the poor have children, that's because the tax system and incentive structure rewards the rich for idle ownership of assets such as land and punishes the poor for investing in and using productive (especially human) capital. Consider the limiting case where land is not taxed at all and income tax takes all income above a modest personal exemption: after-tax family income is directly proportional to the number of working people in the family and is completely unaffected by investments in more education than is needed to earn the basic untaxed amount. Meanwhile, owning or "investing in" land (which increases production of goods and services not a whit) becomes a certain route to an arbitrarily large unearned income. Change the incentive system, tax land value instead of income, and the rich will suddenly find it much more difficult to get rapidly richer without doing anything productive, and the poor will find it to their advantage to invest in more education for fewer children.

Child maintenance is an investment in human capital, said Langston. But individuals won't invest more than the minimum in human or physical capital unless the tax system allows them to profit by doing so. If the tax system rewards them more for idle ownership of land than for investment in and employment of productive physical and human capital, the investments in productive capital will not be made, no matter how low the population growth. Limiting fertility is not the only anti-poverty program cheap enough to have a chance of success in the poorest countries; it is merely the only one that doesn't step on the toes of the rich folks who run the poorest countries. And one way to keep GDP increasing forever, is to keep resource consumption per unit of GDP declining forever. ZPG by itself solves nothing, certainly not economic problems. What economists must get through their heads is that the undoubted benefits of free markets are not compatible with large taxpayer subsidies to asset owners, especially owners of assets such as land titles that are not only created and enforced by government but get their value from government and the community, rather than the owner. Poverty happens when people with few assets cannot earn enough by their productive labor to sustain and use their productive capacities. This is more likely to happen when some of what they earn through labor is taken from them and diverted into the pockets of unproductive asset owners by a government that taxes the production and/or consumption of the poor and uses the money to increase the asset values of the rich. We must re-think how to distribute the added value that government gives to assets such as land.

If Kummerow thinks increasing GDP is a dead end, said Langston, he should try static GDP. The planet is not small, we are not limited to the stuff on it, and stuff is not the limiting factor. Certainly decreasing the population is more politically feasible than ending taxpayer subsidies to landowners; but history shows that mass starvation and genocide are more politically feasible than ending taxpayer subsidies to landowners.

The scarcity assumption no longer applies in a world with birth control pills? Scarcity is an assumption about human desires, not fertility. And depleted moral resources have nothing to do with growing population and consumption but plenty to do with a deeply rooted, age-old institutional evil. As for getting moral content back into economics without merely generating endless controversy: The "controversy" (usually just loudly disseminated disinformation) arises because those who profit unjustly from immoral policies and institutions will never be content to relinquish their ill-gotten gains. But once the prospect of such gains disappears, the "controversy" will too. After slavery was abolished, the loud and prolonged "controversy" about abolishing it disappeared too and seemingly in a matter of weeks. The same will happen when taxpayers are freed of their vassalage to landowners.

The game Roy Langston described can work for only a few, said Caspar Davis. Hong Kong has an enormous ecological footprint, which falls on other countries, developed and undeveloped. A few can hog more than their share of finite physical resources but not everyone can do so. Ultimately, average wealth = (available) resources x f (technology function) divided by population. Some believe the benefits of technology to be infinite, which is manifestly untrue. Many of the earth's systems are clearly overstressed. It is probably not possible to keep GDP increasing forever by keeping resource consumption per unit of GDP declining forever -- unless we begin to value and count as part of GDP such things as caring for one's parents and children and providing emotional and other kinds of personal support. One can improve the quality of life almost infinitely, but not if that is defined only or even primarily in material terms. The problem with GDP is that it measures only economic activity. It places a value on such negatives as divorce, weapons production and use, and (replacing) things destroyed by fire, accident, "natural" calamity and crime, but ignores all family and volunteer activity, without which the world would grind to a halt in hours. Not only is "stuff" like fish, clean fresh water, and wilderness (which supports myriad life forms) limited, but so is the ability of the land, waters, and atmosphere to absorb waste. That many of these limits have already been exceeded is demonstrated by the increasing ferocity and costliness of natural disasters (which are great for GDP, if not for victims and their insurers). As for the need to increase the growth rate: Many aboriginal societies have lived in stable adequacy for hundreds, even thousands, of years. The Land Tax is a great tool, said Davis, a necessary but not sufficient answer to the myriad problems that confront us. After all, poverty also occurs when corporate globalizers force wages and environmental standards down by using the threat (or reality) of automation or removal to places where there are no labor or environmental standards. Finally, it is widely acknowledged that the only sustainable way to stabilize or reduce population growth is through general education, especially of women (and not just about birth control), and by enabling women to be self-reliant (hence the value of projects such as the Grameen Bank).

