Opinionista Luke Jordan 5 April 2018

Yes, we can – and must – expropriate land

Something must be done about land. The question is how. The land question looms huge in the cities, where the poor are rebelling against the “new dawn”. It looms larger in the countryside. We can and must transform rural society, from a place of dominance and corruption to one of dignity and growth. The answer is to use the tax code to expropriate without either compensation or state ownership, recycling the proceeds into credit and support for hundreds of thousands of small commercial farmers.

What is rural South Africa today, and what must it become? Today it is a place of violence, corruption and poverty. Most of the farms grow low-margin crops and struggle with high debt loads. Farmers retain a grip on the few profits through intimidation if not outright violence. “Here,” one said as he handed a shovel to an advice officer trying to organise farm workers, “go dig a spot for your coffin over there.”

Farm profits flow to the city, in interest, or school fees, or imports. Farm workers live on subsistence wages, only permitted into town for an hour on a Sunday. Even in good years, little is spent on local services — the only source of viable long-term employment in rural areas. Off the farms there is no money, or jobs, or prospect of either — except from the state.

Corruption results. Say you are smart and young and ambitious in a rural area. You want to get ahead. What are your options? Start a business — but who will buy from you? Farm workers have no money. There are five farm owners and even if they wouldn’t boycott a new black-owned business, there are few businesses you can build on five customers. So you leave for the city, or you head for the only available source of advancement, the state. Once inside, say you are one in a hundred and want to halt the looting you see around you. Who can you summon to your aid? The local farmworkers – barely literate, living in fear? Local media – if it exists? Think carefully and honestly about what you would do.

There is only one way out of this. That is the radical transformation of land ownership to create hundreds of thousands of black, small commercial farmers. No other route will deal with rural poverty and unemployment. Whoever owns them, large commercial farms cannot sustain a viable rural society unless eighty percent or more of the population is already in the cities. Worldwide, the bulk of rural income and employment is off the farm, and large commercial farms have too low a demand for such services.

One of the world’s most eminent agricultural development experts, drawing on a lifetime’s work, has recently estimated that even in conditions of very fast agricultural growth, a countryside dominated by large farms would see only small reductions in rural unemployment and poverty. One dominated by small commercial farms would see massive declines in both.

A species of economic illiteracy will argue against this by invoking “economies of scale”. To see why this is illiterate, consider the analogue in a factory. Imagine if someone said, “well my business is more efficient, because my factory is 2,000 square metres and theirs is only 1,000 square metres”. They would be laughed out the room.

Scale” refers to the scale of production, not the scale of inputs – whether factory space or land. You have achieved economies of scale if you double production on the same piece of land — by new machinery, or more labour, or better management. In different industries, at different times, different combinations of those factors provide greater or smaller boosts to production. In agriculture the evidence is clear. The most efficient farms in the world are not the giant prairie farms of America. They are the mid-sized rice paddies of Japan. Even controlling for crop type and weather, smaller farms are more efficient.

Economists have called this the inverse productivity-size law. Family run farms with small workforces have such enormous gains in management that they swamp big farms’ better access to capital. It’s almost impossible to monitor workers or foremen on far flung fields. The unpredictability of crop yields from metre to metre and year to year makes it hard to manage by targets, as can be done in a very large factory or service company. Machinery provides no inherent advantage to large farms, as it can be pooled and rented— the “sharing economy” has long existed, not in Silicon Valley, but among mid- to small-sized commercial farmers and co-ops across the developed world.

As in all things, balance is necessary. There is such a thing as too small — “efficient, but poor”, as one economist has called it. Farms must be large enough that most of their production is destined for market, not subsistence. Only then can farms generate the cash flow needed for continuous improvement, and only then will the gains in production be significant enough to motivate rational farmers to undertake them.

Optimal physical size will vary by location and type of production, but in the developing world the range would be two to twenty hectares. In Europe itself, as of today, the average farm size is just under 100 hectares. A good range here might then be 10 to 100 hectares. Take our land area, assume 70% redistribution at an average of 50 hectares each, and you have a few hundred thousand black small commercial farmers as the backbone of a new rural society. As the backbone of a country that might, if it’s lucky, have a future.

So how do we get there? How do we achieve redistribution at scale?

The key lies in the tax system. Specifically, the imposition of a land value tax. That means a tax not on the overall value of the individual property, which is the basis for local property rates, but on the value of the underlying land.

This “radical” idea was first proposed by Adam Smith and David Ricardo —the fathers of classical economics and free trade — and fiercely championed by that noted opponent of private property, Winston Churchill. We could follow Smith and Ricardo and replace a transfer tax — which discourages housing renovations and sales and hence construction jobs — with a land tax. But we can do much more.

