MIT INTERNATIONAL DEVELOPMENT GROUP Faculty Perspectives
LAND REFORM AND RURAL WELL BEING IN GEORGIA 1996-2003
EMPIRICAL EVIDENCE FROM HANGZHO U’S URBAN LAND REFORM Evolution, Structure, Constraints and Prospects
TRANSMITTING URBAN MODELS AND THE CONTRADICTIONS between theory and practice as seen in Mexico City (20002006) LOCAL AND
Spring 2008
Lawrence
VOLUME 8 (SUMMER 2008)
ValeDepartment Head, Department of Urban Studies and Planning, MIT
IAS, Ph.D. (MIT), Currently with the Indian Administrative Service, Tamil Nadu, India
Anjali Mahendra
Ph.D. Candidate, Department of Urban Studies and Planning, MIT Georgeta Vidican, Ph.D. (MIT), Visiting Scholar at MIT, Assistant Professor at Masdar Institute of Science and Technology
Prof. Michael Best
Assistant Professor, Sam Nunn School of International Affairs, Georgia Institute of Technology Prof. Aaron Golub
Assistant Professor, School of Planning and School of Sustainability, Arizona State University Prof. Peter Gordon
Professor, School of Policy, Planning and Development, University of Southern California Prof. Karen R. Polenske Professor of Regional Political Economy and Planning
Department of Urban Studies and Planning, Massachusetts Institute of Technology Prof. Balakrishnan Rajagopal
Associate Professor of Law and Development, Department of Urban Studies and Planning, Massachusetts Institute of Technology Prof. Jiawen Yang
Assistant Professor, City and Regional Planning Program, College of Architecture, Georgia Institute of Technology
Christoforos Romanos
Anjali Mahendra, Christoforos Romanos
Emerging research and practice recognizes that sustainable communities need to be built on a foundation of justice and equity. Environmental and social degradation are closely coupled to power inequity, thus compelling academics, researchers, and practitioners to conceptualize and build sustainable communities and places with these essential elements in mind. Within and between rural and urban communities and places, in developed and developing nations, achieving sustainability demands putting equity rights at the center of planning and implementation. Volume 8 of Projections will bring together articles from academics and practitioners to theorize, critically reflect on past experiences, and examine the intersection of justice and sustainability as a framework for planning and action. The Volume will be published in the Summer of 2008.
For more information, please contact the Editors: Isabelle Anguelovski, Anna Livia Brand and Rachel Healey, at projections@mit.edu.
Volume 9 of Projections, “Planning for Sustainable Transportation: An International Perspective,” explores the diversity of and progress in planning for sustainable transport. Transportation is one of the central foci of researchers concerned with fostering sustainable development. On one hand it is one of the main contributors to global problems, such as global warming, on the other hand it is essential for regional economic development and prosperity. These debates not only concern regions, but rather span across countries. Acknowledging that each country - stemming from its unique differences embedded in the region’s cultural, social and economic context - faces its own challenges in pursuing sustainability, contributors to this volume should focus on these conflicts suggesting innovative sustainable transportation ideas, their measures, best practices and applications that highlight and resolve these conflicts in regions around the world. Deadline for full paper submissions: June 15th, 2008.
For more information, please contact the Editor: Eva Kassens, at projections@mit.edu.
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Cover Images: MIT-Africa Internet Technology Initiative. (Source: http://web.mit.edu/mit-africa/www/ projects/2003_pictures.html#.) MIT D-lab Course (Source: http://ocw.mit.edu/OcwWeb/SpecialPrograms/SP-721Fall-2004/CourseHome.) Downtown Sao Paolo (Source: Luc Nadal, Sustainable Transport newsletter, Institute of Transportation and Development Policy, Issue 18, Fall 2006, p. 17.) Farming in Georgia (Source: http://www.investingeorgia.org.)
EDITORIAL 6
Rajendra Kumar, Anjali Mahendra, Georgeta Vidican MIT INTERNATIONAL DEVELOPMENT GROUP: FACULTY PERSPECTIVES 16
The theme for this volume focuses on the role of institutional innovations in the economic and social development of developing countries. We welcomed empirical studies as well as theoretical discourses regarding institutional change and how this process facilitates economic and social development in developing and transitional countries. We approached institutions and institutional change in a broad sense, meaning both informal and formal institutions. Similarly, when we discuss “institutional innovations”, we mean both new ideas that challenge the existing rules of the game and those that build on the existing institutions. Since this topic is very broad, we narrowed down the analysis to three specific areas of interest: land markets, infrastructure, and technological innovations. Below, we discuss briefly each area and the papers included under each track.
Land policies are critical for sustainable development, good governance, and the wellbeing and economic opportunities available to rural and urban dwellers (Deininger 2003). Land markets (including purchases, lease and other transactions in land), have been vital to the successful development of all advanced market economies. However, their existence has mostly been taken for granted in these countries (Lerman and Shagaida 2007). Nevertheless, land reform and the creation of optimal land institutions attracted renewed attention from scholars and practitioners in the past decades. Broadbased processes of institutional change in developing and transitional countries such as China, Vietnam, South Africa, and more recently Central and Eastern Europe (CEE), created a fascinating environment to study the mechanisms by which markets develop and affect economic and social development. Within this context land markets received much attention as instruments for enhancing efficiency and reducing poverty. The interplay of markets and other institutions, such as households, local communities, capitalist firms, and the state, has traditionally occupied a central role in development planning. Empirical evidence shows that the absence of competitive land markets prevented many necessary adjustments from taking place in developing countries, such as labor mobility, adjustments in farm size, incentives to invest or to increase labor productivity, and the transfer land to better uses.
The two articles discussing the role of land markets in this volume examine the process of institutional change in the post-socialist context. Prior to the 1990s the institution of land market was nonexistent in the communist countries, where private property was abolished. Only now land markets are starting to emerge at a very feeble pace (Dale and Baldwin, 2000; Lerman, Csaki et al., 2004). Despite the fact that active land markets have emerged in the urban areas, they have failed to develop widely in the countryside, a pattern which is common in the CEE countries (Renard, 1994). Given that economic diversification is lacking in the rural areas, land remains the main source of income for the rural population. Hence, land sales have been limited and leasing transactions predominate. Nevertheless, the types of contractual arrangements for leasing varies widely between and within countries.
Due to the early development of land transactions, the transition from central planning to market economy offers a unique opportunity to examine the socio-economic factors affecting land market development from its inception, similar with a “natural experiment” (Swinnen and Vranken, 2007). The massive distribution of property rights in land in the CEE countries and the Former Soviet Union Countries (FSU) and the adoption of
Household Responsibility System (HRS) in China in the late 1980s, within an overall macroeconomic context marked by wide instabilities, warrants an appropriate environment to explore the constraints to and opportunities for land market development.
While rural land markets were slow to emerge, property rights reforms in the transition countries led to a much faster development of the urban land markets. Property rights in the housing markets were transferred to individuals, and large areas of land previously in state ownership were transferred to private commercial users. Nevertheless, the diversity in institutional innovations, policies and outcomes, vary significantly among post-socialist countries. In the article “Empirical Evidence from Hangzhou’s Urban Land Reform: Evolution, Structures, Constraints and Prospects,” Zhu Qian examines the development of urban land markets in China, emphasizing the institutional complexity entailed by this process, and pointing to wide within-country differences in outcomes. China is an interesting case to explore because of its unique “dual-track” land system, based on which the ownership of land stays with the state, but use rights are transferred to individuals. As a result of this policy choice, interesting institutional innovations emerged in different regions in the country. Qian’s paper examines in detail specific policies that were enacted for land market development, with particular emphasis on Hangzhou, one of the most developed cities in China. An interesting argument made by Qian is that such policies cannot be understood in isolation from the economic development process and the ideological framework within which they emerge. The article also shows that institutional change occurs from the constant interaction between the local and national government levels. In addition, in contrast to conventional wisdom, the author argues that a monopolized supply mechanism of urban land is not necessarily detrimental to the development of urban land markets. Nevertheless, in order to reach long-term policy outcomes, Qian argues that nongovernmental organizations and the civil society need to be included in the process of institutional change.
These two articles offer interesting and relevant policy perspectives on the issue of institutional innovations in the area of land markets in developing countries. First, they reinforce the importance of accurate and detailed survey data to trace the expansion of land markets in both rural and urban areas. Second, they point to the fact that oftentimes, previously perceived obstacles can sometimes be viewed as opportunities in the process of institutional change. Third, institutional change in developing countries does not form the domain of only governments or private agents. Rather, it requires the interaction between different actors from the public, private and the civil society domain.
The provision of physical infrastructure is believed to facilitate primary, secondary, and tertiary productive activities that in turn promote economic and social development. However, the relationship between infrastructure investment and economic development has puzzled scholars for a long time. Debates surrounding this relationship have been part of the literature on economic development, regional science, microeconomics, and planning, but these debates have largely been inconclusive (Gramlich, 1994; Polenske, 2001). One problem is the fact that definitions of infrastructure have varied across studies. A second problem is that of endogeneity between infrastructure investment and economic growth. Does infrastructure investment bring about higher productivity and income growth in a region or does a growing and increasingly productive region absorb more infrastructure capital in a process of self-reinforcing growth? Scholars believe that the direction of causality is uncertain (Rietveld, 1989; Gramlich, 1994; Guild, 1998). The third problem is that most empirical work has been done at a high level of geographical aggregation, to determine the impact of infrastructure on economic productivity at the national scale or at state-level (Aschauer, 1989; HoltzEakin, 1992). Studies done at a more disaggregated city-level scale (Haughwout, 2002) show that infrastructure investments have spatial spillover impacts that can change the distribution of economic activity within regions, thus defeating the purpose of an aggregate analysis. Further, the role of policy and that of institutions contributing to infrastructure decisions is an important part of the debate. It is therefore essential that more detailed micro-level studies be done to fully establish the linkage (Holtz-Eakin, 1992) between infrastructure and economic development through empirical data and a discussion of specific institutional conditions leading to a particular outcome.
This track focuses on institutional change brought about in the course of implementing infrastructure policy reforms and projects in developing countries. It thus contributes to the debate on the role of infrastructure in furthering the goals of economic development, while focusing on the institutional context. Although we were originally looking for research including some form of economic data analysis, José Xilotl’s article discussing the case of infrastructure development in Mexico City from a political economic lens, addressed these issues well.
Mexico City presents a fascinating case study of how the political and economic interrelationships between local and national actors and institutions have determined the city’s urban development trajectories (Davis, 1994). Also, theorists of urban politics have paid scarce attention to the decision making around urban mega-projects (Altshuler
and Luberoff, 2003)—the particular category of infrastructure that Xilotl focuses on.
In his paper titled “Transmitting Urban Models and the Contradictions between Theory and Practice as seen in Mexico City (2000-2006)”, Xilotl traces some of these institutional linkages that have historically governed the development and planning process of mega projects in Mexico, particularly in Mexico City. In doing so, he explores how particular urban planning practices and Western planning models came to be adopted in Mexico City and emphasizes the institutional models that served as a conduit for these developments. Understanding the relationships between planners, the political sphere, and private developers—typically the domain of urban sociologists—is extremely important for understanding urban development anywhere and particularly, the decisionmaking process behind large infrastructure projects. While the paper focuses on Mexico, the author discusses examples that are reminiscent of urban infrastructure projects in several other cities of the developing world.
The paper is presented as a work in progress and provides an interesting narrative of the roles of interest groups such as businessmen (capitalists), politicians and the state, urban planning professionals, and the alliances between them. These are discussed in the context of economic conditions external to the planning process that resulted in altering relationships among these groups at different times in the city’s history. Xilotl provides two institutional models to explain the development of mega-projects in Mexico City—the Alliance model and the Business model. While the former was a result of historic alliances between the state and the private sector, the latter, more common over the last two decades, has emphasized private investment and entrepreneurship. The author gives an account of the economic and political structural changes in Mexico in recent decades that weakened the position of the political class and strengthened the capabilities of elite business groups to invest in urban infrastructure.
This track focuses on technological innovations and their implications for development policy in developing countries. In particular, it examines the role of technological innovations in economic and social development and examines how policy interventions can help in creating the necessary conditions for harnessing the potential of technological and institutional changes for development.
Technological innovations have assumed great importance in development discourse
as the new technologies, especially the information and communications technologies (ICTs), hold great promise for developing countries in ushering in a new era of economic growth and prosperity. They have assumed great prominence as the primary tools in the fight against poverty and in bringing the benefits of economic development to the poor and underserved communities. It is believed that technological innovations can bring these benefits due to their potential in increasing factor productivities across industries and their capacity to overcome time and distance barriers in reaching remote locations and communities (UNDP, 2004), thus improving the provision and delivery of basic goods and services (Caspary and O’Connor, 2003). They are believed to be especially useful for developing countries in “leapfrogging” to the “information age” of development.
How strong is the theoretical and empirical evidence for the new technologies as the new mantra of economic and social development? The literature on the role of new technologies in development has grown enormously during the 1990s and the present decade. While the early debate focused on an “either-or” approach implying whether precious resources should be spent on these technologies at all when there were more pressing needs of food, nutrition, education, and health care, the recent literature has recognized the role of these technologies as enabling tools for providing new and more efficient means of production, improving access to information, and improving governance and delivery of basic goods and services (Keniston, 2002; McNamara, 2003). This track focuses on how the new technologies can play an effective role in economic and social development in developing countries.
Empirical evidence from developing countries across the world also suggests that there are several conditions necessary before the new technologies can play an effective role in bringing economic and social transformation. These conditions primarily refer to the role of public policy in creating the necessary institutions for effectively utilizing technological changes for development (Caspary and O’Connor, 2003; Kumar and Best, 2006). This track also focuses on these issues in this volume.
The paper on local and non-local geography of technological innovations in developing countries focuses on the importance of non-local ties and networks in facilitating exchange of knowledge among firms and local organizations. As opposed to the local networks, which has been the main focus of the literature in this area, non-local networks, consisting of regional, national, and international linkages among firms and institutions, can play an important role in facilitating technological innovations in the
developing countries. This holds important policy implications for building innovative capabilities through promotion of such linkages in these countries. These aspects must be taken into consideration by the policy makers in these regions.
The tracks in this volume focus on innovations that harness the potential of technologies, help in expanding land markets, and facilitate the development of infrastructure. We believe that these are key areas where institutional innovations can greatly facilitate the process of economic and social development in the developing and the transition economies. Moreover, the papers in this volume tackle these issues in several geographical areas, using different methodological approaches. By offering this variety we highlight that there is a large potential for future research in exploring different development challenges in other socio-economic, institutional and political contexts.
Aschauer, D. A. (1989). Is Public-Expenditure Productive. Journal of Monetary Economics 23(2): 177-200.
Caspary, G. and D. O’Connor (2003). Providing Low-cost Information Technology Access to Rural Communities in Developing Countries: What Works? What Pays? OECD, Paris, France.
Dale, P. and R. Baldwin (2000). Emerging Land Markets in Central and Eastern Europe. Structural Change in the Farming Sectors in Central and Easter Europe: Lessons for the EU Accession: Second World Bank/FAO Workshop, June 27-29, 1999. C. Csaki and Z. Lerman. Washington D.C., World Bank: 81-109.
Deininger, K. (2003). Land Policies for Growth and Poverty Reduction. A World Bank Research Report. Washington D.C., The World Bank.
Gramlich, E. M. (1994). Infrastructure Investment - a Review-Essay. Journal of Economic Literature 32(3): 1176-1196.
Guild, R. (1998). Infrastructure investment and regional development: theory and evidence. Department of Planning Working Paper Series, Auckland, New Zealand, Department of Planning, University of Auckland.
Haughwout, A. F. (2002). Public infrastructure investments, productivity and welfare in fixed geographic areas. Journal of Public Economics 83(3): 405-428.
Holtz-Eakin, D. (1992). Public-sector capital and the productivity puzzle. Cambridge, MA, National Bureau of Economic Research.
Keniston, K. (2002). IT for the Common Man: Lessons from India, National Institute of Advanced Studies, Indian Institute of Science, NIAS Special Publication SP7-02, www.mit.edu/~kken/Public/PAPERS/ IT_for_the_Common_Man.html.
Kumar, R. and M. L. Best (2006). Impact and Sustainability of E-Government Services in Developing Countries: Lessons Learned from Tamil Nadu, India. The Information Society 22(1): 1-12.
Lerman, Z., C. Csaki and G. Feder (2004). Agriculture in Transition: Land Policies and Evolving Farm Structures in Post-Soviet Countries. Oxford, Lexington Books.
Lerman, Z. and N. Shagaida (2007). Land Policies and Agricultural Land Markets in Russia. Land Use Policy 24: 14-23.
McNamara, K. (2003). Information and Communication Technologies, Poverty and Development: Learning from Experience, Background Paper, InfoDev Annual Symposium. Washington.
Polenske, K. R. (2001). Competitive Advantage of Regional Internal and External Supply Chains. Regional science perspectives in economic analysis : a festschrift in memory of Benjamin H. Stevens. M. L. Lahr and R. E. Miller. Amsterdam ; New York, Elsevier: 259-284.
Renard, V. (1994). Emerging Land Markets in Eastern Europe. Economics of Transition, 2(4): 501-510.
Rietveld, P. (1995). Infrastructure and Spatial Economic-Development - Introduction. Annals of Regional Science 29(2): 117-119.
Swinnen, J. F. and L. Vranken (2007). Patterns of Land Market Development in Transition. LICOS Discussion Papers, Number 179/2007. Leuven, Belgium, LICOS Centre for Institutions and Economic Performance, Katholieke Universiteit Leuven.
UNDP. (2004). Regional Human Development Report. Promoting ICT for Human Development in Asia 2004: Realizing the Millennium Development Goals. Retrieved November, 2005, from http://www.apdip.net/ projects/rhdr/RHDR-Report.pdf.
Vidican-Sgouridis, G. (2008). Institutional Arrangements and Land Reallocation During Transition: A Regional Analysis of Small Farms in Romania. Doctoral Dissertation, International Development Group, Massachusetts Institute of Technology. Cambridge, MA.
The editors of this volume organized a discussion on the main theme of this issue with the faculty of the International Development Group (IDG) within the Department of Urban Studies and Planning (DUSP) at MIT. The objective of the discussion was to elicit the views of the faculty from their own theoretical and practical perspectives on how institutional innovations could promote development in developing countries and how such innovations could be encouraged. The discussion concentrated on the following three broad questions concerning institutional innovations for development:
1 How can institutional change promote development? What policy interventions are required to encourage institutional changes that promote development?
2 How does the process of institutional change occur? When do we know that the old institutions have become obsolete and new ones are required to spur development?
3 While the common premise may be that institutional innovations promote development, there are cases where “innovations” in one region or country fail to achieve their desired outcomes in other regions or countries. Why? What are the socio-economic and political pre-requisites, if any, for ensuring replicability of institutional innovations in promoting development in other institutional settings?
The discussion focused on several themes relevant to the broader issues regarding institutional innovations for development. Faculty members contributed insights from their own research and work experiences. Important among these were: defining the concept of development and institutions; understanding the historical context of institutional innovations; distinguishing between the types of institutions that promote change; the issue of scale at which institutions affect development, such as local, regional, national, or global, and small versus large organizations; different realms of intervention, such as political, bureaucratic, technocratic, and socio-economic; the constant overlap between public and private realms in bringing about institutional innovations; and understanding the process of change, such as incremental or sudden, that could promote development.
Given the diversity of opinions and expertise within the IDG, we summarize below the key points that each of the faculty members emphasized during the discussion. The various perspectives brought forward by the IDG faculty are very important for this volume, as they expand the discussion of institutional innovations for development beyond the three tracks covered (land markets, infrastructure, technology). This synthesis
also highlights the importance of understanding how institutional change is perceived by different disciplines and how it varies within different contexts - social, political, organizational, and economic.
At the outset, Prof. Diane Davis, Professor of Political Sociology, pointed out that before addressing the issue of how institutional innovations promote socioeconomic development, it is important to first specify what we mean by development. For example, do we mean economic growth, equity, social justice, redistribution, or other concepts. In addition, we need to clearly define the types of institutions we are referring to when we talk about the role of institutions in development.
Prof. Davis stated that her research focuses on the relationship between changing state institutions and development at the macro level and in an urban context. She stated that to understand this relationship, it is important to study the embeddedness of state institutions within the private sector, political system, and the civil society. The set of interrelationships within which state institutions operate explains the developmental outcomes. We also need to distinguish between states and regimes. The same state could have different regimes with varying political ideologies that may affect developmental outcomes. In the case of Mexico, it is interesting to ask how the democratization of the state has changed both the macro-development as well as micro-development and how the interrelationships between institutions have been important in determining outcomes.
Prof. Davis also mentioned that although it is important to know when institutions become obsolete, the real challenge lies in making the transition from old to new institutions. Sometimes, new regimes are established that alter institutions in order to deal with the old problems. Therefore, this may not result in new institutions but in hybrid institutions that may be worse than the old ones. This would be a case when institutional change is not desirable because the hybrid institutions could be incoherent and difficult to operate.