It is hard to find universal laws about human economies, said Max Kummerow. Hong Kong, Japan, and a few other overpopulated places have prospered by applying human capital, entrepreneurial skill, and physical capital (and by using natural resources from elsewhere). The former USSR and a few other places are poor despite low birthrates. Up to a point, in a world of plentiful resources, economies of scale made population growth constructive for per capita income growth -- in 19th century and early 20th century America, for example. But later there were probably diseconomies of scale with additional population growth -- environmental problems, pollution, crowding, unemployment, and the need to import food. Certainly the contrast between South and North America -- both endowed with resources -- emphasizes the importance of freedom and social justice to economic development. But Kummerow still believed it would be more feasible for Bangladesh to end hunger by cutting birthrates than by becoming another Hong Kong. (What does Hong Kong do for a living when oil runs out? Would you want to live in Hong Kong? Wouldn't it be sensible to cut birthrates and invest the resources saved in human and physical capital?) Hong Kong cut birth rates; the Russians seem to have invested the surplus from a lower dependency ratio in vodka. And lack of Russian development may well be the result of social injustice leading to poverty. Certainly when Russia increased disparities of wealth and income, its economy imploded. It will take another generation or two for per capita resource abundance made possible (not now, but in the future) by a low birthrate to sort out those problems. If as Langston claims, the planet is not small, why is there no room for tigers? Why can we fly to the other side of the world in a day? Why are 2/3rds of the forests gone and most fish stocks harvested at capacity? Why can't we survive five miles above sea level for lack of air? If "we are not limited to the stuff on it," which planet does Langston intend to move to? Mars' surface temperature averages minus 57 celsius, Venus +450, neither has a breathable atmosphere, and those are the pleasantest nearby resorts; by comparison, Antarctica is the Riviera. And if we do find some (so far mythical) habitable other place in the universe, might it not also be overpopulated? Will it invite us or our descendants to take over the place? One astronaut's overwhelming impression in space was that "it's a long way to the next waterhole." Reasonable risk management is to preserve this planet first, then go on from there to other places -- which means accepting limits and logistical curves.

We don't need population control policies, said Tony O'Brien. We have put the cart before the horse. High birth rates don't cause poverty. Poverty causes high birth rates. Why are all the most economically successful nations enjoying low to negative birth rates, and the least successful (Bangladesh and Sub-Saharan Africa) suffering the highest? If you are financially secure, you have fewer children; if you are not, you have more. Poverty is the sole cause of excessive population growth, and land monopoly is the sole cause of involuntary poverty, whether in New York or in Calcutta.

Max Kummerow responded that issues of distribution and injustice become harder to solve when a small pie must be divided between more people. With too many people and not enough land the argument tends to degenerate into violence (as in Ruanda, Palestine, Kashmir, and Indonesia). Kummerow can see low birthrates leading to prosperity -- freeing income that would have been spent to support children for investment, for example. An only child will inherit, assuming it is not all spent first, from both sides of his family. A one-child policy in an agricultural country would double land endowments in a generation. A many-child policy leads to smaller average landholdings, or more landlessness. Isn't it better to go from farming 5 acres to farming 10 than the other way around? Is there any other way Bangladeshi farmers could get more land per capita? With high unemployment rates, most poor countries are limited in resources, not labor. And in countries short of labor, one would not even need labor unions -- the market would enable workers to earn the marginal value of their production (a fair wage). The birth control pill makes Marx's reserve army of the unemployed obsolete -- it is in fact an effective revolutionary force for social justice, without bloodshed and bureaucracy. The evidence suggests that people can how many children to have. This route to prosperity has worked for some countries and can work for others if they so decide. And he cannot see any way in which having more children in poor countries will lead to prosperity and then (as in Europe) a generation or two later to lower birthrates. The numbers aren't likely to work. For one thing, pressure on natural resources are greater now and population growth rates in poor countries are three times what they were when Europe made its demographic transition. Lenin did not wait for Russia to become an advanced capitalist country. Poor countries today cannot afford to wait for an unlikely miracle to bring them prosperity before cutting population growth. Population control is the only economic development program cheap enough to be feasible. In discussing Marx's idea of the laws of history, science historian Scott Gordon notes that, far from assuming the future would bring socialism and justice, Trotsky, in fleeing Stalin's assassins, concluded that a descent into barbarism was also possible. There are no inevitable futures; there are only choices, individual and collective. Karl Popper said the same thing in THE POVERTY OF HISTORICISM.

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