We could introduce land value taxes with three important features. First, exempt land holdings that are under ten hectares and worth less than R1 million—roughly as we do for transfer duties. Second, exempt first-generation black landowners for holdings up to 100 hectares. Since traditional leaders claim they have owned their land since time immemorial, this exemption would not apply to them. Third, make the taxes ramp up high enough over the next 15 years to add up to 100% of the current land value. Specifically, we could introduce the taxes at 2% a year now, increase that to 10% five years from now, hold it there, and then ramp back down, to a permanent level of 2% a year.

The plan expropriates and redistributes cleanly, predictably, and universally. It answers the demands of justice by exacting a cost from the beneficiaries of injustice. It has no time lines that can slip — the tax is inexorable. And it allows for none of the scope for corruption that expropriate-and-licence will create.

This tax would fund three things. First, building the institutions that can take new agricultural research to farmers, known as extension services. The media focuses on anecdotal stories about old white farmers “mentoring” new black ones. Such mentorship is only necessary because our extension services were gutted in the Mbeki-Manuel years. It does not and has never worked anywhere at scale.

We can and must jolt the system into life by importing expertise, as we have done, for example, with European renewable energy specialists. The Netherlands has the world’s most effective agricultural system, by some distance: the highest value, highest productivity agriculture, on small amounts of land. Invite the Dutch to help us build the most effective, 21st century agricultural extension service in the world. Few policy programmes could more neatly align historic redress and practical need.

Such needed extension services are hard to build and must be amply funded. But in the scheme of things they are not expensive, and they would not absorb the bulk of the revenue from the land tax. That would go to two other pillars: a 20% equity grant to current farmworkers buying up to 100 hectares each; and loan underwriting on the remainder of the cost, covering the interest for the first five years and absorbing 30% of the losses in the event of a default.

Evidently, we do not have decades to build this. Two further mechanisms can provide the necessary acceleration. First, the existing budget and programme for “willing buyer willing seller” can remain — not to redistribute large, mostly failing farms to dysfunctional committees, but to intermediate the sales of large farms to their farm workers. Most importantly, state that whatever price a farmer requests to sell immediately becomes the reference price for calculating their land value tax.

The second mechanism is more technical. Many if not most farmers are in substantial debt to the banks. When capital opposes land reform, it is out of no sympathy for rural farmers. Nor is it about so-called property rights. It is worried about the health of the banks if the farmers’ loans are written to zero. There is a good likelihood that would lead to financial crisis—naïve expropriation without compensation leading directly to bank bailouts.

Expropriation through taxation would mitigate but not remove this risk. Farmers unable to pay the tax burden would default, possibly at high and increasing rates. The banks would likely see this happening and intervene. The current CEO of Standard Bank ran National Treasury for 20 years and hired everyone in it. If he wants to halt tax rises, he will pick up a phone.

The potential answer is an act of legislative jujitsu. Insert a provision that if a bank calculates that the net present value of the future taxes on a farm plus the debt it holds is greater than the value of the farm, it may immediately foreclose, providing that the farm is resold to, in the first instance, current farm workers, and after them, new black commercial farmers, up to size limits. The new farmers could use the grants and loan underwriting described above. The bank would keep the proceeds up to the value of its loan — the remainder returned to the same pot as the land taxes. The banks would have a five-year window to put this into effect.

This would offer banks, for a limited time only, the opportunity to swop old for new debt – far more politically secure and with a variety of financial protections. The window of opportunity stays open right up until the point when escalating taxes are likely to push large swathes of the old debt into default. Little concentrates the mind like an imminent hanging, or, for a bank, a looming wave of defaults. Such a structure holds out the promise of converting the banks from the most powerful opponents of reform to its most active agents. As an ancient Chinese book of governance states, “the strongest man in the world cannot move a buffalo a single field if he pulls it by its tail, but a child can lead it across the length of China if she slips a stick through its nose”.

This solution is admittedly complex, even in the simplified form presented here. Details of timing, funding, cost recovery, and institutional structure will be massively important. But it answers three challenges that confront any programme of land reform.

First, the demands of justice. Dignity must be restored to those from whom it was taken. Practical consequences must matter, but a path that imposes no costs on the beneficiaries of an unjust past is neither spiritually nor politically viable. Since something always beats nothing, such a path if firmly held will at some point lose to any other proposal on the table, no matter how bad.