On innovations and their adaptability to other countries, she pointed out that it is important not only to understand the history and politics surrounding specific innovations, but also to understand how innovations grow organically within particular institutional environments and contexts. This process makes their replication difficult in other institutional environments that have a limited resemblance with the original
context.
Prof. Bish Sanyal, Ford International Professor of Urban Development and Planning, argued that an interesting question to ask on the issue of institutional innovations is: where do ideas for change come from? How have people thought about this question before and what is the history of these ideas? Historically, right after World War II, two major schools of thought emerged on the issue of how institutional change comes about. One was Schumpeter’s idea of change being initiated by creative destruction through markets that can be called the market approach to change. The second was the neo-Marxist school of thought that focused on institutional changes arising from class struggles, e.g., the social dynamic that unfolds between labor and capital. In between these two polarities, is a group of scholars who thought of organizations as being responsible for change, particularly with regard to the state or the government playing a key role in affecting change.
However, this idea that the government and the state can instigate change came under attack by two major schools of thought in the 1970s. On the Right, neoclassical theorists argued that the state was the biggest hindrance to change, rather than being a facilitator of change. On the Left, the neo-Marxists argued that the state was completely captured by the elites, restricting its capacity to bring about progressive social change. The whole idea of capitalist development and political democracy going hand in hand—a central idea of change from the 1940s—was under attack. The argument was that there was no relationship between the two.
Prof. Sanyal’s work draws on another approach that developed in the 1970s. This approach was critical of the government and emphasized the role of small non-governmental organizations, small firms, and the informal economy. These models of development from below proposed that it was the people who generated change, bypassing the government. However, it was realized that there were limits to this argument as non-governmental and other small-scale grassroots social groups were not able to bring about change on a large scale. Large and small organizations were both important within different domains of action.
In some cases, small organizations or groups at the grassroots level borrowed ideas from those at the top level or from large scale organizations. Prof. Sanyal pointed out that this is what innovation is—when a particular domain or group borrows ideas from
other groups, and uses it to strengthen its own thinking. He emphasized the role of cross-fertilization of ideas among organizations in bringing about change and innovation.
Prof. Annette Kim, Ford International Career Development Assistant Professor of Urban Studies and Planning, examined institutions from the point of view of market development in transition economies. Prof. Kim’s work addresses the question of how markets form, particularly in transition countries that did not have markets earlier. She pointed out that institutions are critical to account for the different policy outcomes in various countries in these regions.
Nevertheless, institutions can mean many things and it has become a very popular term, especially in academia. Prof. Kim highlighted that different disciplines look at institutions differently. Her research addresses this variation by examining three different ways of defining institutions. For example, while institutional economics looks at institutions in the context of transactions, laws and regulations, economic sociology perceives institutions in the context of norms, networks, and embeddedness. Political economy, on the other hand, views institutions in the context of different political interest groups. All these play a role in the evolution of markets.
Prof. Kim also pointed out that legal institutional developments were important, such as property rights, privatization, and the devolution of state authority. However, legal norms such as property rights laws may not be such a strong explanatory variable when we talk of market agents such as entrepreneurs and capitalists themselves, as many empirical studies have pointed out, unless there is basic economic and political stability. Nevertheless, the question of why policy “sticks” in some places and not in others (or why policies become successful in some places while failing in others), still needs further examination. You can have the same policy in different places but it may not be disseminated in the same way or have the same impact. Hence, Prof. Kim’s work revolves mostly around the issue of social construction of markets.
Along these lines, Prof. Kim argued that the role of a cognitive shift is important in determining how market agents view the economic world and what the opportunities are, and what the new ways of behavior are. She emphasized that a mental or cognitive change needs to occur, as well as behavioral changes associated with it. The interesting questions are where does this cognitive change come from and what instigates people
to change the ways they have been doing things? This process is related to laws, structured environments, regulations, and social norms that limit what people can do, but institutional change also requires an internal change in the way we view the external world, which subsequently affects human behavior.
Prof. Karen Polenske, Professor of Regional Political Economy and Planning, explained the importance of distinguishing between institutions and organizations. Institutions consist of formal laws, property rights, and informal norms or codes of behavior, which need to be distinguished from organizations. Organizations are entities that carry out those institutions and operate within their framework. You might have the same property rights law, but each country or region might have a very different way of implementing and enforcing that particular right. Prof. Polenske also argued that any perspective on institutions depends on the geographical boundaries or regions that we are talking about. The need for certain institutions is different in different parts of the world. She gave the example of energy security, which is a major current concern. A complex set of institutions and a strong set of rules and regulations are required to establish norms regarding the use of energy or water or other basic needs. The way we deal with environmental regulations varies from country to country, and the differences affect outcomes in these countries not only at the national level but also at the local level.
Prof. Alice Amsden, Barton L. Weller Professor of Political Economy, examined the role of firms as an institution, as a source of private sector enterprise and entrepreneurial activities in developing countries. She argued that a firm is an institution because institutions comprise organizations and they also comprise norms of behavior, both formal and informal. It is important for economic development planners to think of the differential developmental impacts of foreign-owned versus private nationally-owned firms. In order to improve the developmental outcomes in developing countries, she mentioned that the real challenge is to change some of the international organizations, such as the World Bank. To illustrate her point, Prof. Amsden argued that while the World Bank is very much in favor of the private sector, it never lends to private firms, for example, manufacturing firms in developing countries. Hence, one area where change can positively affect developmental outcomes is in providing loans for private national industrial activities in developing countries, in particular to those that cannot obtain finances from other sources.
Prof. Amsden also pointed out that people in developing countries are trained to believe that multinational firms are better than nationally owned firms. Nevertheless, there is a lot of evidence more recently, particularly anecdotal evidence and case studies, that this is not the case. Private national companies in Korea, Taiwan, and India, tend to be as good, if not better than multinational firms in the same industry. Hence, there is a lot of potential in looking at the institutional issue of foreign versus national enterprise. This is interesting because it also addresses the issue of how to measure success. Most researchers that study this issue use an inductive method – they start from the institution, the organization, say through a case study, and then they generalize. Others follow a more deductive methodology. However, the methodology adopted for examining these comparisons can yield different results. In studying firms, aspects such as firm size are also a cause of variation. It is important to realize that both—large firms and smaller firms - have significantly different developmental outcomes in developing countries. Prof. Amsden also argued that evidence pointed to large firms being more effective in facilitating innovations as compared to small and medium enterprises.
Prof. Christopher Zegras, Ford Career Development Assistant Professor of Transportation and Urban Planning, works mostly on metropolitan level development in Latin America. Prof. Zegras pointed out the key role of the public sector in determining the effectiveness of investments in this area. The public sector influences the effectiveness of investment through its role in three realms: political, technocratic, which is related to the political realm, and the market. These realms run through the different sectors of operations, regulations, delivery of infrastructure, and enforcement. For example, infrastructure is delivered through either public sector or private institutions, often affecting each other to some degree. Hence there is an overlap between these realms and their range of influence is incredibly different in different countries and regions of the world. The question is how change can be promoted through these realms.
Prof. Zegras gave the example of the innovation of the Bus Rapid Transit (BRT) system in Bogota, run by Transmilenio –a public sector company that designed and regulated the system. It originated from a few public sector entrepreneurs, has been quite successful to date, and has had significant implications for the private sector. Another example of institutional innovation is the organization called SECTRA in Chile—a transportation planning agency at the national level, which was empowered by the Pinochet regime in the early 1980s in a very apolitical way with a mandate to develop capabilities, data, and models for the transportation sector. The agency has been a worldwide model
for the technical expertise it has developed. Nevertheless, its degree of effectiveness in affecting change when it has to move through the various institutional realms is still debatable. Hence, an important question that arises is how effectiveness can be measured.
In addition, in Latin America more broadly, another institutional innovation is the private sector delivery of public transportation. Private actors are serving markets that nobody was able to serve in a cost-effective way. The question that arises is what the public sector can do to innovatively stimulate the private sector to respond better to these markets, such as by providing better regulation. Prof. Zegras also highlighted the role of culture in institutional change, along with socio-economic and political aspects and the difficulty of distinguishing between these categories.
Prof. Judith Tendler, Professor of Political Economy, explained the institutional reasons for the differential performance of public enterprises in various countries. She pointed out that the concept of pre-requisites for institutional innovation is flawed. Often what we consider pre-requisites are actually outcomes of a particular development process or policy. The differences in the performance of enterprises need to be analyzed much more deeply and not simply in terms of public versus private enterprises. For example, the World Bank established many of the public state-owned enterprises in developing countries to overcome infrastructural bottlenecks. In several cases, these state-owned enterprises did not function properly and were subsequently privatized. However, in several cases, privatization also did not work and was subjected to similar criticisms as in the case of public enterprises. Prof. Tendler emphasized that we need to understand in depth the institutional reasons for the variations in the performance of enterprises through inductive case studies.
Prof. Tendler also argued that in the debate on small versus large firms, it is important to understand that size is not as important as the system of firms that exist in a particular region and the linkages and spillovers among them. We must understand what types of connections exist between the firms, and the public policy support that can maximize the linkages and spillover effects among firms in a country or region. The growth of small firms is often linked with the growth of large firms through the markets of inputs and outputs established between them. Just focusing on large or small firms may be limiting and may miss out on several aspects. It is the process of clustering that matters
and the public sector can sometimes play a role in intermediating the linkages between firms. It is difficult to change from one system of clusters with top-down regulation and provisions of standards and training, to a more bottom-up approach where each cluster identifies its own priorities and bottlenecks—an approach that is considered important in the literature on clusters. Planners, researchers, and activists are faced directly with the challenge of bringing about these institutional changes.
Prof. Ralph Gakenheimer, Professor of Urban Planning, examined the issue of institutional innovations in the field of urban transportation. Studying institutional innovations in the transportation sector is very interesting because it is one of the most conservative areas of policy. Nevertheless, when innovation does occur it tends to have a very high profile. This is because its products of transportation services are extremely visible and experienced by everybody in a city or region. Also, it is possible for those providing the services to exert extraordinary leverage, almost without constraint when they want to. While providers have power, there is a tendency for this sector to be poorly funded and poorly regulated. To the extent that there are two basic institutional options available for the provision of services—privatization or public control—there is a tendency for events to swing like a pendulum from one to the other. This is because both institutional forms produce critical reactions that drive the situation back in the other direction. Thus, significant resources are lost in the process of transition without bringing about adjustments to either form.
Prof. Gakenheimer has researched this trend in four cities in Latin America over the last thirty years where the institutional developments in transportation moved in different directions. There is a tendency for bureaucrats in this field to be extremely conservative because they are resistant to any type of change. The question then is how we can alter this status quo and what type of commitments it would take. Prof. Gakenheimer mentioned that global commitments on air quality and global warming are important in this regard as they are becoming prevalent and strengthenedover the past decade in areas where they never existed before. This institutional change is occurring in several countries during the present time, which are moving towards stronger actions in a slow but detectable way.
Institutional innovations also come about through new technologies and new funding made available by various sources. For example, the Bus Rapid Transit (BRT) movement has been a remarkable innovation across developing countries. One factor for its suc-
cess has been that it can be institutionalized separately. This is critical to innovations in developing countries because existing institutions are so hindered by corruption and old practices that new foundations must be created for moving forward. This has been done in several cases of implementation of BRT.
There is also the issue of concatenation—once you enable one innovation, it may trigger others, including some that had not been possible earlier. Leadership and charisma are also important factors that can facilitate institutional innovations in this field. Examples of charismatic leaders are Enrique Penalosa in Bogota and Jaime Lerner in Curitiba who have been influential in bringing about innovations in their cities. Prof. Gakenheimer also mentioned the “copycat tendency” which may not be as common in other fields as it is in transportation, but has been important in facilitating the spread of innovations such as BRT across cities. Finally, national policy related to the urban transportation sector is severely lacking across countries and there is a strong need for change, especially as secondary cities across developing countries face rapid growth while remaining underserviced by national governments.
The richness in approaches and ideas expressed by the IDG faculty during the discussion suggests that the topic of institutional change represents a very fertile ground for research in the context of developing countries. More contributions on this topic are needed, both for consolidating the theoretical base with respect to the role of institutions and institutional innovations in development, and for understanding the use of diverse methodologies in accounting for institutional change. In addition, more research is needed to unearth specific country or regional experiences that focus on different policy alternatives and developmental outcomes. The articles in this issue of Projections are examples of such research endeavors to enlarge our knowledge base on the topic of institutional innovations for development.
Land reform was launched in Georgia in 1992, about a year after the country gained its independence from the Soviet Union. While an impressive land individualization process has been in effect since then, the pace and the performance of this process are far from satisfactory. This is due to a combination of institutional and economic constraints. We use comparable survey data from 1996 and 2003 and show that the land reform has been progressing mainly through land leasing. This allows successful farm households to expand their farming operation and improve their well-being. Land documentation doesn’t seem to yield the expected results, and the blame may be on less than sufficient labor and credit opportunities. We conclude that there is scope for continuing the process of land reform in Georgia, but this has to be accompanied by measures to develop rural credit and labor markets.
GOGODZE, KAN, KIMHIAgriculture has traditionally been an important sector of the Georgian economy. After independence in 1991, the agricultural sector underwent a severe crisis, mainly due to the civil war, which resulted in the destruction of the productive ability of collective and state farms. A process of land individualization has been in effect since then, with agricultural land being distributed to private households. Land individualization was composed of two different mechanisms: privatization and leasing. A program of land privatization was initiated in 1992, involving an establishment of a “privatization reserve” of 850,000 hectares including 200,000 hectares already used by private farm families at that time and an additional 650,000 hectares from collective and state farms. This land was intended for allocation among existing and new family farms. By 1996, land held by private households grew by roughly 200% to a total of 628,000 hectares (Lerman, 1996). By 1997, this number grew further to 766,000 hectares (Shuker, 2000), and by April of 1999, to 918,000 hectares (FAO, 1999).
In addition, private households leased more land from state reserves. In 1996, the government of Georgia permitted the leasing of agricultural land still under government control to private households or legal entities. By 1997, the amount of land leased to producers was almost equal to the amount held privately (Shuker, 2000). Still, about half of the agricultural land in Georgia remains under the control of state agencies, which do not use it productively.
The resulting structure of the farm sector is composed of three types of farms. First, there are the small family farms, cultivating 0.75 hectares of land on average, that do not lease land. Second, there are the larger individual farms that lease land and cultivate 6 hectares on average. These are perhaps the more ambitious and also possibly better connected farmers. Finally, there are the large entities that cultivate close to 100 hectares on average, almost all of it leased (Shuker, 2000). In fact, it turns out that the large entities tend not to cultivate all their leased land, mainly because of capital constraints (FAO, 1999). They may be leasing the land in part for speculative reasons.
Institutional factors impose considerable limitations on the functioning of the land market. Private land is restricted to a maximum of 1.5 hectares per household. The distribution of both privatized and leased land was at the hands of the Sakrebulo (representative body of local government). There seems to be huge variation across Sakrebulos in the fraction of land distributed to private hands (Lerman, 1996). In addition, not all land transfers are formally complete. A transfer is only complete once the state issues a
transfer certificate called a “giving and receiving act.” A large number of small farmers are still without certificates, which means that they cannot sell the land to others or use it as collateral in the capital market. Moreover, land sales between private farmers within a Sakrebulo are allowed only after all agricultural land in the Sakrebulo is systematically registered, a restriction that practically prohibits all private land transactions as of today (Shuker, 2000).
These institutional constraints result in an inefficient use of agricultural land in Georgia. On one hand, efficient and successful small farmers cannot expand their landholdings, and cannot utilize their potential and grow into commercial farming operations. On the other hand, inefficient small farmers cannot exit and inefficient large farmers cannot reduce their size since they cannot get compensated for the land and also perhaps lack of economic alternatives. At the macro level, eliminating the institutional constraints in the land market and continuing the individualization process (including privatization and land leasing) would very likely result in a land distribution that includes a much larger fraction of mid-size family farms. Much more of the agricultural land in Georgia will be cultivated, and crop yields will be higher. These have been found to be the results of land reforms in many developing countries (Binswanger et al., 1995). Land registration that will enable private land to be used as collateral will have indirect effects on agricultural productivity through the alleviation of capital market constraints (Feder et al., 1988). Moreover, established property rights may increase the incentives of farmers to make costly long-run investments (Besley 1995), thereby promoting prospects for further long-run growth of the agricultural sector.
The purpose of this paper is to investigate the progress of the land reform between the years 1996 and 2003 and assess its consequences for the well being of the rural population. In the next section we describe the data used in this paper and the progress of the land reform as expressed in the data, and after that we examine the changes in household income. Then, we analyze the association between land reform and household income through a multiple regression analysis. We conclude with a discussion of the policy implications of our results.
We use data derived from two farm-household surveys conducted in 1996 and 2003 in four districts surrounding the capital city of Tbilisi: Dusheti, Mtskheta, Sagarejo, and Gardabani. The 1996 and 2003 surveys included 1914 and 2520 individual farms, respectively. In each district, ten villages (Sakrebulos) were selected randomly in 2003,
GOGODZE, KAN, KIMHIand sixty three households were surveyed in each village using the “random walk” procedure (the 1996 survey covered fewer villages). The survey questionnaires were quite similar in 1996 and 2003. They collected information about the demographic profile of the household, household income and its sources, land resources and other farm assets, farming activity and related activities (finances, investments), and social aspects (Gogodze et al., 2005).
FIGURE 1 Distribution of farms size (ha)
Figure 1 portrays the changes in farm-size distribution between 1996 and 2003. It is evident that the distribution has shifted to the right, implying that farms are larger in 2003 than in 1996. This is attributed mainly to a significant increase in the amount of leased land. While the size of land owned by a typical farm has grown from 0.74 ha in 1996 to 0.81 ha in 2003, an average farm rents about 0.77 ha in 2003 relative to only 0.16 ha in 1996. Only 2% of the farms leased land in 1996, while this fraction increased to 12% in 2003. On average, a farm that leased land in 1996 owned 0.85 ha, while an average farm that did not lease land owned 0.73 ha. These numbers have changed to 0.66 ha and 0.84 ha, respectively, in 2003. The number of plots cultivated by each family has increased from 1996 to 2003. In 1996, 74% of families cultivated up to two plots. This fraction decreased to 61% in 2003. In 2003, 70% of farmers possess some land ownership document, an increase of 30% relative to 1996. In summary, the progress of land reform from 1996 to 2003 is expressed mainly in the possibility to lease land. This possibility is utilized by a relatively small number of farmers, perhaps due to constraints
on the availability of credit or labor. This probably leads to increased inequality among farmers. In addition, the increased possession of land ownership documents might lead, in the long run, to an increase in the ability of small farmers to raise credit.
Since the average cultivated land increased from 1996 to 2003, one would expect an increase in farm production. However, this is difficult to measure because farmers grow many different types of crops and the composition of crops also changed between 1996 and 2003. For example, because rented land tends to be marginal, there has been an increase in the cultivation of hay, a marginal crop. Also, the yield of several crops dropped considerably between 1996 and 2003. This could be because of natural conditions, but inputs of production other than land may be important as well. Georgian farmers rely mostly on family labor and hence may face labor shortages when increasing the cultivated land. However, the average number of workers per farm increased from 2.65 in 1996 to 4.07 in 2003. On the other hand, only 13.5% of farmers used purchased inputs in 2003, compared to 25% in 1996. This may explain the drop in yields. The value of farm production depends not only on cultivated land and crop yields but also on prices. The data show that crop prices dropped dramatically (in real terms) from 1996 to 2003. This has led to a 50% drop in the value of crop production. The value of livestock produc-
GOGODZE, KAN, KIMHI
FIGURE 2 Value of farm production (Lari, 2003 values)
tion remained roughly the same, and the total value of farm production dropped by about 25% from 1996 to 2003 (figure 2). Farm products may be used for self consumption, sold, or reserved. In rural Georgia, most farmers still consume all their farm output (Kan et al. 2006). The fraction of output consumed increased from 66% in 1996 to 72% in 2003. This means that household cash income suffered even more in 2003.
FIGURE 3 The composition of household income
In 2003, farm income, while being the most important source of household income, constituted less than 50% of total household income (figure 3). Non-farm labor and business income combined for about a third, and the rest came through public and private transfers. While we do not have these statistics for 1996, we do have a report on the fraction of farm income in total household income in both years (figure 4). We observe that the share of farm income has increased, on average, from 1996 to 2003. Combined with our earlier observation that farm income has decreased over the same period, we conclude that the decline in total household income was even more extreme than the decline in farm income alone.
It would not be correct to blame the decline in household income on the land reform. Farm household situation is determined, in general, by a combination of technological factors, market conditions and policy, as well as the household’s own decisions. The discussion above implied that market conditions had perhaps the most significant negative effect on household income. Hence, it could very well be that the marginal effect of land reform on household income is in fact positive. This is supported by the results of Kan et al. (2006), who showed that landholdings have a positive effect on the tendency of farmers to sell their farm products on the market. Moreover, we have seen that most of the increase in landholdings has been achieved through leased land, and hence is concentrated among a small number of farms.
