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| Residents of Mathare
Valley, Nairobi, feel they do not have
basic human rights. © Justo N. Casal. |
Slum dwellers could literally build their way
out of poverty if supported by the correct policies.
The secret is to remove the artificial ceiling
that caps their talents and energy.
But acquiring ownership of property as suggested
in Hernando de Soto's thesis, The Mystery
of Capital, is not a solution. He argues
that poverty could be ended and enterprise stimulated
if slum dwellers were able to acquire ownership
rights over the real estate they occupy, and
thus be able to use their property as collateral
to borrow money.
The generic solution is a model of property
rights and taxation which obliges the public
and private sectors to intersect as partners.
The traditional hostility towards each other,
which victimises citizens, can be removed. In
the new land-and-public-finance model, land
is treated as collateral to pay for public goods.
Rental income, instead of being privatised and
extracted from the community, would cover the
cost of the investments in infrastructure and
the social services that people need to build
viable communities.
The new strategy begins with a diagnosis that
exposes a myth. Well-meaning governments believe
that economic development is retarded by the
shortage of capital. Law-makers have talked
themselves into believing that capital is mainly
owned by the private sector and that they have
to borrow from foreign markets to invest in
the education, health and transport services
that are the prerequisites of prosperity.
But as happened in the 1997 southeast Asian
financial crisis, the flow of "hot"
capital undermines economic activity. According
to Koichi Mera and Bertrand Renaud in their
2000 publication, Asia's Financial Crisis
and the Role of Real Estate, speculative
cash pursues capital gains from real estate,
which draws the locally-generated taxable revenue
out of the country. The challenge is how to
reverse this situation.
World Bank experts have known of the solution
for at least two decades. What might be called
the best kept economic secret is the policy
that locates people in communities that are
self-financing. The operating mechanism:
public services that pay for themselves.
When a new road is constructed, a value at
least equal to the capital cost surfaces as
increases in the value of land. The same phenomenon
is observed when children are given access to
a new school - the measurable value of residential
land increases. Exactly the same applies when
a hospital is established in a community, or
potable water is piped into a village, or the
sewerage system is upgraded to levels that reduce
people's exposure to infectious diseases.
Increases in land values measure the enhanced
productivity of neighbourhoods. If that value
was recycled back into the community to pay
for the services, a financially self-sufficient,
sustainable cycle of virtuous growth would be
embedded.
This model was described by Adam Smith in The
Wealth of Nations. It was reaffirmed by
Harold B. Dunkerley, a former senior adviser
on urban development at the World Bank. In a
study for the World Bank in 1983, he wrote:
"The effective supply of urban services,
such as roads and public utilities, in turn
largely depends on the effective collection
of revenue from beneficiaries, through general
land taxes or special levies on land benefiting
from public projects, or the collection of costs
via public ownership of urban land."
Mr Dunkerley cited evidence documented at the
UN Habitat Conference of 1976 in Vancouver,
which identified sharply rising urban land prices
"as the most serious of the many problems
facing developing countries in this urbanization
process".
Conventional fiscal policies in relation to
property tax (land and buildings), and the way
in which the governments have framed them, (with
the few exceptions already mentioned, e.g.,
Denmark's land tax) inflict serious damage on
the urban economy. This is an empirical fact,
affirmed by testing evidence, not a mere statement
with which we can disagree. The evidence confirms
that the kind of taxes cited here distort people's
work incentive, savings and investment patterns,
to the detriment of their personal welfare,
and the prosperity of their communities. And
that produces slums.
But what appears as a "problem" -
rising land prices - may thus be converted by
enlightened fiscal policy into a virtuous solution.
The first step is to remove the tax burden on
residential and commercial buildings. This encourages
people to invest their savings in new structures.
Public revenue would be raised exclusively from
the rental income imputed to land.
The public administration of land taxation
presents no technical difficulties. Land taxes,
at very low rates, are in place in countries
like Denmark, Australia and New Zealand. One
of the best examples is Hong Kong, which captures
a significant part of land rent as public revenue.
As a community invests in shared services,
so the tax base (land values) expands to pay
for those services, and it becomes possible
to reduce or eliminate those taxes that damage
private incentives to work, save and invest.
Mr Dunkerley cites the 1976 Vancouver Report
and Recommendations of the UN Habitat Conference
as endorsing "the widespread conviction
that these surplus values should accrue to the
public, since they are produced mainly by public
or community efforts and are unearned by the
private holders".
This generic solution addresses many environmental
and social problems. The policy is imperative
if we want a permanent solution to the poverty
that consigns people to slums. As Mr Dunkerley
states further: "The present failure to
capture surplus value particularly affects the
urban poor, who suffer most from lack of access
to public services _ services they could afford,
given appropriate levels of service and the
adequate recovery of unearned surpluses".
UN-HABITAT might wish to encourage some research
into the collation of the evidence, to assist
policy-makers around the world who need access
to the most efficient solutions to the problem
of urban renewal.
Fred Harrison is Research Director of the Land
Research Trust, London.
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