Second, the need to provide sufficient support for new black farmers in their first years. If the transitional phase is unfunded or hurried then waves of default will return the land to its old owners, or the rural economy will be damaged for years, if not decades. Promising improved services without a specified funding mechanism or a clear plan to break out of business as usual will lead directly to one or both of those disasters.

Third, the need to protect against recycling dominance and corruption. That will mean minimizing arbitrary local government decisions, at least until rural society is strong enough to itself create accountability. Otherwise, the result is predictable—the same forces that have subverted school governing boards across the country will join with the old farmers to rig local deals that simply amount to rent skimming. Rural people are poor but not stupid. If they are offered a better plan they are likely to take it — but that plan cannot be merely “trust us, and wait, or the investors will run away”.

The programme described here may not be the only way to answer these challenges. But it does answer them. The major parties’ existing proposals do not. The DA’s fails the first, the ANC’s and EFF’s the third. All fail the second. As with the recent budget, as with almost every major policy question confronting the country, all three of the major parties are showing themselves unfit for purpose.

There is one obvious omission in this list of challenges: the bed-time story known as “property rights”. This argues that investment is only possible if every single claim to property is rigorously upheld — if any policy so much as contemplates expropriation, investment will flee.

Here is a true story about so-called property rights and investment. Five months ago, the government of Saudi Arabia arbitrarily arrested 200 of the richest people in the country. It claimed this was a “corruption sweep”, but there were no court trials, no legal process. The detainees were kept in detention until they signed away ownership stakes in their companies, or whole assets. The whole programme was conducted to fill a budget deficit left by lower oil prices. It was quite literally expropriation without compensation.

Far from hiding this, the Saudi Arabian government has publicly boasted that it expropriated over R1.2-trillion, at least the same order of magnitude as all the agricultural land in South Africa. And the stock market is up 7% this year, not on government buying, or in oil stocks. Far from a downgrade, the rating agencies are about to include the Saudi stock exchange in several international indices.

More generally, here is a non-exhaustive list of countries that have undertaken radical land reform, compulsorily dispossessing large landowners: Japan (1946-48); South Korea (1945-50); Taiwan, China (1950-); Mainland China (1947-55, 1962; 1978); Vietnam (1953-56); Cuba (1959); Peru (1969); Columbia (1968-69); Venezuela (2003); Iran (1962-71); Russia (1917-22); Ethiopia (1974); and Zimbabwe (2000).

Some of those countries were subsequent disasters. Some were subsequently the greatest growth stories in history. Some were both, at different periods. The point is the absence of any fixed relationship. There is no evidence from anywhere that the violation of legal property rights inherited from an old regime has, in and of itself, any determinative effect on future growth or investment.

Here is another case, perhaps the most extreme. At the height of the Cold War, in the 1970s to 1980s, Western banks lent the countries of the Warsaw Pact tens of billions of dollars. By 1982 such debts amounted to over $60-billion (roughly $150-billion today) lent to core members of the Soviet bloc. These were countries committed to having no property rights at home, and to the revolutionary overthrow of property rights everywhere. The banks didn’t care. They lent anyway.

Capital does not care about law or the past. It cares about power and the future. If investors see land reform as mostly predictable, with causes that are clear and specific, they will mostly ignore it. The notion that someone thinking about building a factory or buying a bond will not do so because colonial and apartheid-era land theft is being unwound is fantastical. What will make them pause is an increasingly unstable and unpredictable politics, fuelled by mounting anger.

Against this, a clear, predictable and well-defined reform programme can provide confidence — both by showing that a society can confront and deal with deep-seated problems, and by creating new sources of domestic growth (as happened in the successful East Asian cases). There are many good reasons to oppose some of the expropriation ideas being debated. The myth of property rights is not one of them.

Land was at the heart of the colonial conquest. Land remains at the centre of economic liberation for the country’s poor. As a necessity for dignified housing, it is central to the urban poor. Answering that need requires a participative state with a serious, large-scale housing programme. That would have been central in a new dawn worth celebrating, instead of a million cheap tricks — sorry, “youth internships” — and a budget more anti-poor than the one just passed by Donald Trump’s Republicans.

If land matters to our urban crisis, it is the only means to deal with our rural crisis. Rural society must be transformed. Many ways to try do this will be a fraud; many will fail. We must steer between those, and create a vast cohort of prosperous, small commercial black farmers, supporting millions of rural jobs.

That is the economy that briefly came into existence in the Eastern Cape, until it was deliberately destroyed by the 1913 Native Land Act. We must answer that injustice and avoid merely entrenching new forms of corruption. We must emancipate a historically stifled economy. The creative use of taxes, credit, and expertise can get us there. It’s time to stop posturing and start acting. DM

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