In table 1 we compare several observed characteristics of households who lease land and those who do not, using the 2003 data. We observe that households who lease land have much higher farm incomes, but also considerably higher non-farm incomes. Remittances and social payments are lower for households who lease land, but these constitute a relatively small fraction of household income. Overall, total income of households who lease land is more than twice that of households who do not, on average. As mentioned before, households who lease land own less land of their own, but the leased land more than compensates for that. Those households also have more farm assets, and are more likely to own livestock. On the other hand, they are less likely to hold a land ownership document, and their plots are more remote. In addition, farmers who lease land tend to be somewhat younger and more educated, and have larger families.
TABLE 1 Comparison of households who lease land and those who do not (2003)
farm income (lari) 27926723 non-farm income (lari) 10531487 remittances (lari) 15058 social payments (lari) 12276 total income (lari) 41188344 land owned (ha) 0.850.66 land rented (ha) 0.006.49 total land (ha) 0.857.15 number of plots 2.373.02 mean distance to plot (km) 1.493.30 mean land quality (index) 3.173.18 land document (dummy) 0.730.48 livestock (dummy) 0.800.89 farm assets (lari) 1631423345 age 45.4942.41 elementary education (dummy) 0.090.13 higher education (dummy) 0.470.52 professional education (dummy) 0.180.14 academic education (dummy) 0.170.18
In order to find the marginal effects of the land-reform-sensitive variables on household income, we conduct a multivariate regression analysis. The dependent variable is the natural logarithm of per-capita household income (hereafter income), hence the coefficients can be interpreted as percentage changes in income caused by a unit change in each explanatory variable. The analysis is conducted first for the whole sample, and then repeated for households who do not lease land, in order to confirm that the results are not driven solely by the vast differences between households who lease and those who do not lease land that were discussed above. The results are in table 2.
TABLE 2 Regression of per-capita household income (2003)
All householdsNo leased land VariableCoefficientt-statisticCoefficientt-statistic land owned 0.05202425.54**0.0590465.08** land rented 0.00916385.82** number of plots 0.11668897.87**0.1045826.51** mean distance to plot 0.02278983.1**0.0074920.82 mean land quality 0.02050120.850.0397451.57 land document -0.1149916-3.21**-0.139310-3.52** livestock 0.793867017.95**0.78789317.05** farm assets 0.03698077.34**0.0332486.1** age 0.01035516.45**0.0101895.95** elementary education 0.32599382.45*0.4238183.03** higher education 0.00746390.070.0267560.23 professional education 0.23880961.98*0.2183471.76 academic education 0.34385322.87**0.3809223.07** family size -0.1506635-12.15**-0.158460-11.83** Dusheti region -0.0662070-1.38-0.066660 -1.37 Sagarejo region -0.1790063-3.64**-0.169970-2.99** Gardabani region 0.35646477.25**0.2523324.91** intercept 5.295918033.42**5.35342132.17** r-squared 0.26670.2518 number of households 24862186
* coefficient significant at 5% ** coefficient significant at 1%
We find that an additional hectare of owned land can increase income by more than 5%, while a similar increase in leased land has an effect of less than 1% on income. This implies that the potential of increasing rural household income is much larger among households who own small plots rather than among those who operate larger land
areas through leasing. This is consistent with the “inverse relationship” phenomenon (Kimhi, 2006). Income is positively related to the number of plots, holding land constant. Land fragmentation is likely to have a negative effect on crop yields through plot-level economies of scale, but could also allow farmers to diversify their output mix and reduce yield uncertainty, and therefore allow them to grow more risky crops with higher mean yields. The latter effect seems to be dominant in this case. In the whole sample, income is positively related to the distance to plots, but this effect vanishes in the sub-sample of households who do not lease land. This implies that the effect of distance is significant only among land-leasing households, perhaps because those households agree to rent remote plots only when they expect that these plots will yield higher incomes. Land quality has a positive effect on income, as one could expect, but the effect is not statistically significant. Households who hold a land document have lower incomes, and this effect holds even among households who do not lease land. One possible explanation for this counter-intuitive result holds even among households who do not lease land. One possible explanation for this counter-intuitive result is that households with land documents have more secure property rights on their land, and thereby undertake land-improving investments that should be profitable in the long run but may be costly in the short run (Besley, 2005).
Households who own livestock enjoy almost 80% more income than those who do not. Holding farm assets increases income significantly, but the magnitude of the effect is rather small. Age and education of the head of household (human capital indicators) increase income significantly, as one may expect. However, the effect of education is not linear, with elementary education almost equivalent to academic education, and high school education no different from no schooling at all. This may reflect the highly imperfect labor markets in rural Georgia, where educated individuals tend to be employed in the public sector and are willing to earn low wages in return for job security (Hoyman and Kimhi, 2005). Larger households have lower per-capita income, which is a common result. We also observe regional income disparity, with higher income in Gardabani region and lower income in Sagarejo region, compared to the other two regions.
What can we learn from these results on the prospects of land reform in Georgia? It is not necessarily informative to judge the land reform using a comparison of 2003 to 1996, because, as Rozelle and Swinnen (2004) mention, the agricultural performance is affected by many additional factors. We do conclude, though, that the progress of land reform in Georgia was gradual and has not reached full coverage, mainly due to institu-
tional complexities. We can think of the land reform as composed of three dimensions: allowing rural families to own one or more plots of land; allowing farm households to lease land from state enterprises; and land registration. We shall now discuss the merits of each dimension as reflected in our empirical results.dimension as reflected in our empirical results.
First, we found that the amount of land owned by rural households increase their percapita income. This calls into question the logic of the institutional constraints on the amount of land allocated to each farmer. Supposedly, these constraints were aimed at allowing more households to obtain land, but it is not clear that the low income gained by cultivating such small plots is better than the alternative. Second, land leasing seems to be a successful channel through which the more productive farmers can expand their farm operation. The land leased tends to be marginal in terms of its suitability to the most profitable crops, but its value at the state enterprises is close to zero, and it allows farmers to enjoy much higher incomes. Leasing is also subject to lower transactions costs, and hence it seems to be the most promising channel in which the land reform in Georgia should proceed.
Finally, we found that land documentation is associated with lower household income, even after removing households that lease land, that have higher income on average and are less likely to hold a land document. We do not see any reason that land registration in itself will cause lower household income in the long run. The main motivation for land registration as part of a land reform is to allow land transactions (it also allows farmers to engage in the off-farm labor market and to raise credit. See Deininger 2003). This is necessary in order to allow evolutionary changes in land ownership, so that productive and efficient farmers could buy land from less productive and inefficient ones. Macours and Swinnen (2002) identified the allocation of use rights as one of the key conditions for post-reform agricultural productivity improvements in transition countries. Land documentation, however, is perhaps a necessary but not sufficient condition for land transactions. Farmers who want to expand their landholdings must also have equity or access to credit. Neither sufficient equity not access to credit is likely to be prevalent in rural Georgia. The fact that landholdings variability in our sample is quite low tells us that not many land transactions have been conducted so far, despite the fact that nearly 75% of the farmers hold land documents. This implies that land documentation is perhaps the least promising channel through which to promote land reform in Georgia. In this sense, the need for continued land reform cannot be disentangled from the need to develop other rural markets, such as the credit market.
GOGODZE, KAN, KIMHIAnother rural market that needs to be taken care of is the labor market. This is relevant to our current discussion of the land reform in more than one way. First, increasing landholdings requires more farm labor, and above a certain threshold, family labor will not be sufficient and additional workers will have to be hired. Second, if some farmers are to give up all or part of their land, they should be able to find an alternative source of income, and the rural labor market is the natural choice. Without a well-functioning rural labor market, the response of farm households to the land reform will be limited.
A final aspect that needs to be discussed in the context of land reform is rural income inequality. Our findings indicate that the expansion of land leasing between 1996 and 2003 has led to a higher polarization of household income. Naturally, continuing the reform will expand this trend, especially if the availability of alternative income sources is far from satisfactory. It has been shown for many countries that off-farm income allows poor farmers to keep up with the more affluent ones (see for example Arayama et al. 2006 and the references therein). In the case of Georgia, continuing the momentum of the land reform without developing rural labor markets could increase rural income inequality and raise rural poverty, at least in the relative sense.
To put these findings in a broader perspective, we return to the comparison of structural reform policies across countries offered by Lerman et al., (2004). They point to the sharp differences in the paths followed by two sub-blocs in the formerly Sovietdominated region, despite the common institutional and organizational heritage. Georgia is among the countries that recognize private ownership of land and have no legal barriers to land transactions. These countries also distributed land as physical plots rather than paper shares, increasing the land disposition options of farmers. However, land transactions are severely restricted in practice even in many of those countries, due to high transaction costs and complex administrative procedures. Bezemer and Davis (2003) report significant transactions costs associated with land registration and land leasing in Georgia.
Agricultural performance is positively correlated with the degree of individualization of agriculture, which in turn depends on the choice of land policies (Lerman et al., 2004). However, it also depends on the market environment, which as measured by several indices. In Georgia, the land policy index scores 9.2 out of 10, while the overall policy index is only 4.3. This implies that additional market reforms are needed in Georgia in order to reap the benefits of the land reform. As reported by Gogodze, Kan and Kimhi (2005), Georgian farmers still face difficulties in purchasing farm inputs
and selling farm products, and most of them experience difficulties in obtaining credit. Severe credit market imperfections were also mentioned in a USAID assessment of the agricultural sector in Georgia (Heron et al., 2001). Bezemer et al. (2005) also find empirical evidence for the importance of credit constraints to farm efficiency in Georgia. Hoyman and Kimhi (2005) find evidence of imperfections in the rural labor market in Georgia. These empirical findings confirm the conclusion of Rozelle and Swinnen (2004), that “successful transition requires a complete package of reforms (p. 448).”
To summarize, our findings indicate that the potential of increased land market activity is still there. A continuing specialization process that will enable successful farmers to acquire more land could improve the economic well-being of farm families even in a period of depressed produce prices. As has been shown by Zimmerman (2000) for South Africa, other rural markets, including the credit market and the labor market, need to be developed concurrently in order to allow farmers to take full advantage of the opportunities opened by the land reform, and in order to avoid negative repercussions of the land reform, namely rural income inequality and poverty.
GOGODZE, KAN, KIMHIArayama, Yuko, Jong Moo Kim, and Ayal Kimhi. Determinants of Income Inequality among Korean Farm Households. Center for Economic Research Discussion Paper No. 161, School of Economics, Nagoya University. November 2006.
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Bezemer, Dirk, and Junior Davis. The Rural Non-Farm economy in Georgia: Overview of Findings. National Resources Institute Report No. 2729, UK Department for International Development, 2003.
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Deininger, Claus. Land Markets in Developing and Transition Economies: Impact of Liberalization and Implications for Future Reform. American Journal of Agricultural Economics 85 (5), 2003, p. 1217-1222.
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Gogodze, Josefh, Iddo Kan, and Ayal Kimhi. Development of individual farming in Georgia: descriptive analysis and comparisons. In Josefh Gogodze and Ayal Kimhi, eds., Privatization, liberalization, and the emergence of private farms in Georgia and other former Soviet countries. Tbilisi, Georgia: Color Publishing House, 2005, p. 9-38.
Heron, Lena, Robert Lee, and Marcus Winter. Georgia Agricultural/Agribusiness Sector Assessment. Unpublished Report Submitted to USAID, March 2001.
Hoyman, Ofir, and Ayal Kimhi. Off-Farm Labor Supply in Rural Georgia. In Joseph Gogodze and Ayal Kimhi, eds., Privatization, Liberalization, and the Emergence of Private Farms in Georgia and Other Former Soviet Countries. Tbilisi, Georgia: Color Publishing House, 2005, pp. 80-96.
Kan, Iddo, Ayal Kimhi, and Zvi Lerman. Farm Output, Non-Farm Income, and Commercialization in Rural Georgia. Discussion Paper No. 16.06, The Center for Agricultural Economic Research, Rehovot, Israel, December 2006.
Kimhi, Ayal. Plot Size and Maize Productivity in Zambia: Is There an Inverse Relationship? Agricultural Economics 35 (1), July 2006, 1-9.
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Lerman, Zvi, Csaba Csaki, and Gershon Feder. Evolving Farm Structures and Land Use Patterns in Former Socialist Countries. Quarterly Journal of International Agriculture 43 (4), 2004, p. 309-335.
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GOGODZE, KAN, KIMHI
China’s urban land reform is a gradualist process of transforming a planned land allocation system to an open land market system, while the ownership of land remains under the control of the state. Through a series of reforms in institutions and policies, urban land markets have emerged rapidly. This study analyzes the evolution of urban land reform in Hangzhou, one of the spearhead cities in China’s urban land reforms, to discuss its emerging structure of urban land market—its legal, institutional and financial frameworks, to identify the current urban land management characteristics and the principal constraints, and to propose relevant recommendations for urban land reform with emphasis on rural land rights and expropriation, interactions between central and local governments, and non-government sector’s participation in urban land use management. Besides the policy implications, the study concludes that: (a) urban land reform in Hangzhou actively interacts with economic reforms in other fields in a variety of ways; (b) a monopolized supply mechanism of urban land is not necessarily a detriment to the development of a market system in the urban land economy; (c) a government-led land use management model with little civil society and public participation is one of the most significant constraints in China’s urban land reforms.
Urban land reform constitutes one of the most important areas of China’s socialist economic reform, which was launched in the late 1970s. Within the overall reform framework of establishing a developed socialist market economy, urban land reform is a process of transforming the administrative land allocation system in a planned economy to an open land market system. Urban land reform has evolved in a gradual process where the public ownership of land remains unchanged, but land use rights can be granted by the state and transferred between land users.
Given the nature of China’s economic reform, fiscal and administrative decentralization has been adopted as public policy, which has greatly revitalized the urban economy. The highly localized privatization process combined with less emphasis on political reform mean that local governments now have to face an emerging market economy subject to the constraints of an old political system. Many experts quickly sensed the important role of the local government in China’s urban land reform (World Bank, 1993). Empirical evidence also suggests that local government rather than central government policy may be more important in promoting urban land reform (for example, see Deng, 2003; J. Zhu, 2002).
Urban land reform in China has been the subject of much research in recent decade. While some works have investigated the overall policy of urban land reform (Li, 1996; World Bank, 1993; Zhang, 1997; Zhu, 1999), others have chosen specific aspects of the reform, such as: the political economy of urban land reform (Deng, 2003; Li, 1997); property rights (Che and Qian, 1998; Li, 1996; J. Zhu, 2002); emerging land and real estate market (Li, 1997; Xie et al., 2002); land pricing system (Li, 1995; Li and Walker, 1996); and the land development process (Wu, 1997; Yeh and Wu, 1996). A body of literature has also emerged on China’s local governments under economic reform (Qian and Weingast, 1997) and their relationship with State Owned Enterprises (J. Zhu, 2002) and growing non-state businesses (Nee, 1989; Wank, 1996). Through analysing the legal, financial, and administrative frameworks, this study first reveals the key characteristics of the urban land system. While acknowledging common factors underlying urban land reform in China, the study highlights the significance of gradual urban land reforms in Hangzhou. The magnitude of growth and transformation experienced by emerging coastal City of Hangzhou, particularly in the 1990s, is unlikely to be paralleled in many other Chinese cities (Wei and Li, 2002). The study examines the challenges encountered in a city adjusting to a socialist urban land market, focusing on the experiences and difficulties of introducing a land use fee and tax reforms, land leasing, land market formation, and institution arrangements.
Instead of addressing extensive issues in urban land reform, the study provides a close observation of Hangzhou by investigating the key characteristics of the evolving land reform process. Given its overall economic situation and size, Hangzhou was selected by the state to test out some of the key land policy initiatives. One such policy was the benchmark land leasing price mechanism in 1991. Hangzhou was also designated by the State Land Administration Bureau (the Ministry of Land and Resources since 1998) as one of the five contacting cities for the National Urban and Town State-owned Land Use Reforms.
While investigators have previously focused on urban land reform in major cities like Beijing, Guangzhou, Shanghai, and the five Special Economic Zones, Hangzhou has escaped the attention of academics. The analysis is followed by policy implications on urban land reform, with emphasis on rural land rights and expropriation, interactions between central and local governments, and non-government sector’s participation in urban land use management. The study is based on intensive fieldwork in Hangzhou during the summer of 2004, and the beginning of 2005. Besides documentation and archival records collection I conducted 14 open-ended interviews with government officials, scholars, developers, rural collective leaders, and ordinary rural residents within the study area.
Labour, capital and land are recognized as the three primary production factors in political economy. Marxists argue that land has no value until labour, the only creator of products, is added to it. The added value of land in capitalist economy is therefore interpreted as an exploitation of labour involved in production activities. The revenue of any landowner is an output of exploitation. Since one of the ultimate goals of socialism is to terminate exploitation through discarding private ownership, China’s pre-reform urban land system was based on this Marxist theory and took the form of state ownership of urban land. The pre-reform urban land system can be characterized by the following institutional aspects: public ownership where the state is the trustee of the public; absence of land value; no clearly specified time limits for users; and prohibition of land transactions apart from administrative allocation.
During the pre-reform era, land expropriation converted collective-owned rural land to state-owned urban land to meet the demands of economic development. Instead of paying the affected rural collectives or residents for the expropriated land at market value, or its real value in pursuing economic goals, the state provided a compensation
package that covered for the loss of crops and provided rural site residence, employment opportunity, and urban resident status permit (or city Hukou, a city Hukou holder can have access to social welfare such as medical insurance, retirement plans, education, and subsidized agricultural products that were usually confined to urban residents).
After land expropriation, local governments, authorized by the state, granted land to potential users by administrative allocation only, according to their local socio-economic development plans. Local governments decided the locations and extents of urban capacity expansion to meet the comprehensive economic plans. Insufficient capital however was a major barrier to realize the capacity of the expansion plans. The fact that land did not have value made land the only effective factor for consideration. The governments thus substituted land for capital to overcome the financial barrier. For State-Owned Enterprises (SOEs), which predominated, the ability to obtain more land from the government rather than other factors such as new technology, labor skills, management capability, and enterprise reform, was the key competitive advantage (Ding, 2003).
In 1978 China decided to initiate reforms which have dominated the country’s economic and political agenda in the proceeding decades. In contrast to the ‘big-bang’ reform policies of the Former Soviet Union and some former socialist countries in Central and Eastern Europe, where the reforms moved countries towards a complete capitalist socioeconomic system, the reforms in China are moving towards market socialism (Adlington et al., 2000; Jin and Haynes, 1997; Stiglitz, 1998). Instead of sweeping away the existing socialist planned economy completely, China’s strategy is to merge it with the incoming market mechanism. The reform process has been described as incremental or gradual, with step-by-step, trial and error changes, reversals of policy, and having no definite, clearly defined goals (Lindblom, 1992; Ma, 2002; McMillan and Naughton, 1992; Nee, 1992). This “muddling through” process, as Deng Xiaoping depicted, has been notably pragmatic and has its ideological foundation on a shifting emphasis in Marxism. The Central Communist Party justified the economic reforms by adapting Marxism as a developing ideology under the changing situation. Therefore, China’s socialist revolution would be more effectively facilitated by the coexistence of multiple economic elements. This emphasis on Marxism has helped the State maintain a balance between its economic reforms and political power stability. The ideological principles involved have provided a unique context in which China’s urban land reform was designed.
The emergence of a market economy led to the expansion of the non-state economy, mainly private and foreign entities. On the one hand, the increasing demand for urban public infrastructure pushed governments to initiate public finance alternatives, whilst on the other hand, concerns for foreign investment provided a chance for the reformers to re-examine the existing urban land use system. The 1979 Sino-Foreign Joint Venture Enterprises Law marked the start of China’s urban land reform by terminating the free land use rights of foreign investment related enterprises, requiring those enterprises to pay land use fees. Free, unlimited and non-transferable land use led to problems such as difficulties with reallocating land, unlimited demand from powerful state agencies (Deng, 2003), waste of land and inefficient use of land to meet economic need, inflexibility in rational urban restructuring (Bertaud and Renaud, 1992), a shortage of local public finance for urban infrastructure, and distorted local government responses.
In 1981, Shenzhen, a newly established special economic zone, began to impose a levy on land use to all land users, and the practice spread to a third of Chinese cities by the mid-1980s (Editorial Committee, 1992). Then the State Council took a further step and decided to introduce an experimental land market with pilot projects in six cities in September 1987. The urban land market concept was regarded as transforming the “administrative allocation only” system into a dual-track land system, which referred to the co-existence of a planned approach with a market channel including the options of negotiation, tender and auction for land leasing. It should be noted however that the state still retained the urban land ownership, with the newly established land market providing land use rights. By 1989, most coastal cities had produced regulations to facilitate land use rights transfers (Editorial Committee, 1992). In April 1988, the PRC Constitution was amended to allow the land use rights transfer, which provided a legal foundation for the establishment of land markets. In May 1990, the State Council’s enforcement of Provisional Regulations on China’s Urban Public Land Leasing and Transfers constructed the urban land market system where land value and market competition were honoured and land use rights became tradable and transferable. Since then, China’s urban land reform has developed quickly and fostered a fast growing property market that has brought significant changes to the urban structure.
The primary characteristics of China’s urban land reform can be depicted as: (1) The central feature is the separation of land use rights from public land ownership, as political ideology has restrained the reform from extending to ownership. Public land ownership therefore retains political and ideological meanings and its impact on actual land market operations is limited (Zhang, 1997); (2) Another feature is the dual-track
system, which refers to the coexistence of a traditional planned approach and a market channel for land allocation. The administrative allocation of land is conducted through a planned approach wherein land users pay only a nominal compensation fee for property attached to land and resettlement. Land users under the planned approach are usually not allowed to dispose of their land use rights in the market. Land allocated through the market channel, on the other hand, is based on the market mechanism and is completely transferable and tradable; (3) The third feature is that the reform adds value to land in the market through charging land allocated premiums, land transaction related fees in the market of transfers, subleases and mortgages, and annual land use fees.
The State established the Land Administration Bureau in 1986 to oversee land development, and responded to the policy problems of increased land use pressure with the 1988 Land Management Law. This land law required all administrative levels to conduct land surveys, prepare land use plans, report land statistics, coordinate construction projects, and conserve arable land. A quota system set limits for each level of government’s power on the amount of land that could be approved for conversion. The 1988 Land Management Law was in general not a detail-specific law and left many undefined areas (i.e., the Law did not even clarify who is the exact representative of the state-owned urban land) in the land use system. That made the implementation highly variable from one administrative jurisdiction to another.
Between 1988 and 1993, the state issued over twenty different types of land regulation measure, from circulars, opinions, and tentative procedures, to new and substantial regulations (Zhang, 1997; Cartier, 2001; Xie et al, 2002; Lin and Ho, 2005). Among the various types of land regulation measures, three measures gradually erected a framework for real estate development in urban areas. The Provisional Administrative Measures for Commercial Land Development and Management by Foreign Investors and the Provisional Regulations on China’s Urban Public Land Leasing and Transfers both called for more efficient and rational land development to promote local economic growth and the establishment of a preliminary structure for a partially market-oriented urban land system in 1990. The 1995 Urban Real Estate Law enhanced regulations for land market transactions, and guided a shift in investment from the overheated villa, office, and fancy townhouse development to average and low cost housing development, by offering the latter certain tax waivers, low land lease rents, and competitive loan terms. In order to cool down overheated land development and minimize land speculation, the Law imposed on the developer a fine of twenty percent of the contracted land invest-
ment if the land lay idle for more than one year, and confiscated land use rights from developers without any compensation if the proposed construction did not start for more than two years. In order to further regulate arable land conservation and, more important, to prevent state over-requisitions of village and township land for industrial construction purposes, the Primary Arable Land Conservation Regulations was formulated in 1994. This regulation set an institutional basis for primary arable land conservation and management and structured a conservation system inside designated agricultural conservation zones. Provincial government was required to establish minimum areas of primary farmland and locate these conservation areas.
The 1988 Land Management Law has many weaknesses. From a land revenue perspective, the philosophy of “selling land to obtain financial reward” made localities emphasize short-term economic benefits, downplay the beneficial simultaneous development of land use and economic growth, and ignore the overall and long-term interests (Cartier, 2001; Guo, 2001; Deng, 2003). The root cause of the problem was that rural land could be directly converted to urban construction land upon expropriation approval. Localities took illegal but common strategies such as “breaking the whole into parts” or “devolving approval power” so that the size of the proposed land conversion could be within the local (i.e. provincial, municipal, or town) approval limits (Cartier, 2001; Lin and Ho, 2005). Large areas of arable land were converted to urban land, but was not necessarily used in an efficient manner.
The new 1998 Land Management Law no longer delegates municipal and county level governments any power to approve arable land expropriation. The expropriation of this type of land must be authorized by either the provincial or state level governments depending on the size. In addition, the new law raised the cost of occupying arable land through increasing the land compensation fee and settlement allowance fee from twenty times the average annual product revenue for the previous three years to thirty times in total (Table 1). The new law emphasizes the importance of land use master planning and its decisive role in land use management and regulation. The new law takes back the authorization of land use master plans, arable land conversion, and the total volume control of land supply to provincial and higher level governments.
Before the enactment of new Land Management Law and the establishment of the Ministry of Land and Resources in 1998, there were three key government departments directly involved in urban land administration: the National Land Administration
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TABLE 1 Rural Land Expropriation Fee in China.
Type of Land Item of Compensation1988 Land Management Law 1998 Land Management Law
Arable Land Compensation for Land3 to 6 times of the annual value of production which is calculated by the average production in the previous 3 years
Compensation for Young Crops and Improvements on the Site
Housing Displacement Allowance
Other Collectively-owned Rural Land
6 to 10 times of the annual value of production which is calculated by the average production in the previous 3 years
Decided by the provincial governments Decided by the provincial governments
2 to 3 times of the annual value of the production per Mu (667 square meters) for each person; it can be increased in special cases, but the sum of the allowance and compensation should not exceed 20 times of the annual value of production
Compensation fo LandDecided by the government at provincial level, referring to the compensation for arable land
Compensation for Young Crops and Improvements on the Site
Housing Displacement Allowance
4 to 6 times of the annual value of the production per Mu (667 square meters) for each person; it can be increased in special cases, but the sum of the allowance and compensation should not exceed 30 times of the annual value of production
Decided by the government at provincial level, referring to the compensation for arable land
Decided by the government at provincial level Decided by the government at provincial level
2 to 3 times of the annual value of the production per Mu (667 square meters) for each person; it can be increased in special cases, but the sum of the allowance and compensation should not exceed 20 times of the annual value of production
Decided by the government at provincial level, referring to the compensation for arable land;it can be increased in special cases, but the sum of the allowance and compensation should not exceed 30 times of the annual value of production
(based on 1988 Land Management Law and 1998 Land Management Law.)
Bureau, the Ministry of Construction, and the National Surveying and Mapping Bureau. They all had branches from provincial to town level governments: the Land Administration Bureau, the Urban and Town Commission of Construction, and the Surveying and Mapping Bureau.
The institutional reorganization in 1998 arranged by the State Council integrated the National Land Administration Bureau and the National Surveying and Mapping Bureau into the newly established Ministry of Land and Resources. The Ministry of Construction has managed to grasp more power in urban land management. The situation is particularly apparent at the local level, administrative conflicts are found between the Urban Planning Bureau and the Urban Housing and Property Administration Bureau, both of which are subordinates of the Urban and Town Commission of Construction and the Urban Surveying Authority. There are overlapping administrative areas between the Ministry of Land and Resources and the Ministry of Construction.
To respond to such conflicts, central government tried to define the respective functions for those departments more clearly. The Bureau of Land and Resources is authorized to administrate both urban and rural land, to be responsible for land ownership and rights management, land lot registration, land use plan making and land resource conservation, and also to be responsible for land use rights conveyance in cooperation with other relevant departments such as the Urban Planning Bureau and the Urban Housing and Property Administration Bureau (Xie et al, 2002). The establishment of the Ministry of Land and Resources and its branches below the state level is clearly an attempt to minimize the conflicts. Besides those administrative units, the National Development and Reform Commission and its branches at the provincial and local levels have indirect influences on land use through the comprehensive economic development plan and the national productivity distribution plan (table 2).
In addition to the enforcement and coordination conflicts, the hierarchical structure of the land use planning approval process has created tensions and incoherence (Cartier, 2001). Land use plan making does not have a hierarchical structure to mirror that of the administrative levels. In some cases, lower level governments make their land use plans well before the higher administrative level plan has completed, which often leads to the disapproval of the plans made by the lower levels. The hierarchical system does not facilitate the effective and efficient implementation and monitoring of the plans. When land use conversions occur, the existence of many government departments, agencies, and state-affiliated companies (i.e., SOEs) at each administrative level, all with vested
TABLE 2 Functions of Urban Land Use Management in Different Central Government Sectors.
Ministry/CommissionsDepartment in ChargeFunctions in Urban Planning
Ministry of ConstructionDepartment of Urban and Rural Planning
To frame the drafting methods of urban planning, and town and village planning;To supervise and approve town system plans of provinces,autonomous regions, and some large cities; To supervise and approve plans of important national parks.
Ministry of Land and ResourcesDepartment of PlanningTo draft the national land use plan; To frame the drafting methods of land use master plans and other thematic land use plans; To supervise and approve land use master plans and other thematic plans for provinces, autonomous regions, and some large cities
National Development and Reform Commission Department of Development Planning, Department of Regional Economy
To draft long-term, and yearly national economic and social development plans; To decide on key national projects; To draft plans of national productivity distribution.
(Source: Han and Nishimura, 2006)
interests in land, has made it unclear who should actually act as the bona fide land owner.
Rural land expropriation by the state is conducted without any market-based compensation. For administrative allocation, the compensation is usually paid by the urban land user to the rural collective, and bargaining is often the key processes between urban land users and rural collectives. The compensation for land expropriated for public leasing is different. In this case, local government pays compensation directly to rural collectives, and then leases the land to the potential user. However, the compensation fee is usually far below the market value of land. It is not possible for rural collectives to obtain compensation based on market value under the current land legislation (Xie et
al, 2002). Besides expropriated land from rural collectives, existing urban land is also available for public land leasing. In the latter case, the local government takes back the land from the existing user with a compensation and puts the parcel of land to the land market. Here the compensation only reflects the value of the properties on the land and relocation costs rather than the full market value of the land. In some cases, the compensation can be higher as an incentive to achieve the goals of quick relocation to facilitate urban renewal.
In the public land lease market, which includes negotiation, tender and auction for land transactions, the payment for leasing land usually consists of four major financial components: the land premium, the urban infrastructure fee, the community infrastructure fee, and various kinds of fees collected by the municipality that vary from one to another. Each city has a standard guideline that classifies land ranks and stipulates land prices for different physical parts of the city, these benchmark prices are produced to serve as a reference for the minimum premium rate in land leasing. However, since land benchmark prices are set every five years or longer, contrasting with the fast pace of urban development, most cities rely on updated land appraisals to adjust leasing prices to more accurate land values.
In practice, many land leasing prices are determined by negotiation between local governments and land users with limited reference to the price guidelines. Land leasing revenues are shared by different levels of governments. Although the central government tried to share a certain percentage of the revenues with the localities (for instance, in the early 1990s it was 30 percent), this was very difficult to realize as local governments understandably hided their revenues through different approaches and made various excuses in order to retain more revenue at the local level. The 1998 Land Management Law terminated the debate, resolving the struggle for land revenue sharing by stating that the central government would no longer require a certain portion of land leasing revenue from the localities. However, a thirty percent share of the land use fee is imposed on newly acquired arable land for construction purposes, all of which would be invested in arable land reclamation. According to the Provisional Regulations on China’s Urban Public Land Leasing and Transfers (1990) and the Urban Real Estate Law (1995), there is also a secondary land market where prospective users obtain land from other existing users instead of the state, through land transfer, sublease and mortgage. Upon the completion of more than twenty five percent of the proposed investment, land users are allowed to dispose their land in the secondary market as long as the transactions are registered with the local land authority. The transaction price is normally negotiated
and determined by the parties involved with limited government financial intervention. Land tax was calculated on the basis of the actual size of the occupied land. Land used by government agencies, charities, military services, and others specified by the Department of Finance is exempted from taxation. This annually collected tax is rated based on the status of the city1. This land taxation seems more like a charge of land use fee rather than a tax since the increased value associated with the land is not taxed and the system is independent from the type of development or land use on the site2. Land tax only reflects land ownership but does not indicate land value since it is size-based. The size-based taxation has its drawbacks in practice. Area-based land tax could be tremendously higher than that based on value or rent because it is neither a tax on capital value nor a tax on site or rental values. Because the tax distribution approach determines that the majority of the tax income goes to the central government which leaves only a small part of it with the localities, it creates a catch-22 situation for the state, by encouraging localities to collect land tax and to avoid state tax loss.
The capital of Zhejiang province, Hangzhou, lies 180 kilometres southwest of Shanghai. With a total area of 16,596 square kilometres (Hangzhou Statistical Bureau, 2002), it forms part of the Yangtze River Delta (YRD) region (Figure 1). In 1984, the State Council permitted Hangzhou to open up to foreign investment, and the city soon initiated incentives for foreign investment. By late 1990s, Hangzhou had been transformed from a socialist town to a transitional city experiencing rapid economic growth, a booming service sector, a massive inflow of migrants, rising foreign investment, and expanding trade (Wei and Li, 2002). In 2001 Hangzhou’s GDP reached $18.9 billion, a 12.2 per cent increase from the previous year. GDP per capita was 25,000 RMB, or the equivalent of more than $3,000. The population of the Hangzhou Municipality was 6.29 million, of which approximately 3.79 million was in the administratively defined urban core (Hangzhou Statistical Bureau, 2002).
Hangzhou’s geographic orientation in the YRD region places it in the shadow of Shanghai when competing for intellectuals, talents, and capital resources. There is obviously a risk of losing valuable resources to Shanghai, however the situation can be viewed from two angles. Since the late 1990s, with Shanghai’s rise as China’s emerging global city, Hangzhou has been pushing hard for globalization and growth, due to its concerns over possible marginalization by Shanghai. This competition has pushed Hangzhou to be innovative and creative in policy-making. The natural environment along with the living quality is a counterbalance for the possible high financial compensation one can obtain
in Shanghai. To the city of Hangzhou, Shanghai’s recourses are easily accessible with one and a half hour’s drive. and a half hour’s drive. Because Shanghai has officially been identified as the leading city of the YRD region, and even of the whole country by the central government since the 1990s, the city is always willing to cooperate with Hangzhou in one way or another to enhance regional competitiveness.
The 1979 Sino-Foreign Joint Venture Enterprises Law introduced for the first time in China the concept of a land use fee. The Hangzhou Municipality followed Shenzhen’s model and immediately adapted its successful policy, charging a land use fee to foreign and joint ventures in the early 1980s. The fee was categorized into four different rates according to different functions (Y. C. Zhu, 2002): for business, financial, tourist, and service uses, the rate was $1.2-$3.6 per square meter per year; for entertainment, office, and residential uses, the rate was $0.6-$2.4 per square meter per year; for indus-
trial/warehouse, transportation uses, the rate was $0.5-$1.9 per square meter per year; and for cultural, educational, and public health uses, the rate was $0.2-$1.2 per squareand for cultural, educational, and public health uses, the rate was $0.2-$1.2 per square meter per year. The nominal charge of the fee indicated the acceptance of the land value concept, but demonstrated the cautious implementation of the reform at the municipal level. During the early days of the reform, it was obviously premature to apply such regulation to other economic entities as the majority of the economic entities in the city were still state owned and responsible for public welfare and private sectors, with most being not financially competent.
The Hangzhou Municipality established the Land Administration Bureau in 1988. Like its corresponding organization at the central level, most staff in the newly established administration were from the existing municipal agriculture and surveying bureaus. The Bureau was very active in exploring the implementation of the land use fee to other economic entities though the lack of expertise made investigation, research, and drafting of fee collecting standards, approaches, and boundaries a pains-taking experience. The efforts were terminated by the issuance of the Provisional Regulation of Urban and Town Land Use Tax by the State Council in the same year. In 1989 Hangzhou levied a land use tax.
The theoretical debate and practical experiment of land contract leasing (by negotiation) and land tender leasing in Shenzhen achieved great success in 1987. The new approaches to land commoditization widely spread to other cities in the nation.
Hangzhou’s first land leasing transaction was a 2,200 square meter land parcel in the city core obtained by a Zhejiang provincial trading company for a 50-year use right at the cost of $819 thousand (Y. C. Zhu, 2002).
Hangzhou’s effort in initiating the urban land market and its ambition in exploring land lease alternatives were well recognized by the State Land Administration Bureau. In 1991, Hangzhou was appointed as one of the five “contacting” (pilot) cities of the National Urban and Town State Owned Land Use Reform and the pilot city for the Urban Land Benchmark Pricing System. In order to legalize and regulate urban land lease and transfer, the Municipality issued the Provisional Measures of State Owned Land Use Rights Leasing and Transfer in the early 1989, one of the earliest measures of its kind in the nation. The measures put an end to free, unlimited, and non-transferable urban land use in Hangzhou. The city experienced a phenomenal increase in land transac-
tions in the 1990s. From 1995 to 1998, Hangzhou Municipality leased a total of 614.8 hectares of land, among which 261.1 hectares was for residential use (42.5 percent of all leased land); 155.7 hectares was for industrial use (25.3 percent); and 198.0 hectares was for commercial and mixed use (32.2 percent) (table 3).
TABLE 3 Land Conveyances from 1995 to 1998 (Unit: Ha.).
YearLand Supply ResidentialIndustrialCommercial/ Mix-use AmountRatioAmountRatioAmountRatio
1995188.334.518.423.612.5130.269.1 199656.238.869.07.513.49.917.6 199797.240.842.021.221.835.236.2 1998273.2146.953.9103.437.922.88.4 Total614.8261.142.5155.725.3198.032.2
(Source: Hangzhou Municipal Land Reserve Center, 2000)
Economic development required greater land supply. A hidden land market spontaneously emerged in Hangzhou around the late 1980s. This market primarily comprised of land transfers, joint management or construction with land invested as capital, land-goods trade, housing trade with land attached as transaction item, land leases and leasing transfers (Zhu et al., 2001; Y. C. Zhu, 2002). The phenomenon revealed that the market had already existed in urban land allocation and distribution process. However, an open and legal land market had not been structured until the issuances of the Land Management Law (1988), the Provisional Regulations of Urban and Town State-Owned Land Use Rights Leasing and Transfer (1990), and the Real Estate Management Law (1995).
Hangzhou has made efforts in fostering the urban land market including a series of local regulations and measures for land market structure. The Municipality in 1997 issued the Implementation Measures of Hangzhou Urban Land Reserve. Since then, the land reserve model has become a favourable approach for urban land conveyance from the local authority and a channel for urban land supply in the city3. The establishment of an urban land purchase and reserve mechanism has greatly facilitated efficient land resource allocation through the government purchasing the unused land and then releasing it to the market. The mechanism, in the meantime, contributes to economic restructuring and enterprise reforms, assures the state-owned land capital value, regulates land transaction behaviors, and consolidates land management.
Land reform has also been used to facilitate local enterprise reforms in Hangzhou. The Municipality stipulated that when enterprises (in most cases SOEs) are restructured into joint-stock ones, the land that an enterprise had previously obtained through administrative allocation, can be transferred or rented to the joint-stock enterprise, or invested as capital in the form of state stock in the newly established enterprise, contingent on appraisal from the licensed local property assessment agency and approval from the Municipal Land Administration Bureau and the stateowned assets management department. To ensure the land is transferred, the newly approved joint-stock enterprise needs to complete the land use rights conveyancing procedure by paying land rent at the rate of 40-60 percent of the evaluated land value upfront or by instalments within five years as the land was previously obtained through administrative allocation. Until the user has paid off the rent, the land cannot be further used for transfer, rent, and mortgage. Another option for joint-stock enterprise is land tenancy for which the enterprise enters a contract with the land administration authority to obtain land tenancy for a certain period of time by paying an annual fee. The urban land reform frees up the capital from the formerly hidden financial capability of the SOEs, and consequently helps the SOE reform from inside out. The joint ventures of SOE and other non-state sectors revitalize the SOEs while capitalising on the vibrancy of non-state entities. Furthermore, the ongoing SOE reform means that the state sector is shrinking while non-state sector employment is growing—the state sector would no longer be housing provider, which has significant implications on land development.
In 1990 the Hangzhou Municipal Land Administration Bureau started to investigate the hidden urban land market that spontaneously emerged in the late 1980s, intending to structure a legal channel for urban land use rights transactions. The survey of the hidden land market4 aimed to make clear the formation, types, and development of this market, and more importantly, the land capital lost through this market. A series of measures and proposals were then produced to give the Municipality’s decisions on handling hidden land transactions. One key article of evidence from the investigation was the original (illicit) contract for land transactions. The 328 investigated cases of illicit land transactions covered a total area of 128,767 square meters with a total annual rent of $1 million, and a resultant annual rent rate of $7.7 per square meter (Y. C. Zhu, 2002). The survey revealed a considerably active illicit land market which had experienced a trend of exponential increase. The Municipality decided to encourage and facilitate rational land transactions and distribute land revenue among government, enterprises, and individuals. Aiming to draft an effective local regulation on land
transaction, the Municipal Land Administration Bureau filed a document based on the land leasing and transfer survey conducted in 1990. The Bureau Director, along with the Director of the Municipal Legislation Bureau, went to Beijing to seek advice from the National Land Administration Bureau and the State Legislation Bureau. The professors in the land management program in Renmin (People) University in Beijing were also invited to Hangzhou to grade urban land into several categories and set up a basic leasing price for each of the categories. Efforts made to explore the regulations for legal land transaction gained strong support from the central government, and in 1991 the city was selected as one of the five ‘contacting’ cities for state-owned land reforms. The Provisional Management Measures of Administratively Allocated Land Use Rights Transfer and Leasing took effect in the same year. This regulatory document marked a shift from previously dominant land administrative allocation to land leasing and transfer, and the establishment of a legal local land market (table 4). In particular, both transfer and rent
Type1992199319941995199619971998
TransferParcel Number 3135111154 Area 4.430.231.890.7156201.5610.16 Transfer Capital 7.248.2328.9715.7N/A1050.73995.2
RentParcel Number 1052789501007223610433202 Area 53.51412.8371.9121.2942.94 Land Rent 120.5180.7640.4515.712609.69174.51285.3
MortgageParcel Number 535125896 Area 8.9563.398.19103.09188.45 Management Fee 44.6N/A1.3N/AN/A
Foreign Capital Related Enterprise
Parcel Number 597762714554109 Area 8852.911.910.625.2 Land Use Fee 74.7542.2722.9968.7843.4634.1N/A
Usage ChangeParcel Number 2132 Area 1.91.87 Land Rent 309.2278.3 Enterprise Restructuring Parcel Number 3437 Area 38.515.6523.58 Conveyance Capital 4561.42179.43559
TABLE 4 Registered Land Transaction Statistical Report (Area Unit: Ha; Capital Unit: thousand USD) (Source: Y. C. Zhu, 2002: 307)
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transactions in Hangzhou’s land market experienced steadily increase in the 1990s, with a significant leap in the late 1990s in terms of both area and capital.
The Hangzhou Municipality established several organizations and units responsible for urban land transactions. One of the key organizations is the Hangzhou Municipal Property Market, an affiliated agency of the Hangzhou Municipal Bureau of Land and Resources. The Property Market is primarily overseeing the daily management of land use rights transfer, lease, use change, mortgage, and relevant land issues in enterprise restructuring. The purpose of this initiative was to provide a one-stop service for land management and transactions. The Land Market Section within the Municipal Bureau of Land and Resources was also introduced, and is in charge of the routine process of land lease through negotiation, tender, and auction.
The land reserve system formulated in 1997 is the latest initiative to efficiently use urban land. Two years later the Hangzhou Land Reserve Implementation Measures took effect and constituted the first government regulatory document of its kind in the nation. The land reserve mechanism has a three-level management hierarchy for policy making, administration, and implementation. The Municipal Land Purchase and Reserve Committee is an official government organization chaired by the deputy mayor and staffed with the leaders from the land related departments citywide. The Committee makes land purchase and reserve policies and coordinates these departments. Directly under the Committee is the Hangzhou Municipal Bureau of Land and Resources, responsible for administrative functions. The Municipal Land Reserve Centre, at the third level in the hierarchy, works with the supervision and monitoring from the Committee and the Land Administration Bureau. The Centre carries out the specific tasks of land purchase, reserve, and preparation for land leasing on behalf of the Municipality. A basic model for the implementation of the mechanism is from land purchases5 (of unused or not efficiently used land from the users) and reserves to preliminary land development (i.e., building and ancillary structure removal and land levelling off ), until the initial preparation for land lease (i.e., call for potential interested developers). The initiative activates the enterprise’s land capital that may otherwise be less valuable (e.g. idle land, and land not able to be developed by the user for various reasons), and helps to achieve land resource optimization. It also pushes forward land tender and auction approaches, facilitates the implementation of the urban master plan, and prevents state-owned land asset loss (Zhu et al, 2001; Xia, 2003) (figure 2).
In October 1998, the Municipal Land Reserve Centre released two parcels of land for public tender for the first time after the establishment of the Centre. More than twenty developers showed interest in the tender and later six of them were short-listed in the formal tender process. The final transaction price for both parcels was $1.2 million higher than the base price originally set for lease through negotiation, reaching as high as $9.45 million per hectare, on average. Land auction also debuted in January 1999 with the successful transactions for two parcels in the city centre (Y. C. Zhu, 2002). Until August 2002, the Hangzhou Municipal Land Reserve Centre accumulatively purchased and reserved 912.5 hectares land with a total cost of $0.89 billion, and also leased 497.9 hectares of land with a capital return sum of $0.83 billion (Xia, 2003).
The Land Reserve Centre plays a dual role. As a government affiliated agency, the Center works on behalf of the Municipality for issues such as land purchases, reserve plan making, and plan implementation based on urban land use planning. In addition as an enterprise the Center runs the reserve land management and raises capital depending on market demand and supply. The Hangzhou Land Reserve Centre was established in August 1997, and cost the Municipality $4.8 million. While land purchase and reserve needs a tremendous amount of capital input, the Hangzhou Land Reserve Centre currently has one-year term bank loans as its only financial resource. By June 2001, the Hangzhou Land Reserve Centre had an outstanding loan balance of $204.8 million, which translates into $28.9 thousand per day in interest (Xia, 2003). The singular financing approach and the large amount of debt placed the Land Reserve Centre at risk. To combat this problem, methods to attract capital from society such as land trusts and land bonds could be incorporated into the financing of the Land Reserve Centre. Since there has been no practice in either land trusts or land bonds ever before, Hangzhou
tried to obtain approval from the state as a pilot city. In 2001 the State Council in its Document No. 15 permitted local government to invest part of land revenue6 in land purchase and reserve and called for greater support from financial institutes.
Hangzhou’s desire for reform is genuine and its purpose is to increase land use efficiency and to accommodate the interests of newly emerging sectors (i.e. private, joint and foreign investors) without jeopardizing the socialist principle of public and collective ownership. The city is on the way towards a complete system of public land leasehold where the state principal’s rights over land are fully in force. The Chinese approach of firstly encouraging market activities and then gradually creating a market structure has proved more effective than formulating an overall package (Li, 1999; World Bank, 1993). However, it should be recognized that despite the move towards marketization, current transitional land mechanisms and institutions may not provide sufficient order and certainty for the emerging land market. The case of Hangzhou shows that a learning curve is being established allowing China to gradually enter the market system. The examination of the land reform in Hangzhou further illustrates that the development of the urban land market is possible within a socialist socio-political framework, provided that certain government guidelines and institutions are provided. However, the case also highlights the constraints from the ambiguous definitions of urban land property rights and rural collective land ownership, and therefore, the need for further reform and strengthening of urban land policy and management institutions, to keep pace with the complex and rapid process of change in Hangzhou.
Abuse of land expropriation rights and unreasonable land expropriation compensation are the primary problems of the current land expropriation system (Guo, 2001; Xie et al, 2002; Lin and Ho, 2005). Hangzhou is not an exception and its land reform has put little emphasis on these issues. The PRC Land Management Law clearly articulates that the rural collective is the owner of rural land. However, organizational types of rural collectives have not been specified in any code, and therefore the property rights of rural collectives are vague in practice. As the basic self-governing body in China’s rural areas, the village committee has well-established sections and functions. Not surprisingly, the management of rural collectively owned land and land expropriation compensation distribution are the responsibility of the village committee. Rural land owned by rural collective, as legally specified, in reality means that the land is owned by the village committees. Village committee cadres tend to decide on land expropriation compensation distribution and use themselves. The fairness of land expropriation compensation
distribution largely depends on village cadres’ moral character. In a sense, village administrators replace land property rights with administrative rights and are de facto collective landowners. Rural residents are not clear about their exact rights with collectively owned land and hence are unable to protect their land rights. Though rural residents are collective landowners, the land rights have not been clearly articulated in rural land readjustment and land conversion to construction use.
Rural collective property rights have been discriminated, failing to meet the land market principle of equal property rights, with land use rights conveyance and transfer applying only to state owned land. No regulation has been promulgated for rural land use rights transfer. The legal term that bans any rural land transaction needs to be reconsidered for amendment. A legal collectively owned land market, as an integral part of the whole land market, helps to protect rural land from abusive encroachment of urban land market. Land expropriation reforms could also be given a more coherent structure. Land expropriation should be strictly categorized into two: for public purpose and for other purposes7. Different compensation criteria should apply to these two categories. Current land compensation does not take potential land value and revenue into consideration. More importantly, the dual functions of rural land as both a rural residents’ production resource and social insurance have not been fully integrated into compensation. Land expropriation compensation reforms therefore should introduce a new valuation mechanism that considers not only the rural land value before land expropriation but also issues like land location, supply and demand, the local economic situation and even local government’s macro economic policies.
Local government’s land administrative rights and de facto land ownership means that they have the upper hand: municipal and town governments have been given power over local land use regulation and financial decisions. According to the current Chinese tax arrangement, the central and local governments share the urban land use tax and the arable land occupation tax. Municipalities often prefer not to charge land tax on local enterprises in order to keep revenue in localities. Local governments are reluctant to share the land leasing premium with the central government. The primary reason is that local investment in land development (for infrastructure improvement and extension projects), before the land can be marketable, justifies the local retention of all land leasing income (Zhang, 2002). Land use planning and public participation would be able to add certain restriction to municipalities’ rights on urban land use so that the state and the public interests could be reflected in urban land use. Since China’s economic reforms, a significant portion of the land has been used for profit making
purposes (instead of public interests). Nevertheless, this land still enjoys the status of administratively allocated land8. The dual track land system creates financial asymmetry between the two tracks, which might not be the original policy intention. Lowering the proportion of revenue to be submitted from an administratively allocated land transfer or lease would encourage the trade of administratively allocated land in the secondary urban land market and provide an open market for administratively allocated land transactions that previously existed in the hidden market.
Governments have financial budget limits for large-scale urban developments such as infrastructure construction, public facilities, and housing. Local governments may request real estate developers to take responsibility for some infrastructure and public facility constructions, through administrative means so that local authorities can retain part of land revenue that is required to be submitted to the central government. Local governments may also divide land revenue into several categories and name the portion that will be shared with the central government as a land conveyance premium and with other agencies, as land development fees and different types of relevant fees most of which will be retained by local authorities. Furthermore, a low land premium is used in exchange for a rapid land lease and development, as a visible achievement is appreciated by local government officials as it enhances their political assets towards promotion.
Other measures should be introduced to improve the urban land market such as: restricting administrative land supply to well-defined projects for public interest; promoting the use of tender and auction and at the same time restricting the use of negotiation9; restructuring the mechanism for land revenue distribution between central and local government; and exploring more market functions of the land reserve centre model.
Since the open door policy was adopted in the late 1970s, different aspects of economic activity have started to move toward a market system. In the urban land system, it was not until the late 1980s when the ideological problem of privatizing land titles and ownership could be pacified by way of leasehold land tenure reform, that the impact of the economic reform in the urban land system started to be felt. Since then, the Chinese government has attempted to rationalize the previously planned urban land use distribution system by way of economic reform measures.
This study examines the way in which economic reform has been carried out within the urban land mechanism under the ideology of ‘market-socialism’ in the city of Hangzhou. As part of China’s economic reform, urban land reform in Hangzhou, like that in other Chinese cities, has not occurred in an isolated way. Rather, it actively interacted with economic reforms in other fields such as State Owned Enterprises (SOEs) restructuring, urban infrastructure taxation, emergence of new economic entities such as foreign investors and joint-stock enterprises, and the changing urban management institutions.
In fact, Hangzhou’s urban land reforms have contributed to reforms in many other fields in a variety of ways.
As one of the spearhead Chinese cities in urban land reform, Hangzhou has been active in uncovering the emerging problems created by the gradual land reforms and in exploring possible solutions. The investigations of the hidden land market and corresponding regulations and measures afterwards lead to greatly increased urban land transactions within an open arena. The reform of administrative institutions also added market elements to urban land management in Hangzhou, such as the affiliation of the Municipal Property Market with the Municipal Bureau of Land and Resources, and the Land Market Section within the Bureau.
The highlight of the latest policy and institutional reforms has been the land purchase and reserve system, a model orchestrated by the Hangzhou municipality, and a market approach given legitimate government guidance. The practice of Hangzhou’s Municipal Land Reserve Centre illustrates that a monopolized supply mechanism of urban land is not necessarily a detriment to the development of a market system in the urban land economy. When urban land ownership is in the hands of the government, maximum land revenue can be captured while allowing the market mechanism to develop.
A better understanding of China’s urban land reforms needs to consider geographical and economical diversity of the country. Zhejiang Province (of which Hangzhou is the capital) has been well known for its better-developed private economy. There land use rights have been better circulated in the secondary market through transfer or lease than in other provinces. Similar provinces and cities are Beijing, Shanghai, Jiangsu, Fujian, and Shandong. While in the economically backward provinces such as Jiangxi and Guangxi where financial capital is in short supply, land use rights are used for transfer, lease, and as collateral to obtain bank loans (Lin and Ho, 2005).
Urban land management in China has not been a uniform and coherent national effort;
rather, it has been a combination of central and local governments. The state’s intention to increase land use efficiency has been compromised by the Chinese socialist state where the forces and interests of different levels of the state are contested, negotiated, and mediated (Lin and Ho, 2005). Urban land use is a local issue with most of the authority and responsibility for urban land use planning and control delegated to local government, while the central government keeps the power to adjust them at any time to secure the national interests (e.g. economic development, industrialization, SOE reforms, and cultivated land conservation). Under China’s centralized legislation system, this may include the redistribution of the power and responsibility between the central, provincial and local governments, the issuance of national administrative ordinances and measures, and institution restructuring. Nevertheless, the rules and institutions have been contested, challenged, and circumvented by local governments, as well as land developers and users who are protected by localism.
There have been difference between the interests of the central and local governments, and the central government has been trying to exercise power and instruments to have more control over the resources and direct impact on the local governments’ land management practice. However, the economic interests in land conveyance and transfer have offset the local governments’ strategies from the track towards central government’s objectives. The original purpose of land reform was to encourage land use efficiency through economic incentives. The intention has been constrained by local governments’ need for revenue generation. With land sales income as an important part of local revenue, local governments at various administrative levels have every motive to engage in land development either legally or illegally because the potential financial gains are substantial (see other cases for example, Guo, 2001; Wong and Zhao, 1999). Furthermore, a government-led model with little civil society and public participation is still one of the most important characters in China’s land management practice. This can be most clearly seen in rural land expropriation practices. More social and environmental considerations need to be integrated into land management, and this would be more likely to be achieved through active involvement of non government organizations and societies.
1 For instance, the rates are $0.06-$1.20 per M2 for large cities, $0.05-$0.96 per M2 for medium size cities, $0.04-$0.72 per M2 for small cities, and $0.02-$0.48 per M2 for township areas.
2 However, the Provisional Act of Land Value Increment Tax on State-Owned Land regulates that land users that transfer land use rights need to pay a land value increment tax if they gain a net profit exceeds 20 percent of total costs (i.e., land improvement costs, construction costs, management fees, transaction fees and taxes).
3 The practice of urban land reserve was mainly in the urban core at its incipient stage where the reserve centre purchases the land from the relocated industrial enterprises. It then spread to other land purchase with other reasons but still mainly in urban centre. In Hangzhou, land reserve practices have been usually not applicable to rural-urban land conveyance, or the land acquired through primary urban land markets. For instance, land in the Hangzhou High Technology Zone has not been leased through this model.
4 The survey covered contents such as (1) involved parties in land transfer and rent; (2) formats of transfer and rent; (3) land parcel locations; (4) area; (5) transaction dates and duration of the transferred use rights; (6) land usages before and after transaction; (7) revenues of transactions; and (8) final destination of revenues (Y. C. Zhu, 2002).
5 The targeted land for purchase, according to the Hangzhou Land Reserve Implementation Measures, is: (1) urban land without any user; (2) land per-expropriated (based on plan) by the Municipality; (3) land with its use rights terminated according to contract and ready for returning to the government; (4) idle state owned land; (5) land acquired through illegal approach and so confiscated by the government; (6) previously administratively allocated land that has been adjusted out due to enterprise restructuring, bankrupt, relocation; (7) land not able to be developed yet not qualified for transfer since use rights obtained; (8) land needed by the Municipality due to planning; and (9) land that requested by the user to be purchased by the Centre.
6 The annual land revenue is a significant amount. For instance, Hangzhou’s annual land revenue (mainly from land lease premium) increased from 72.3 million USD in 1997 to 481.9 million USD in 2001 (Xia, 2003).
7 A strict definition of public interests for land expropriation should be made. Land expropriation reforms need to phase out land expropriation for commercial, tourism, and housing development. For those projects that are not truly for public interest purposes, land purchase should gradually replace land expropriation--a legacy from planned economy so that land market value can be reflected in land compensation.
8 In the year of 2001, administrative allocation counted for 41.4% of the total urban land supply area. In 2003, of all the 286436.66 Ha. of new urban land supplied in China, 65258.16 Ha., or 22.8% were administratively allocated (Beijing Normal University, 2005; Wang, 2006).
9 In 2003, the total land conveyance area in China was 1868 square kilometers, among which 1349 square meters, or 72% of total land area conveyed through negotiation (Ministry of Land and Resources, 2004). While in 2002, 2001, and 2000, negotiation counted for an even higher ratio with 85% (Ministry of Land and Resource, 2004), 89% (Wang, 2005) and 95% (Liu, 2002) of the total land conveyance area respectively.
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The expansion of the globalized world and the use of strategic planning in developing countries has led to an interest in the planning processes and theories of the developing world. In response to this interest, research into processes dealing with the conformation of space such as Rodgers (2004) and Brown and Bornstein’s (2006) work on Managua has emerged. Yet indigenous planning practices fail to explain large aspects of the cities we see today. North American-style suburbs, Parisian-style boulevards, and Modernist housing projects are ubiquitous throughout the developing world. How did they get there? Rather than form a greater theory for the spread of urban models and planning practices, I hope to advance a dialog for understanding the introduction and adoption of Western planning theory throughout the developing world. As an opening contribution, the objective of this work is to provide an overview of the development of urban mega projects2 in Mexico, in general, and Mexico City, in particular.
In dealing with such an expansive topic, clarity is of the utmost. As noted by Lungo (2004), the development of urban mega projects occurs in association with case-specific scenarios envisioned by strategic planning (estrategica or operacional in Spanish). This incites questions concerning the adequacy of exporting the mentioned strategies as well as whether an urban mega project can truly articulate a city. This article will therefore deal with each of two institutional models and the period of change from one to the other in order to explore how such projects are publicly marketed and how the above mentioned questions are answered. While both models are initially explained within the introduction, it is in the subheadings that the models are subsequently fleshed out. In the case of the first model, these deal with the pioneers of Mexican planning and their distinct political periods. For the second model, the particular projects that dealt with the confrontation of a political dogma, and their political reality, are discussed. It should be noted that this body of work is still in its infancy and greater analysis and theoretical detail will eventually spring from it.
This article seeks to show that the adoption of foreign urban models and the subsequent development of urban mega projects are entwined into a single process that has substantially changed in the last 25 years due to the changing relations between the urban planning professional, politicians, and businessmen. While these changes have in large part led to institutional innovation, the result has not always been positive or even desirable but instead merely a reaction to the times. This is not to say that these processes are set, since at least two variations exist for each, and it is crucial to understand
SOBERÓNthe evolution from one to another. It would, however, be erroneous to state that a clear differentiation exists between the gestation process of urban projects today and those of yesterday. By focusing on a description of the circumstances under which several historical Mexican urban mega projects were developed as well as the use of biography as an analytical tool, I hope to advance the following institutional models as the basis for the introduction and adoption of foreign urban theory and practices:
1 ALLIANCE (1890S-1982) MODEL
2 BUSINESS (1982-TODAY) MODEL
In accordance, these institutional models denote a strong shift in the preeminence of the urban planning professional in favor of the businessman as a result of the changing relationship between them and their individual relationship to key politicians. This shift handicaps the urban planning professional by both slowing him down and also by reducing his power base in coming up with urban mega projects. In effect, he no longer holds a monopoly on knowledge unique to experts in urban design. It simultaneously increases the demands of the businessman over the politician as a result of his monetary resources replacing political will and mobilization as the key resource in the development of Mexican urban mega projects. These shifts are set against a backdrop of stagnating economic development that continues to serve as the primary motivation for the creation and implementation of all Mexican urban mega projects. Consequently the goals of each player and the logic to which he responds has in effect changed little, allowing the empowerment of that player best able to take advantage of externalities to the planning process.
As a brief explanation of this shift, the Alliance model was led by foreign-trained professionals who upon returning to Mexico dedicated themselves to promoting grand projects, like those they had experienced in Europe or North America, to the local authorities. This movement reached its peak in the 1940s when the planning professional started to double as a public official or as a privileged advisor to government institutions. From this perch, an alliance between politicians and a small circle of contractors dedicated to the construction of public works formed quite effectively. In recent years due to the rollback in the scale of state intervention, the private sector’s role has grown in importance. Business moguls capable of molding government policy on urban development to their own interests have emerged as a power base. This situation is not exclusive to Mexico; other cities around the world have also seen a shift from a more or less centralized planning system to one of government institutions and private initiative working side-by-side to develop the grand urban projects that have come to define urban planning over the last thirty years.
Putting the aforementioned changes aside, both state and private promoters have historically come to view Mexico’s mega projects as the political materialization of the country’s efforts to modernize and develop. From this derives the importance of following the latest international trends in planning and urban design by a society whose elites have always admired other cultures from afar. Still, one can readily acknowledge the absence of a long-term city plan (or strategy) founded upon a coherent theory and public involvement. In its place, a succession of isolated projects conceived as business ventures paid for by public funds or more recently by private investment have become the norm. In the case of Mexico City’s outgoing administration, there exists a series of contradictions between what their political rhetoric promises (in terms of their overall scheme for the city) and the current practice of urban development. At the same time, one cannot ignore the importance of the self-gestation process which continues to give rise to a considerable portion of all contemporary Mexican cities.
Beginning with an initial amassing of wealth and a desire for cities to showcase their citizens’ wealth in the 1890s, a heavy French influence drawing from Haussman’s treatment of Paris gave rise to the state’s position as a promoter of large-scale urban works3 . These projects promoted esthetics as the determining factor and were located exclusively in and for the use of ritzy neighborhoods4. In 1910, Porfirio Diaz launched an ambitious program of urban renewal to mark the centennial of Mexico’s independence. The objective of this program was to modernize the country’s capital through the con-
struction of huge public buildings characterized by a revivalist architecture which ran the gamut from neogothic to neoaztec following the trend of the ‘Ecole de Beaux Arts’. Around this date the number of residential neighborhoods built for the elite multiplied. These neighborhoods heavily contrasted with the older squalid constructions and the irregular conditions of areas occupied by the nascent industrial proletariat. This phenomenon would continue throughout the 20th century.
Inevitably, the main externality affecting this period is the Mexican Revolution. As Juan Brom (1998) argues, a nationalist political program that reached its zenith in the 1940s heavily combated the lack of a national identity (seen as a key factor in creating the political instability leading up to the Revolution). While the resulting switch in political system from a dictatorship to a one-party system did imply a move to an economic policy of import substitution, it did not change the personal prerogative of politicians to use pork barrel politics to develop urban mega projects. In this sense neoliberals understandably argue that the creation of strong national industries whose growth is based on the protection of nascent industry naturally favors the economic growth of a national elite and the long-term economic stagnation of the country5. This shift and resulting economic decline is evidenced within the historical context of the Alliance model and the planners who followed from it, as discussed below.
Miguel Angel de Quevedo studied civil engineering in France where he came under the influence of Jean Claude Nicolas Forestier. In 1903 he took charge of the Office of Parks of the City of Mexico where he conceived a series of projects founded on the principles of hygiene and social welfare attributed to city parks. Quevedo equally admired F.L. Olmsted’s designs for residential suburbs in Chicago and Boston. In comparison, José Luis Cuevas Pietrasanta, was a multifaceted architect interested in the initial ideas of Ebenezer Howard and the Garden City as a design solution. By the 1920s, he was well known as a designer of upscale neighborhoods such as Lomas de Chapultepec and Hipodromo Condesa on the edge of Mexico City. Both projects were significant as the former became the fashionable place to live for the city’s affluent class while the latter lent its open space and road design criteria to the first construction safety manual the city enacted as law. As an academic, Cuevas went on to organize the first course on urban planning at the San Carlos Academy (1926-1929). During this period European training was essential in gravitating to the parlors of the elite from where ad hoc urban
developments for the wealthy sprang. Equally the power of these men was limited to the power of the caudillo (warlord) of the day limiting the spread of planning theory outside Mexico City and its surroundings.
Starting in 1921, the end of Mexico’s political instability, a new state structure began to come together. Suddenly development and progress became the apex of all political rhetoric, which favored the adoption and diffusion of the principals of regional planning through state institutions. The new rhetoric pushing for the creation of strong federal institutions with both a national and local presence6 follows on from the grievances of centralization and the lack of government presence in much of the country that marked the pre-revolutionary age. As such regional planning, a logical consequence, became embedded within each federal institution in opposition to the ad hoc nature of urban projects that had come before. A small group of American university graduates, of whom the architect Carlos Contreras of Columbia University was the most distinguished, took advantage of the country’s institutionalization in order to dominate Mexican urban planning. From 1925 onwards, he directed a campaign to divulge the social and economic advantages of both urban and regional planning to politicians, business leaders, and a new generation of Mexican professionals.
As an official representative of Mexico at diverse congresses of the American Planning Association, Contreras became the principal promoter of American planning practices which conferred upon the car an almost primordial role. Through his efforts zoning, as well as other American concoctions such as the greenbelt, the suburb, and the expressway found a home in Mexican planners’ lexicon. In 1932 he submitted Mexico City’s first urban ordinance plan which he quickly followed with a national urban development plan. The peak of his career came under the government of Lázaro Cárdenas, an emblematic figure of Mexico’s left wing, whose presidency characterized a new nationalist spirit that heavily opposed the European influences as a comment on Diaz’s regime. In 1938, with Cárdenas behind him, Contreras held the 16th Congress on Planning and Housing in Mexico City. Arguably it is under Cardenas that the greatest level of institutional development and investment occurred. Yet, the political class was incapable of recognizing the need for urban development planning at a time when the demographic growth in the country began to boom. In the end, confronted with the vested interests of local political power brokers, these men’s visionary proposals were reduced to mere good intentions. Still, given the nature of heady days, who has time to plan when growth is considered the sole good7?
SOBERÓNCarlos Contreras’ project came to life in 1947 with his proposal for the development of several river basins in a similar manner as had been accomplished with the Tennessee River. It may come as a surprise that the institutionalization of urban and regional planning in Mexico did not come about until the 1970s, when the combined forces of the urban problems had surpassed the public administration’s ability to gestate solutions. To be precise, the Human Settlement Law passed in 1976 simultaneously led to the creation of the federal department of the same name. This was in many ways due to the protagonist role played by Mexico’s then president during the Vancouver Reunion organized by the UN that same year.
Returning to Lázaro Cárdenas and the 1940s, one can see new influences in the form of political refugees arriving in Mexico in an effort to escape the totalitarianism of Spain and Germany. Among the political refugees, Hannes Meyer, dean of the Bauhaus from 1928 to 1930, stands out. Meyer found the opportunity to continue the pedagogic project he had initiated in Germany even if it had to incorporate the ideals behind the Mexican Revolution. Backed by the Mexican Union of Socialist Architects, Meyer proposed in 1939 to create a school of urban planning within the National Polytechnic Institute (IPN). Although the idea received support from the government, it soon found opposition in the shape of the right-wing architects’ guild who didn’t like having a communist among their fellows. The school’s closure two years later shows the continuing influence of the insider pressure group in comparison to the social outsider of the times.
Following Cárdenas’ presidency, the official state ideology rapidly shifted rightwards in order to closely coincide with the biggest financial backer of the government’s economic development policy, the United States of America. The emblematic figure of this period is Mario Pani (1911-1993). The son of a prestigious engineer and Mexican ambassador to France, Pani was able to hear Le Corbusier exhibit his ideas on social housing and rationalist planning while attending the École de Beaux Arts, so continuing the trend of foreign-trained experts of high social standing who eventually returned to prominent government posts. Returning in the 1940s, Pani quickly signed on to construct huge social projects (mainly schools and hospitals) whose architecture came to symbolize the modernity promised to the masses by the politicians of the day.
During the presidency of Miguel Alemán (1946-52), Mario Pani served as the official architect for the regime. In 1947, he built the nation’s first housing project for the Union of Social Security Workers (showing the influence of labor unions during the times). The
country was in a time of economic boom and public funds were plentiful. 1954 found Pani and his associates heading the Ciudad Universitaria (University City) project, considered among the best-realized examples of modern architecture in Mexico. Other relevant works include the construction of the Tlatelolco housing project and the plan for Ciudad Satélite (Satellite City, the paradigm of Mexican residential suburbs which tried to sell the American way of life). Pani is instrumental not in terms of understanding economic development but in terms of understanding Mexican thoughts on modernity and economic progress. The curators of style in many ways held on to their base of power for so long precisely because of this ability to sell ‘progress’. It is equally interesting to note the changes in the type of mega projects, which by this time were clearly geared towards corporate groups rather than city populations or economic progress as a whole.
All of the aforementioned projects have clearly shown signs of an alliance between the private and public sector. This is particularly true in the case of the construction firm Ingenieros Civiles Asociados (ICA) founded by Bernardo Quintana, an old school-mate of the then president and a colleague of Mario Pani. ICA would go on to win practically every major public work over the next few presidencies. Pani’s successor as the architect for the regime was Pedro Ramírez Vázquez, the designer of many emblematic buildings with a reference to contemporary Mexican culture. His work includes the National Anthropology Museum and the Basilica of the Virgin of Guadalupe. In a political role, he also served as the president of the 1968 Olympic Games Organizing Committee, for which many urban projects were built that grace Mexico City to this day. Of note is the construction of the first subway lines in Mexico City around this year by ICA. Although French firms served as consultants throughout the project, the specific conditions of Mexico City’s subsoil favored the development of new construction techniques and technology by local firms that would later employ this knowledge throughout Latin America. It is at this stage that the institutionalization of the planning process was complete. By strengthening the position of key economic and professional players, politicians ensured their own dominance of the planning process. This gave them the ability to grant privileges to the urban masses and handle huge amounts of public funds. It is similar to the relationship highlighted by Bardhan (1984) in India where the political strength favored industry and then eventually lost control as the interests of these industries outgrew the possibilities of the home market.
This era of mega projects brought about through an alliance of political and private entrepreneurial power saw a brief but memorable heyday under the regency8 of Carlos
Hank (1976-1982), who was able to take advantage of city politics and the newly generated petrodollars in order to undertake an ambitious urban project that integrated transport, road works, and basic infrastructure. Before taking office as regent of Mexico City, Carlos Hank was best known as an influential promoter of urban mega projects within his home state The best examples would be Cuatitlan Izcalli, a successful industrial city heavily inspired by the new towns built in Europe in the early 1970s. Having said this, the political regime was heavily marred by corruption and abuse of power scandals throughout its stay in power. Excesses were especially rampant given Hank’s role as an urban planning professional, businessman, and politician giving him full leeway for the development and repartition of public projects. This is notoriously seen through his nearly single-handed planning, construction, and populating of Nezahualcoyotl City9 . Unpopular throughout the city for the direct impact that his schemes had (in particular the expropriation of land for the creation of grid-like high-speed one-way streets—Ejes Viales), Hank was effectively the last of Mexico City’s true strongmen. In his final years in office, Hank became bogged down by both the 1982 banking crisis on one hand and the forced integration of citizen’s committees in the planning process, both of which limited his ability to operate as a politician.
Looking back, the Alliance Model relied on the ability of an urban professional to keep the channels of communication open with the political class. Politicians would then resort to propping up businessmen who later built the project and provided a cover for corruption. These projects were highly reflective of the existing political discourse and largely based on foreign theories. Eventually the politicians’ desire to control the process led them into assuming all three roles, thus endangering the role of the urban planner and straining their own relationship with the newly minted industrial elite.
The 1982 economic crisis marked the end of the interventionist state and the adoption of liberal economic principles quickly took hold. This was mainly through the efforts of the very controversial figure, Carlos Salinas (a Harvard economist) during his time as budget secretary and later as president (1988-1994). In that same year, the banking sector was nationalized which was looked upon by the private sector as a betrayal. Another factor came in the form of the 1985 Mexico City Earthquake which showed evidence of the government’s incapacity to deal with the needs resulting from the event, let alone the accumulated social needs of the populace. This new understanding
fortified the leftist-populist political opposition parties. During Salinas’ presidency, the territorial planning system put in place in 1976 was effectively dismantled, citing as the reason the system’s failure to alleviate regional inequalities and control urban growth. A new federal agency was put in charge of an ambitious program of public works (grouped together as the Programa Solidaridad or Solidarity Program) partially funded by the federal government and partially funded by the affected population (under technical supervision). This program went as far as to invoke the ancient practice of the work collective (still common in rural areas). This program constituted the body of the entire social policy under Salinas’ neoliberal regime. This economic conservatism, far from being original, strictly adhered to the criteria of the Inter-American Development Bank.
Even with this turn in economic policy, a series of major works developed under Salinas harked back to those of previous administrations. With the reduction in state building funds, came the beginnings of a move towards an outlook of such urban projects as business ventures. In the early 1990s, Mexico City’s government decided to transform what was then a municipal landfill into a world-class business district that would enable the city to reposition itself within the global urban hierarchy. The business district of Santa Fe has curiously come to symbolize this stage in urban projects, as well as to become the last example of a state-financed intervention. The project was conceived within Mexico City’s government by a former alumnus of an English university who based it on London’s Docklands redevelopment project. On a different scale lies the National Center for the Arts (1994), which comprises a collection of buildings designed by the leading Mexican architects of the time. In this manner, several projects show similarities with Mitterrand’s Paris. Consider, for instance, the National Library under construction which is located on top of the city’s old train station and was financed by the present federal government in an effort to compensate for a perceived lack of investment in culture.
In reality, while neoliberals decry the Mexican banking crisis of 1982 as a result of the protectionist economic policies of the previous 40 years10 , Susan George (1988) takes a different view, basically blaming the geopolitical interests in free trade, capital flight, corruption, and excess investment capacity for the crisis. By forcibly employing solutions of ‘free trade’, government thrift, economic specialization, etc., espoused by the International Monetary Fund, George states that the banking crisis only served to further changes to the Mexican planning process, thus killing the Alliance Institutional Model.
SOBERÓNDuring the government of Ernesto Zedillo (1994-2000), the last Partido Revolucionario Institucional (PRI) president before the arrival of Vicente Fox and the Partido Acción Nacional (PAN)11 party, no mega urban projects were conceived due to the dire economic crisis of 1994. Interestingly, 1997 marked the first occasion that the citizens of Mexico City (the Federal District or D.F.) were allowed to vote for a Mayor. This election was won by Cuauhtémoc Cárdenas, son of Lázaro and founding father of the leftist-leaning Party of the Democratic Revolution or PRD. On the national stage, the preceding few years were marred by the three main political parties bickering from their separate strongholds within the executive, legislature, and the media (effectively used by the Mayor of Mexico City). This had effectively blocked any decision from being taken at a metropolitan level. For instance, a projected new city airport never managed to be implemented due to the squabbling between the PRD-backed landowners, the PRI government of the State of Mexico12 , and the PAN national government13 .
This chain of events signaled the death of the previous model. The perceived betrayal by the state coupled with its inability to go it alone indicated to the private sector that the state had failed them as a partner, thus resulting in the end of the alliance. While Salinas and Fox tried to reestablish the previous agreement; the airport’s failure on political grounds proved once and for all that business moguls would have to do things themselves14. This can be seen as an extension to the privatization of key government industries under Salinas and Zedillo.
The best example of the federal government’s relinquishment of direction is the creation of new homes. Historically a nation of renters15, the last 12 years have seen a huge jump in the creation and acquisition of new homes by the Mexican lower middle class. Here we find a variation of the Business model. While the fledgling building industry was largely in the hands of former government cronies thanks to the large government contracts they initially received, the ability of these companies to churn out 10,000 peri-urban units throughout Mexico shows the ability of private interests to dictate urban expansion. Lately, the federal policy has focused on regulating these companies into SOFOLs (building societies) based upon the transference of funds from a national workers housing fund (INFONAVIT) to the SOFOLs in exchange for mortgaged homes for workers (underwritten by the federal government, of course). This particular scheme has quickly taken over resources previously heaped upon other programs favoring selfconstructed homes and government-built homes. While the caveat remains that this
program helps almost no one outside the salary group of 2.5 to 5 times minimum wage (95 to 190 pesos or about US$8.75-US$17.50 per day), the government’s intention to become nothing more than a facilitator in the creation of urban mega projects as well as social interest programs is quite clear. A live example of this is the program Alianza para la Vivienda, the Alliance for Housing, which is a forum for discussion between government agencies, banks, and developers, and has effectively replaced previous housing forums made up of government, business, and labor16 .
The 2001 Mexico City Mayoral election marked the second consecutive electoral victory for the (broadly speaking) leftist PRD (Democratic Revolutionary Party) and the coming to power of Andres Manuel Lopez Obrador. This is a man who for the preceding twenty years had been spouting corruption charges against rival parties, staged protests that captured the national headlines, widely published utopian visions of social justice, and in many ways engineered the rise of the PRD throughout the late 1990s. Finally he was given a chance to implement the changes or ‘cambios’ that had been promised for so long. Looking back on six years of what has been a very active government, in terms of large-scale urban projects, one wonders where all these projects came from?
2nd Floor of the Outer Ring Road: While this has by far been the most visible and controversial project undertaken by the city throughout this administration, it oddly enough managed to escape the attention of the media up to June 2001. Anonymous sources specify that the idea for this project originated in the late fifties when the ring road was first built. Developed by engineers within ICA (the contractor that built the ring road), the project shows strong similarities to the urban highways built in Los Angeles at the time. After the fall of the company, the engineers started to promote the 2nd floor to successive city governments through ‘informal’ channels until Lopez Obrador’s administration picked up on the idea and decided to follow through on it. Sources within SETRAVI (the city’s department of transport) admit that while the project predates the current administration, the idea is only ten years old and forms part of the Transport and Roadworks Master Plan (submitted to the city council at the start of the new administration).
Reforma Avenue: Public works dedicated to bettering the image of Mexico City’s most
famous avenue have had mixed reviews; for one, they have enticed some corporations to set up business along this street, yet others feel that the city missed a chance to make some money by charging these corporations for the betterment of the streets. While the ties between Lopez Obrador’s government and big business have been widely publicized and date back to his candidacy (La Jornada 6/1/00), the Mayor’s office discredits claims that corporations such as TELMEX had anything to do with the project and instead mention that the project originated within the administration.
Metrobus: Although transport projects of this kind exist in Curitiba and Bogotá, it is important to mention that those projects, far from being transport projects, were modes of raising and then skimming property values by the cities in which they were built. Being strictly a transport project, the Metrobus has more to do with similar projects in León and Puebla (both in Mexico) where a bus line runs all along a main road stopping only at predetermined locations and taking up the inside traffic lane. Sources at SETRAVI say that the direct precursor of this project can be found in similar schemes developed during the government of Hank Gonzalez in the 1970s. What makes this project truly meaningful is its strategy to incorporate the local corporative pressure groups that operate the peseros (old rickety 80-passenger buses) into the operations of this new mode of public transport. In this manner, the project maintains the tradition of old electoral strategies such as granting favors to the leaders of corporative groups in exchange for future votes. All of the Metrobus drivers came from the displaced pesero routes which were not disbanded, but instead altered to occupy an avenue running parallel to the one now reserved for the Metrobus.
This area has been the one most closely linked to Lopez Obrador as an individual, and to his party; something reflected in his campaign promises. In particular, his social policies included allowing a plebiscite every two years on his administration, empowering neighborhood comities, giving free public services to the handicapped and old age pensioners (70 years and above), and the creation of a new public city university and a public high school in each of the city’s boroughs or delegaciones (La Jornada 5/7/00). He based these proposals on the concept of universal rights (La Jornada 4/12/00) very much in line with his party’s political doctrine, such that, for example, the city controlled public high schools (La Jornada 4/1/00). Big business has also joined the fold, paying Rudolph Giuliani from the US to offer advice on the security situation within the city, to give an example.
Densification of the Urban Core (Bando 2) : Lopez Obrador and his closest advisors developed this project concept to such an extent that it was written into his administration’s charter or Bando. It was meant to allow for the creation of 50,000 homes (as specified in his campaign promises) with assured basic services and to stop the physical expansion of the city (which was harming the ecosystem). Yet, land price speculation resulted in the project becoming economically unviable. A consequence of this has been the flooding of the upper and middle tier of the housing market, within the urban core, by developers (who tend to have strong links with Lopez Obrador’s PRD party), with the exception of a few projects developed by the Instituto de Vivienda del D.F. (INVI), the city’s public housing arm). In comparison, most of the new low-cost housing developments have been located in the outlying counties of the metropolitan area.
Refurbishment of the Historic Center: The physical and social degradation of the heart of Mexico City has come to the attention of successive governments over the last forty years. This is due to recent governments’ official position on the Historic Center as the physical manifestation of the Mexican identity. Among the schemes to rehabilitate the area, the 1980 declaration of the Historic Center as a national landmark (under the protection of federal patrimony laws), its 1987 declaration as a World Heritage Site, and the creation of a standing committee for the Historic Center in 1990 stand out. The government has been charged with administrating all resources derived from a city program designed to transfer the building potential of the Historic Center to other outlying areas. Since then, the brunt of refurbishing efforts have been concentrated in that part of the Historic Center best connected to the business districts lying west of the area. This has resulted in the continuing deterioration of the low-class neighborhoods which make up most of this World Heritage Site as funds are continuously tied up elsewhere within the site.
Although this is not the first effort to refurbish the Historic Center, the main differences between earlier efforts and those under the successive PRD administrations has been the involvement of Big Business in the urban renewal (Reforma 14/1/01). To exemplify, consider a proposal by Carlos Slim, the world’s third richest man according to Forbes magazine , for a new luxury office district around the Alameda Central in Mexico City. His interest can be seen to lie in the fact that Mexico City, far from being an efficient city, has still managed to garner a position on the second tier of the world-wide capital distribution hierarchy, with influence over all of Latin America. Yet with competition
SOBERÓNcoming from Miami, São Paulo, and Buenos Aires, Mexico City needs an edge. This edge has been the city’s Historic Center, the largest of its kind anywhere in the world, as it offers the stakeholder an attraction that is unmatched by the competition and thus a major reason to invest in the city.
Slim is both a life-long Mexico City resident born and raised in the Historic Center and the head of a consortium with banking, building, and telecommunications interests throughout the Americas. With this background, he understands how the Historic Center works, how corporate investors think, and if anything, he has made a career out of knowing when something is being sold cheap. The Mayor’s need for both cash and connections has forced him to offer Slim a place at the helm of the Board overseeing the renewal of the Historic Center, an endeavor being paid for in part by the city. Slim has even been applauded for buying many of the buildings previously owned by the city at rock-bottom prices ! Through Grupo Carso (Slim’s real estate brand) he is focused on restoring the historic construction (with most prospects executed by his foreign-trained architect son-in-law) and rehabilitating them as luxury housing.
In comparing the Alliance Model with the Business Model, the latter has led to the start up of a greater number of projects and in less time than before. At the same time, we are seeing a greater divergence from any sort of government discourse on urban theory. Government officials have seemingly given up a great deal of self confidence in their abilities to conceive and plan projects, preferring to instead reconcile an idea for a project with the greater economic interests behind it. This has in a way legitimized the position of the businessman as the principal force behind urban mega projects, almost entirely leaving out the urban planner in his role as a visionary.
In my opinion, the present Business Institutional Model is a result of changes in the historical, political, and sociological structures within the country. These changes, which came about with the death of the old institutional structures, were both unavoidable and yet caught a large part of the populace unawares. Traditional pressure groups have been replaced by much stronger and (in many ways) more visionary elite business groups that have decided to tie their companies’ prestige to those of the city’s. Slim is the main example in this trend of homegrown urban promoters, popular heroes, and businessmen currently becoming prevalent in the main cities of Mexico, who seem to have copied the North American model of fashioning a real-estate business around a mega project. These economic city guardians have mostly grown as a result of the
economic and political structural changes that weakened the position of the political class over the last 25 years.
With the structural changes serving as the motive and opportunity behind the second model, the means of achieving it is another story. Recapping from the main text, the urban planning professional has lost his role as the continuing source of ideas for new urban projects due to the internationalization of Mexican politicians and businessmen. This has resulted in a haphazard but much quicker process of proposing projects, based less and less on urban theory and increasingly more on the perceived benefits of projects in other cities. Politicians take these proposals and sell them to the businessmen; this is due to the former’s lack of resources and perceived lack of power. The businessmen still require the politicians due to their control of government land, building permits, and to serve as public spokesmen for the projects. All in all, the businessman makes a tidy profit, the politician furthers his career, and the populace gets to live in an awe-inspiring age of rapid change.
These conditions are accepted by both, the right-wing Federal government and the left-wing Mexico City government. This acceptance of the political and economic externalities dictating the balance of power between different players involved in the planning process shows that the Business model now in effect is unlikely to change in the foreseeable future, especially not through the political dichotomy pervasive in Latin American politics. While it may appear that institutional innovations have been brought about exclusively by externalities affecting Mexico’s political reality, in terms of the original aims, the local need and understanding of urban mega projects has changed little since the time of the Mexican Revolution. Instead it is the context and process through which these projects emerge and the choice of emerging projects that has changed greatly. Changes in political and economic significance stemming from the development of mortgaged homes instead of public parks or planning for airports over irrigation schemes cannot be underestimated. It is in this change of values by which these mega projects are judged and instituted that the greatest change in the theory and planning process behind urban mega projects occurred. Obvious as it may seem, Mexico’s experience is that given preeminence, neither urban planning professionals, politicians, nor businessmen alone create urban mega projects for the general public good or in accordance to its reality. The solution might lie not in placing initial efforts on what project to build but on the institutional process by which to build it.
1 Based on the article ‘Continuidad y contradicciones en la transmisión de modelos para la práctica del urbanismo. El caso de la ciudad de México (2000-2006)’ by Jose Xilotl (zambini237@hotmail.com) and Hector Quiroz (uweq@yahoo.com) published in Quivera magazine Spring 2006.
2 “[government developed] large-scale physical facilities’’ as defined by Alan Altshuler and David Luberoff in The Changing Politics of Urban Mega-Projects in Land Lines Newsletter October 2003, Volume 15, Number 4
3 For example, the Cuahtemoc and Juarez neighborhoods around Paseo de la Reforma.
4 Leading to neighborhood and racial segregation similar to that found in 19th century India (see Drakakis-Smith’s Third World Cities)
5 Little, Ian, Industry and Trade in Some Developing Countries (1970)
6 Examples include IMSS (the public health service institute) and SEP (the institute for public education)
7 An early indicator of differences within a Brown agenda and a Green agenda of growth.
8 The Regent was the head of the Distrito Federal (Federal District) Department which answered directly to the President until 1997 when Mayoral elections took place for the first time. In practice, the Regent carried out the same functions that the Mayor does today.
9 Built entirely on a dried lake-bed, by law a federal government holding.
10 Most notably Miguel de la Madrid, President at the time, by firing Jesus Silva-Herzog, the Finance Minister of the day and then implementing Herzog’s plan. The Partido Revolucionario Institucional (Party of the Institutionalized Revolution or PRI) was founded by the surviving leaders of the Mexican Revolution (1910-1921) and managed to stay in power between 1928 and 2000. The longevity of its reign is due to the adaptability of its ideology towards new political and international economic events. In this manner it has come to uphold socialism, populism, and economic liberalism without skipping a beat.
11 The Partido Acción Nacional (Party for Nacional Action or PAN) originally was an umbrella group of conservatives who opposed the social reforms implemented by Lázaro Cárdenas. It would later transform itself into a party for middle-class shopkeepers critical of the rampant corruption within the government.
12 The state neighboring the Federal District.
13 See http://www.prodigyweb.net.mx/laboetie/cronoatenco.html for a full time-line of the project’s demise.
14 In this way the role of the state was reduced in practice to that of maintaining a healthy macroeconomic climate. Today, as seen with the reforms to the Energy policy, this has become a dogmatic condition as well.
15 Since the colonialist era and the hacienda system, in which the peasant was essentially a sharecropper.
16 For a fuller explanation see Ramírez, Víctor. Notas para la Periodización de la Política Habitacional del Estado Mexicano: 1917-2004 (Unpublished) or SEDESOL, Financiamiento para Vivienda en México. Ed. SEDESOL, México, 1999.
17 Secretaria de Transportes y Vialidad.
18 For an overview of the private sector’s response, see: Medina, Luis. “Crecimiento de Vivienda Residencial y Residencial Plus en la Ciudad de México” in Inmobiliare Magazine, Mexico, year 7, Number 37, September 2006, pp. 122-124.
19 As of March 3rd 2007, see “Slim’s Chance” by Helen Coster at www.forbes.com
20 In private conversation stemming from the author’s experience, it is common to hear the middle classes praising Slim’s efforts to make the area a ‘safe’ place to visit again whilst lower classes praise the way a non-politician is ‘sticking it to the man’. This guttural reaction is countered by the common theory that he’s Carlos Salinas’ errand boy.
Altshuler, Alan and Luberoff, David. The Changing Politics of Urban Mega-Projects in Land Lines Newsletter. Volume 15, Number 4. Lincoln Institute of Land Policy, October, 2003.
Balderas, Erick. “Los vecinos del piso dos” in Chilango, year 2, No. 19, May 2005, pp. 53-57.
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Brom, Juan. Esbozo de Historia de México. Mexico, Grijalbo Mondadori, 1998.
Brown and Bornstein, Lisa. Whither Managua? Evolution of a City’s Morphology. 42nd ISoCaRP Congress 2006.
Consuegra, Renato. “Arrasa con todo el metrobús” in Vertigo, México, year 1, 2005, pp. 34-37.
Garay, Graciela de. Mario Pani. Vida y obra. México, UNAM, 2004.
George, Susan. A Fate Worse Than Debt. New York, Grove Press, 1988.
Little, I.M.D. Industry and Trade in some Developing Countries. Oxford University Press. 1970.
Lungo, Mario. Grandes Proyectos Urbanos. El Salvador, Ed. UCA, 2004.
Peralta, Leonardo. “De Colombia para Insurgentes” in Chilango, México, year 2, No. 19, May 2005, pp. 47-49.
Quiroz, Hector and Xilotl, Jose. Continuidad y contradicciones en la transmisión de modelos para la práctica del urbanismo. El caso de la ciudad de México (2000-2006) in Quivera. Spring 2006.
Ramírez, Víctor. Notas para la Periodización de la Política Habitacional del Estado Mexicano: 1917-2004. Unpublished. 2004
Reyes, Gerardo. Los Dueños de América Latina. México, Ediciones B, 2003, pp. 7-37.
Rivadeneyra, Patricia. Hannes Meyer. Vida y obras. México, UNAM, 2004, 79 p.
Rodgers, D. Disembedding the city: crime, insecurity and spatial organization in Managua, Nicaragua in Environment & Urbanization 16:113-124. 2004.
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La Jornada, México, 2/1/00 –18/1/00, 5/7/00-19/7/00, 1/12/00-5/12/00 Reforma, México, 14/1/01-24/1/01
Information on Carlos Slim: Pardo Gaston. “El magnate Carlos Slim juega al demócrata. El dueño de Teléfonos de México se apodera del centro histórico de la capital” in http://www.redvoltaire.net/article645.html
Caballero, María Cristina in http://www.laprensagrafica.com/elfinanciero/elfinanciero22.asp
Coster, Helen. “Slim’s Chance” in http://www.forbes.com/free_forbes/2007/0326/134.html?boxes=custom http://www.revistapoder.com/NR/exeres/627FE7AD-DA54-4952-936E-80EB77F27BAE.htm http://www.telmex.com/explorer/esto/esto_prensa_comun_comu24_2004.html http://www.go2mexicocity.com/?page=articles/historic_center.php
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In recent years, two subjects have received increasing attention from both researchers and policy makers in the industrial and regional development arena: technological innovation, i.e., developing new or improved products or processes, and the interactive or network model of an innovation process, i.e., ties with other organizations such as suppliers, universities, or customers. Especially, it is argued that local ties play an important role in facilitating knowledge exchange among firms and local organizations, which in turn facilitate innovation. Consequently, the majority of regional studies tend to focus on finding data at the local level, neglecting the importance of non-local networks. While models of local networking have emerged in the policy agendas of developing countries, these models fail to identify potential benefits that peripheral regions could gather from non-local (inter-regional and international) linkages. This paper argues that empirical and policy research should take into account the mixed networks of local and non-local ties. Both types of ties play an important role in building innovative capability in developing economies. It would make more sense, analytically as well as politically, to distinguish between different types of networks and their role in building innovative capability in developing countries.
In recent years, two subjects have received increasing attention from both researchers and policy makers in the industrial and regional development arena: technological innovation, i.e., developing new or improved products or production processes; and the interactive or network model of an innovation process, i.e., knowledge exchange with suppliers, universities, customers and other organizations during the product or process development. Especially, local network ties are viewed to play an important role in facilitating knowledge exchange among firms and local organizations, which in turn facilitate innovation (Audretsch, 1998; Camagni, 1991; Storper, 1997). There is a large volume of empirical studies available that describes the innovation activities of firms, and confirms the links between innovation and networking in developed countries. This is not true for developing countries where the characteristics and scope of the innovation processes and networking behaviors are still largely unknown.
This paper reviews the current literature; investigates the relevance of currently used innovation and network concepts in the context of developing countries; and proposes a framework to study innovation and innovation networks in developing countries. It argues that empirical and policy research should take into account incremental innovation and the mixed networks of local and non-local ties. Both types of ties play an important role in building innovative capability in developing economies. While models of local networking have emerged in the policy agendas of developing countries (Altenburg and Meyer-Stamer, 1999; Bell and Pavitt, 1992; Cooper, 1991), these models fail to identify potential benefits that firms and regions could gather from non-local (i.e., interregional and international) linkages. This weakness may hinder an effective implementation of innovation policies in regions of developing countries (Ernst, 2002).
The paper is divided into six sections. After the introduction, the next two sections examine the interactive innovation process and the local geography of innovation. Section four discusses the changing view of the innovation in developing countries. Section five identifies the gaps in the literature and discusses the role of non-local networks in innovation and its relevancy to developing countries. The last section introduces the framework to study innovation and innovation networks in developing countries.
Technological innovation is today defined as the introduction of new or improved products or production processes, or the introduction of new organizational structures, that have direct or indirect economic impact (Schumpeter, 1934). Examples include a
new organizational structure that makes a firm more competitive in domestic or international markets, an improved production process that decreases the production costs of an existing product, or the introduction of a new product that creates a new branch of an industry. Economists have always recognized the importance of innovation in economic development1. However, it was Schumpeter who first defined innovation as used today and gave a central place to the role of innovation in his theory of economic development (Schumpeter, 1934). Schumpeter (1934) defined economic development as a qualitative change in the nature of production rather than quantitative changes in savings or investment patterns.
There have been two approaches to innovation process: linear and interactive models. In the 1950s and 1960s, linear models dominated the thinking about innovation. These models are called science-push and demand-pull. The science-push model assumed that innovation is a linear process and was thought of as a series of sequential steps leading directly from basic research, through to applied research, to development and commercialization2. This hierarchical approach emphasizing basic research became the principal model for innovation and science policies in the 1950s (Nelson, 1959). The demand-pull model, on the other hand, stressed the importance of the demand side and markets as the source of ideas for innovation (Schmookler, 1966). In this model, the emphasis shifts from researchers to users. Users define the problems and ask researchers to conduct research specific to these problems (Weiss, 1979). In both views, innovation was defined as new machinery. The implication of this view was reflected in ‘learning’ models. Technology mastery was achieved through ‘learning by doing’ (Arrow, 1962). Arrow (1962) argued that production costs decrease as productive experience increases. Learning was an automatic process.
By the mid 1980s and 1990s, the linear innovation model and learning type was questioned in the search of new ways of conceptualizing technological innovation. The linear model overemphasized research as the only source of innovation (Smith, 1994) and innovation policies were based on introducing internal, formal R&D-based products and processes. But these policies could not reach small and medium-sized enterprises (SMEs), which have relatively fewer financial and human resources compared to larger firms. However, SMEs were able to develop new products or processes and they kept up with larger firms in the field of innovation (Acs and Audretsch, 1988; B Noteboom, 1994; Rothwell, 1989). Research showed that linear conceptualization of the innovation process and R&D only represented a portion of the entire set of activities that firms had to take to innovate (Malecki and Oinas, 1999). Innovation did not have to be sequential
and did not have to start from basic research in academia (Nelson and Winter, 1982) and feedback and trials were essential (Kline and Rosenberg, 1986).
Based on these criticisms, the interactive innovation model was developed. Interactive innovation is a non-linear and independent process (Kline and Rosenberg, 1986). It may stem from many sources, both inside and outside of the firm. Innovation is created and sustained by knowledge inputs generated not only within the firm, i.e., the feedbacks across all stages of the production chain (Kline and Rosenberg, 1986), but also knowledge inputs from suppliers, universities , competitors, or customers (B.-A. Lundvall, 1992).
In the interactive innovation models, knowledge is increasingly regarded as the critical source and ”at the core of production and innovation activities” (Archibugi & Michie, 1995). Two forms of knowledge are emphasized in the literature: codified and tacit knowledge (Nonaka and Takeuchi, 1995; Nonako, Toyama, and Nagata, 2000). Codified knowledge refers to knowledge that can be organized and codified by its holder so that it can be easily saved and communicated. Codified knowledge is transmittable in a systematic way (Nonaka and Takeuchi, 1995). Examples of codified knowledge include software, databases, operating manuals, patents, best practices, and procedures. Some of this knowledge can be purchased in the market place. Tacit knowledge refers to intuitive, unarticulated, and implicit knowledge. In most of the innovation studies, tacit knowledge is identified as an important component of the knowledge used in innovation (Dosi et al., 1988; Howells, 2002; Kline and Rosenberg, 1986). Tacit knowledge is embedded in a person or in organizational routines (Johnson and Lundvall, 2001). It is difficult to transfer, communicate, and assimilate (Cohen and Levinthal, 1990) since it is personal and context specific-temporal, spatial and social (Lam, 1998). Sharing tacit knowledge between individuals requires social interaction, shared understanding and trust (Gertler, 2003; Lam, 1998; B. Lundvall and Johnson, 1994; Maskell and Malmberg, 1999b; Storper, 1999). Therefore, it entails co-presence and co-location between the transmitter and the receiver ( Noteboom, 1999). Therefore, local geography is important to our understanding of knowledge sharing in the innovation process.
Different local development models promoted the locality as the best level for the occurrence and diffusion of innovation. These models were labeled in a variety of ways in the literature: Industrial Districts (Brusco, 1982; Piore and Sabel, 1984; Pyke, Becattini, and Sengenberger, 1990), Innovative Milieu (Aydalot and Keeble, 1988; Camagni, 1991), New
Industrial Spaces (Saxenian, 1996; A J Scott, 1988), and Regional Innovation Systems (RIS) (Braczyk, Cooke, and Heidenreich, 1997; Kaufmann and Todtling, 2000; Morgan, 1997).
These local innovation models share common concepts that can be grouped under four headings. First is the emphasis on locality or endogenous development which emphasizes mobilization of the resources available locally. While differences in innovative capability among firms are in part attributable to their organizational capabilities (Cohen & Levinthal, 1990), it is in part attributable to properties of their local economies (Camagni, 1991; Maskell and Malmberg, 1999b; Porter, 1990; Storper, 1997). Local or endogenous resources include social, economic, technical, and political resources, such as regional entrepreneurship, human capital, existing industrial structure, R&D infrastructure, and the existence of professional associations. An essential characteristic of endogenous development is the broad involvement of local groups and individuals in the planning and policy process (Coffey and Polese, 1984; Friedmann and Weaver, 1979; Moulaert and Sekia, 2003). The success of high technology clusters, such as Silicon Valley, and places making traditional products, such as Emilia-Romagna in Italy, emphasizes the use of local resources for competitiveness.
Second, all models acknowledge externalities associated with the spatial clustering of firms or agglomeration economies. Two viewpoints exist regarding externalities. One is localization economies, which refer to the agglomeration economies of similar industries (Brusco, 1982). The second is urbanization economies, which reflect externalities associated with the presence of complementary firms and organizations in a variety of relevant industries and services (Harrison, et al., 1996; A. J. Scott, 1990). This is particularly relevant for some SMEs that undertake little R&D themselves, yet contribute considerable innovative activity in newly emerging industries such as biotech and computer software (Audretsch 1998). SMEs make use of universities, trade associations, and other knowledge-generating institutions. The knowledge spillover from the firm conducting R&D or the research lab of a university stimulates innovative capability in a region.
Third is the emphasis on networking. All territorial innovation models use network concepts as key characteristics. The industrial district literature stresses the role of personal relations, and networks of such relations in the innovation process. Similarly, innovative milieu theory argues that firms innovate through relationships with other agents of the same milieu. New Industrial Spaces argues for inter-firm transactions and a culture of networking and social interaction as the characteristics of new industrial spaces. Last,
Regional Innovation System (RIS) sees the innovation and learning process as an interactive process and the network as an organizational mode of interactive learning.
Fourth, all territorial innovation models emphasize that firms are embedded in local networks. These local networks constitute a valuable resource in the conduct of economic activity and for innovation activities. Tacit knowledge in firms and organizations comes into existence in local networks of firms and organizations (Storper, 1997). Local networks are dense (Storper, 1997) and contain a diverse set of organizations including firms, customers, suppliers, universities, financial organizations, research institutions and professional associations (Kaufmann and Todtling, 2000; Perrin, 1991). However, customers and suppliers are specifically emphasized. While a flow of incremental innovations is generated through localized interaction with customers (Von Hippel 1988), embodied technologies are imported into the firm through the exchanges with suppliers as knowledge spillovers (Audretsch, 1998).
These ties can be formal or informal, market or non-market (Torre & Gilly, 2000). Informal or personal relationships depend on trust, while formal relations are based on contractual agreements. The informality of interrelationships is viewed as being a potential strength rather than a weakness of local networks. Because of trust-based relationships, firms are willing to undertake risky co-operative and joint ventures and to act as a group (Gordon and McCann, 2000). The duration of networks is argued to be longer in local networks (Oerlemans, Meeus, and Boekema, 2000). It is argued that a long duration of a tie enhances mutual understanding and trust (Nooteboom & Gilsing, 2004). Tacit knowledge is best transferred via frequent face-to-face interaction and can best be managed in local proximity (Audretsch, 1998).
The basic assumption in the literature is that geographical distance affects the ability to receive and transfer knowledge. In general, innovation is assumed to be more dependent on local networks. This local networking pattern has been closely linked to the best examples, those which built their competitive advantage from localized learning. These include Silicon Valley and Emilia-Romagna in Italy. However, these examples are unique and non-transferable although policymakers try to do the same in developing countries.
During the 1950s and 1960s, there was little mention or interest in understanding innovation in developing countries, partly because innovation was assumed to be absent
in developing countries. This assumption was based on a notion of innovation at that time that was considered to be embodied in durable, capital goods, in other words, the development of new kinds of machinery (Solow, 1957). While the developed countries were the producers of new kinds of machinery, developing countries were the users of this machinery. Any problem about achieving technological change and economic growth for developing countries was largely seen as the acquisition and installation of new machinery which had already been developed elsewhere (innovation as technology diffusion). Therefore, the issue was viewed as generating level of savings (Domar, 1957) and capital accumulation (Solow, 1957) through international capital flows, that needed to acquire externally provided machinery. Local industry in developing countries was essentially seen as passive, involving only the adoption and routine operation of externally supplied technologies. Consequently, policy concerns about innovation tended to focus on the choice of appropriate technology, technology transfer, or financial and informational gaps that hindered the flows of capital embodied technology
This view changed in the 1980s, partly because the definition of innovation changed. Innovation was not seen specifically as “new machinery” anymore. Subsequent research has extended Schumpeter’s theory and addressed the scope and scale of innovation. The basic dichotomy of product and process innovation informed the empirical research agenda on the scope of innovation. While product innovations are usually associated with the creation of new markets or the quality enhancement of existing products, process innovations are typically introduced to reduce costs and/or increase the flexibility and performance of production processes (Edquist et al., 2001; Simonetti et al., 1995). Regarding the scale of innovation, radical (new) vs. incremental (improvement) innovation was also researched. According to several firm level empirical studies, both radical and incremental innovation proved to be important (Cohen and Levinthal, 1990; Nonaka and Takeuchi, 1995; Porter, 1990). Case studies in developing countries revealed that learning was not an automatic process. Learning was a conscious, systematic, and frequent effort made by the concerned actors (Bell and Pavitt, 1992; Cooper, 1991; L. Mytelka and Ernst, 1998; Westphal et al., 1984). While R&D existed only in small scale in developing countries, their innovative capabilities have been gained mainly through reverse engineering and shop-floor level incremental processes such as resolving production line bugs and suggesting product improvements (Amsden, 1989; Westphal et al., 1984). In addition, machinery suppliers and multinational corporations were not the only sources of technological change (Bell and Albu, 1999).
Dosi et.al (1988) defined incremental and new innovations as follows:
Incremental innovations occur more or less continuously in any industry or service activity although at differing rates in different industries and countries, depending on a combination of demand pressures, socio-cultural factors, technological opportunities and trajectories… Although their combined effect is extremely important in the growth of productivity, no single incremental innovation has dramatic effects, and they may sometimes pass unnoticed and unrecorded. However, their effects are apparent in the steady growth of productivity.
New innovations are discontinuous events and usually the result of a deliberate R&D activity in enterprises and/or university and government laboratories… Whenever they may occur, they are important as the potential springboard for the growth of new markets and for the surges of new investment associated with booms. They may often involve a combined product, process, and organizational innovation. Over a period of decades radical innovations… may have fairly dramatic effects… but in terms of their aggregate economic impact they are relatively small and localized unless …… radical innovations are linked together in the rise of new industries and services, such as in the synthetic materials industry or the semiconductor industry.
Innovation is now seen as one part of the capabilities of developing countries. Four main categories of capabilities were defined for developing countries (Dahlman et al., 1987; Kim, 1997; Lall, 1992; Mytelka and Ernst, 1998; Westphal et al., 1984):
1 Production capabilities include the day-to-day, shop floor activities such as monitoring production and output quality.
2 Investment capabilities relate to the knowledge and skills needed to establish or extend production facilities. These capabilities include feasibility analysis, evaluation, and selection of technology as well as setting up equipment.
3 Innovative capabilities imply the capability to adapt, change or create technologies in response to changing needs (Kim, 1997). The term covers a wide range of activities including incremental vs. radical and product vs. processes and organizational innovation.
Incremental innovation involves the ability to adapt and improve existing products or processes. Incremental innovation is argued to be key for developing countries (Forbes and Weild, 2000; Kim, 1997). These innovations add value, especially if they are continuous (Evenson 1995; Dahlman 1987; Tushman and Nelson 1990). Developing countries in Asia, in particular, succeeded in developing considerable innovative capability and export success via incremental innovations such as imitation, reverse engineering, and resolving production line bugs (Bell and Pavitt, 1992; Ernst, et al., 1998; Kim, 1997; Nelson, 1993). New or radical innovation involves the ability to create new products or production processes and to develop patentable ideas (Ernst et al., 1998). It could be new for a firm or the market it serves. Even if a firm introduces a technique that is already used by other firms, this still represents a new innovation for that firm.
4 Marketing capabilities refer to the ability to understand user needs; to keep track of changing market demand; to create new markets; to establish distribution channels; and to provide customer services.
Forbes and Weild (2000) examined basic similarities and differences in the nature of innovative activities between developing and developed countries. They reached the following conclusions. First, incremental innovation is key for both developed and developing countries. “As developed countries continue to improve the technology, keeping up requires incremental innovation, and catching up requires incremental innovation at a faster pace than in the developed countries. Incremental innovation is thus the primary source of long-run competitiveness in developing countries” (Forbes & Weild, 2000, p.1099). Second, radical or new innovation can be a new technological paradigm for developed countries, but for developing countries this could be new to a firm. Third, both product and process innovation are important for developing and developed countries. However, product and process innovations are different at different stages in industrial development. Wong (1999) suggests that firms in developing countries deliberately choose to focus on either the product or process side while some firms may focus on both simultaneously. Last, shop-floor innovations, occurring in the day-to-day operations, contribute significantly to the competitiveness of developing countries in cost-sensitive markets. However they are not captured by formal innovation indicators (Forbes and Weild, 2000).
While the phenomenon of local networking has excited considerable interest in developing countries, there are also important weaknesses that need to be addressed
to broaden the acceptance of network theory and to improve its policy relevance in developing regions. An important weakness is the neglect of the non-local dimension. The importance of proximate relationships may be overstated by failing to take into account non-local forms of networking (Alderman, 1999; Amin, 1999; Oinas, 1999; Hendry, 2000; Markusen, 1999; Malecki, 1999; Harrison, 1994; Simmie, 1998; Simmie, 1999; Amin, 1992; Amin, 1999; Ernst, 1999; Staber, 1996; Amin, 2005). Non-local network relationships have been mentioned by innovative milieu and in new industrial districts literature, which states that local systems are not self-contained, but are linked to the outside world by various sorts of connections. The role of these non-local connections in innovation, however, has not been emphasized. These counter debates and evidence can be grouped under three headings:
1 The dichotomy of knowledge: The network theory identifies tacit knowledge as an important component of the knowledge used in innovation. Local networks are hypothesized to be of particular importance to innovation due to the production and diffusion of tacit knowledge, requiring proximate relations. However, research shows that the simple tacit vs. codified dichotomy and its local and global implications are problematic (Bathelt, et al., 2004). Tacit and codified knowledge are not alternatives but complements for competitive advantages at different stages of a firm’s or product’s life cycle (Amin and Cohendet, 1999, 2005; Gertler, 2003; Howells, 2002; Lawson and Lorenz, 1999). Firms depend on different knowledge types and adopt different approaches to learning (Amin 1999; Nonaka 1995; Polanyi 1967). The relative importance of tacit vs. codified knowledge and their role in learning and innovation can vary greatly between firms in different societal contexts (Nonaka 1995). Moreover, accepting the superiority of tacit knowledge over codified knowledge would come at the expense of denying not only the role of global codified knowledge, but also of denying the role of local sources based on formal research, and the development efforts within firms, universities, and research institutions (Amin and Cohendet, 1999). Malmberg and Maskell (2002) argue that in some cases the process explaining spatially concentrated innovation has less to do with tacit knowledge and more to do with local opportunities to share and monitor codified knowledge ( Malmberg and Maskell, 2002).
Empirically, Lawson and Lorenz (1999) explored the relationship between codified and tacit knowledge in the innovation process. They showed the importance of the regional capability in combining and integrating diverse knowledge, based on a case study of Minneapolis, US, and Cambridge, UK (Lawson and Lorenz, 1999). They observed that both tacit and codified knowledge seems to be crucial for product development in both
regions. Similarly, in the case of developing countries, Ernst (2002) showed the need to blend diverse international and domestic sources of knowledge to compensate for initially weak national production and innovation systems (Ernst, 2002). He further argues that the key to success is to facilitate the concurrent leveraging of multiple and diverse sources of knowledge—the global production networks of buyers and suppliers of both foreign and domestic origins, as well as the diverse carriers of national innovation systems (Ernst, 2002).
2 Lock-in vs. stay tuned: Local networks are hypothesized to be of particular importance in enhancing interactive learning due to the frequent, face-to-face, and durable local ties. However, local networks may be harmful for interactive learning and innovation because they may create spatial lock-in situations. The lock-in situations occur when the local structures become so narrowly focused on a particular economic activity (technology or market organization and technology) that they are unable to shift to another development track (A. Malmberg and Maskell, 1997, p.38). Amin and Cohendant (1999) argued that business networks that are largely dependent on local tacit knowledge may be inadaptable in the face of radical shifts in markets and technologies. For example, research on Italian districts showed that they were not well-equipped to cope with radical changes in product or the technological trajectory, and their preference towards local tacit knowledge hindered districts’ performance (Amin and Cohendet, 1999). Similarly, Glasmeier (1999) argued that local networks may create a lock-in situation in small areas with a limited inflow of external knowledge, a resistance to change and a delay in generating response to changing economic conditions (Glasmeier, 1999). In that case, spatial lock-in situations may be prevented by establishing non-local ties. Non-local ties help firms and organizations to stay tuned with what happens in the market, among producers (both competitors and collaborators), and among consumers (Britton, 2004). Of course, this requires that local firms have the capabilities to absorb non-local knowledge, which necessitates organizational proximity (Gertler, 2003; Malecki and Oinas, 1999; Oinas, 1999).
In the case of developing countries, local linkages may not be sufficient (Ernst, 2002). This is because most newly industrializing countries and second-tier OECD countries have an incomplete set of domestic linkages (Sanjaya Lall, 1990, 2000; L. Mytelka and Ernst, 1998; L. K. Mytelka, 1999). Therefore, the ability of firms to select and connect to relevant local, regional or international ties becomes increasingly critical.
3 Beyond locality: It is argued that most firms’ network ties – personal or business - are not only embedded within social relationships (Granovetter, 1985; Uzzi, 1997), but also embedded in their local environment (Braczyk et al., 1997; Brusco, 1982; Cooke, 2001; Storper, 1997). However, some research argues that many local economic actors have relationships outside the region rather than within it (Britton, 2004; A. R. Markusen et al., 1999).
Research in places such as Silicon Valley (Harrison 1994), Baden Wuerttemberg (Staber 1996), Hertfordshire (Simmie 1999; Simmie 1998) has also indicated that firms have networks outside the region. These studies showed that local ties are less effective in the later stages of growth due to increasing competition. In addition, findings from research in the UK, Germany and US suggest that the role of international and national relationships is found to be much stronger than local ones (Henry et al., 2000). Also, Alderman’s (1999) findings from research in engineering in three regions argued that local networks for technical development are not important. In fact, in many instances they appear to be irrelevant. In his analysis of manufacturing establishments of the electronics cluster in the Toronto region, Britton (2004) concluded that firms do not constrain their knowledge inputs to opportunities found in their industrial cluster. Rather, firms developed strong non-local ties to meet their input and output requirements (Britton, 2004). Doloreux (2004) showed from case studies of the Ottawa and Beauce regions of Canada that firms make use of regional, national and international knowledge sources to sustain innovation (Doloreux, 2004). Similarly, Asheim (2002) studied three regional clusters in Norway dominated by shipbuilding, mechanical engineering and the electronics industry. His findings supported the claim that non-local ties were crucial to the innovation process (B. Asheim and Isaksen, 2002). In their case study of three industrial districts in Germany, Grotz and Braun (1997) showed that while local networks are important for general business issues, non-local networks are important for innovation and technology-oriented information (Groties, 1997).
In the case of developing countries, empirical studies show that substantial networking takes place between technology-related actors in some regions (Fromhold-Eisebith, 1999; Razavi, 1997). However, these ties include not only local ties but also non-local ties with machinery suppliers, customers (Katz, 1987; Lall, 1987; Bell, 1999), the state, and other international linkages (Ernst, 2002; Fromhold-Eisebith, 1999; A. Markusen et al., 1999). The state sets the political framework for development with a wide range of instruments regarding industrial and regional policy, science/technology policy, and educational policy (Fromhold-Eisebith, 1999). In a case study of
CharacteristicsLocal Networks of Innovative Firms
Boundary
Spatial proximity, co-location (Pyke, Becattini, and Sengenberger 1990; Storper 1997; Ratti 1991; Cooke 2001)
Non-local Networks of Innovative Firms
Decentralized, i.e. interregional and international relations (Amin and Cohendet 1999) Organizational proximity (Oinas 1999; Malecki and Oinas 1999)
Size
Diversity
Type of Resources
Dense, as in the higher number of interactions (Torre and Gilly 2000; Staber 2001)1)
Emphasis on customers and suppliers (Von Hippel 1998; Audrestch 1988)
Diverse networks including firms, customers, suppliers, universities, research organizations and other (Kaufmann and Todtling 2000; Perrin 1991)
Emphasis on tacit knowledge (Storper 1997)
Customers and suppliers, state organizations, universities
Stability (Duration)
Longer duration of ties, i.e. the number of years relationship existed (Oerlemans, Meeus, and Boekema 2000)
Emphasis on codified knowledge (Amin and Cohendet 1999; Maskell and Malmberg 1999a; Asheim and Isaksen 2002)
Shorter duration of ties (Nooteboom and Gilsing 2004)
Formality
Formal and informal relations, market and non-market (Storper 1997; Torre and Gilly 2000; Gordon and McCann 2000)
Formal relations, regulated by market
Communication frequency and media
Face to face and frequent relationships (Storper 1997; Torre and Gilly 2000; Gordon and McCann 2000)
Communication media including phone, e-mail, fax Less frequent
Korean firms, Dahlman et al. (1987) show that it is the co-evolution of international and domestic knowledge ties that explains Korea’s extraordinary success. Table 1 summarizes the main characteristics of local and non-local networks mentioned in the literature.
Any study about technological innovation in developing countries should consider several issues. First, studies in developing countries should take into account incremental innovation and their effect on economic development. Shop-floor or incremental innovations, occurring in day-to-day operations, contribute significantly to the competitiveness of developing countries. However their effects are not captured by formal innovation studies and indicators. As to the new or major innovation, the definition of these types of innovation should be broad. Even if a firm introduces a technique that is already used, this still represents a new innovation for that firm.
Second, the geographical manifestation of innovation is a more complex phenomenon for developing countries. While local networks are important in innovation activities of firms, they may also have non-local ties in the form of inter-regional and international ties. Regions are important units of analysis in innovation because differences in economic, business, social and institutional infrastructure influence the type and intensity of local networks (Storper 1997; Amin 1999; Visser and Boschma 2004), and its mixture with non-local relations. The degree of mixedness of local and non-local ties plays an important role in building innovative capability (Sungu 2006). For example, comparison of innovation networks in two regions (Ankara and Istanbul) in Turkey revealed that these regions differ in the degree of mixedness and characteristics of local and non-local networks. Istanbul as a global city has more ties to international and national organizations while Ankara has mostly local ties due to specialization in defense industry and government as the main customer (Sungu 2006). Local and non-local networks are not substitutes but complements. Non-local networks may be used to access capabilities that are not present locally. The region may not contain all the resources, especially in the case of developing countries. Firms have to stay tuned with what happens in the market, what happens among other producers, customers, and suppliers (ibid).
Third, the characteristics of local and non-local ties should be considered in regional innovation studies. These characteristics include their size, diversity (type of organizations), multiplexity (type of resources provided), stability (duration of ties), and formality. Territorial innovation models identify local networks as strong networks in the
innovation process as they are larger in size (Storper 1997); they facilitate production and diffusion of tacit knowledge which is emphasized as an important component of the knowledge used in innovation; and they are built on longer, informal, and personal relationships depending on trust. However, the characteristics of non-local networks are not generally known.
Territorial innovation models highlight the local dimensions of networks, but these models have not assessed the non-local dimension and have not considered the relative importance of local versus non-local innovative networks. It is true that interactions have a spatial nature, but they also have an organizational nature. Non-local networks might represent organizational proximity (Malecki and Oinas, 1999; Oinas, 1999). Similarly, local networks are important due to production and easy diffusion of tacit knowledge, which both require proximate relations. However, tacit and codified knowledge are complements for competitive advantages in different stages of a firm’s life cycle (Bathelt et al., 2004). Local networks may not be effective in places where resources and knowledge inflow are limited. In those cases, local networks should be complemented by non-local resources.
A more empirical problem in the literature is that the majority of regional studies have a tendency to focus on finding data at the local level, and consequently neglect the importance of non-local networks. This problem is especially relevant for regions in developing countries. While models of local networking have emerged in the policy agendas of developing countries (Altenburg and Meyer-Stamer, 1999; Bell and Pavitt, 1992; Cooper, 1991), these models fail to identify potential benefits that peripheral regions could collect from non-local (inter-regional and international) linkages. Therefore, empirical and policy research should look for a more complete model of the networking behavior of innovative firms in developing countries by combining local and non-local networks.
1 Adam Smith, in his book Wealth of Nations (1776), Chapter 1, discusses the importance of improvement in machinery. Marshall (1890), in his book of Principles of Economics, describes knowledge as the chief engine of production and growth.
2 Godin (2005) argues that the precise source of the linear model of innovation is unknown. However, it can be argued that in his second model, Schumpeter argued that innovation process had become endogenous with the emergence of R&D departments.
3 Please see the special issue of World Development (March 1974) on the subject of the choice of appropriate technology and technology transfer.
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SUNGU-ERYILMAZAyal Kimhi is Associate Professor at the Department of Agricultural Economics and Management of the Hebrew University. He has a Ph.D. in Economics from the University of Chicago (1991). He served as the Director of Research of the Center for Agricultural Economic Research, was a member of the Editorial Board of Agricultural Economics, and worked as a consultant for the World Bank on various projects. Since 2006 he serves as Editor-in-Chief of the Journal of Rural Cooperation. He published more than 30 articles in refereed journals. His research spans the fields of Family Economics, Agricultural Economics, and Development Economics.
Joseph Gogodze was born 1951 in Tbilisi, Georgia. In 1974 graduated faculty of mathematics, Tbilisi State University. Acted as a researcher in various scientific institutions. In 1980 took academic degree of candidate of Physical and Mathematical Sciences in The Institute of Mathematics of USSR Academy of Sciences, Moscow. The main area of activities and scientific explorations - optimal control, mathematical modeling, economic statistics, practical sociological and marketing research. Between 1991-1996, Gogodze occupied prominent positions in The Georgian State Department for Statistics. Recently he is a director of the research company “Conjuncture Research Center Ltd” and consults various projects carried out in Georgia.
Iddo Kan is a lecturer in the Department of Agricultural Economics and Management, The Hebrew University of Jerusalem. His activities are related to the scientific areas of environmental and resource economics, agricultural economics, political economics and soil and water sciences. His expertise is in integrating natural processes into economic analyses, aiming at exploring systems involving environmental impacts with the objective to characterize management strategies and policies under optimal or equilibrium conditions. His research topics include irrigation and drainage management, solid waste disposal, biological pest-control, evaluation of climate change impacts and external costs and water pricing in political economic systems.
Zhu Qian is a Ph.D. candidate in Urban and Regional Science at Department of Landscape Architecture and Urban Planning, Texas A & M University. He obtained his M.A. (Planning) from the University of British Columbia in Canada. He was a land use planner in China before came to the US. His recent paper on China’s urban land reform won Foundation for Urban and Regional Studies’ 2006 Best Essay on Urban and Regional Themes by Young Authors.
José Ramón Xilotl Soberón, student at Licenciatura en Urbanismo at the Universidad Nacional Autonoma de México (UNAM). He is still exploring the open field that is urban planning—which has taken him from the study of precarious or informal settlements to public policy, and currently to aesthetics and the spatial manifestations of aesthetic theories. He has presented his research on political ideology and policy-making for urban mega projects at a national congress in Mexico, Congreso Nacional de Escuelas de Urbanismo, Planeación Territorial, y Regional, 2005, and led an international workshop on precarious settlements (World Planning School’s Congress 2006).
Yesim Sungu-Eryilmaz is a Ph.D. candidate at the Graduate School of Public and International Affairs at the University of Pittsburgh. She specializes in urban and regional economic development and international development, and has served as a research assistant in various projects including brownfields redevelopment, affordable housing and disaster management.
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