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Rise of State Rentierism to Extract Rising Land Dividend

During the earlier stages after independence, Singapore’s economic development focused on income generation leveraging on the demographic dividend. The rise in national income was broadly shared by all stakeholders – workers, business owners, capital owners and government – inequality notwithstanding. After the turn of the century, with a dissipating demographic dividend and a growing land divided, economic development appears to focus progressively more on wealth generation to extract the rising land value. Gains from economic development now disproportionately benefit capital owners and the Government at the expense of the workers and SMEs.

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11 September 2019

What is State Rentierism?

 

We have learned that rentierism is the practice of extracting a higher-than-normal market return from an asset. It typically involves asset-owners adopting anti-competitive behaviours to artificially push up the asset’s value on account of its uniqueness and scarcity. Because no additional new value is created in the process, rent-seeking often results in zero-sum outcomes. In extreme cases, rent-seeking can even result in negative-sum outcomes when not only the rentiers profit at the expense of others but the society overall also loses.

 

So far, our discussion has been focused on rentierism by organized capital owners and increasingly also by some corporations (e.g. Microsoft, Facebook, Google, and Amazon) that have managed to grow extremely large by leveraging on technologies they own and by adopting anti-competitive market behaviours to overcome rivalry.

 

But rentierism needs not be limited to just the private sector. It can also be practiced by governments through their ownership of a critical national asset. State rentierism has typically been associated with the oil-rich Gulf States seeking to generate economic rents externally from the sale of oil by manipulating the external political and economic environments and by controlling output to influence oil prices in the international markets. To push oil prices beyond its normal equilibrium market prices, for example, oil-exporting countries set up OPEC as a cartel to control supply and limit competition.

Besides generating rents externally, however, governments can also embark on rent-seeking behaviour domestically. Singapore is a good example of a state rentier extracting rent internally from its control over a critical national asset though quite unlike that in the Gulf State because of the absence of oil, gas and other mineral deposits. Instead, Singapore’s critical national asset is land. Decades of impressive economic development have pushed up the value of land to make it an increasingly invaluable asset. Today, the land-scarce city-state measures about 710 sq km.  Of that, the State owns 90% and the Government is actively seeking to maximize the return it can extract from the land, particularly after the turn of the century. In 2005, for example, a Subcommittee on Maximizing Value from Land as a Scarce Resource was set up to justify Government’s efforts to that end.

 

State’s Acquisition of Land since the 1960s 

 

Compulsory land acquisition in Singapore started as early as 1920 when the Land Acquisition Ordinance was passed to give the government powers to acquire more private land for new development. However, the powers granted at that time were limited and the process was cumbersome and slow.

 

The 1920 Land Acquisition Ordinance subsequently underwent two amendments in 1946 and 1955 but the first significant amendment did not come until 1961 following the Bukit Ho Swee fire. The 1961 amendment allowed for land devastated by fire to be acquired at not more than one-third the vacant site value to ensure that landlords did not benefit unduly from an appreciation in the value of their land.

 

In 1966, the 1920 Ordinance was repealed with the passing of Land Acquisition Act which gave the government increased powers in compulsory land acquisition. The 1966 Act not only established how compensation to landowners would be regulated but also set out resettlement policies on the clearing of squatter land and the rehousing of squatters in low-cost flats.

 

In 1973, the Land Acquisition (Amendment) Act was passed in order to curb speculation on land and to limit the cost of land acquisition. Compensation was fixed at the 1973 market value determined on the basis of its existing use or the Market Plan Zoning of the land, whichever is lower. Any potential the land may have had for future development was disregarded. In 1988, the Act was then further amended to peg compensation to the market value in 1986. By 1995, the government began paying the market rate for all future acquisitions.

 

All in all, the laws and the various amendments had helped the government built up a considerable land bank by the 1980s at extremely affordable costs.

 

Rising Land Dividend amid Declining Demographic Dividend

During the early stages of Singapore’s economic development, land was still relatively more abundant than the small population of about 2 million. The limiting constraint for growth then was therefore human resource and Singaporeans were told that the country’s most precious resource is its people.

 

By the 1990s, though, as the economy continued to expand and demand – residential, commercial and industrial – for land use grew, land value also rose in tandem. In contrast, our workforce was ageing and many older workers were hit by skill obsolescence as Singapore relentlessly upgraded its economic structure to stay ahead of competition. Singapore’s demographic dividend was thus dissipating.

 

By then, global talents were becoming increasingly mobile. Singapore benefited from the new trend by allowing the inflow of not only low-cost foreign workers but also the medium- and highly-skilled ones to expand it labour supply pool. Human resource was thus no more the limiting constraints.

 

In contrast, physical land supply, even with reclamation, remained greatly constrained. Land value was therefore first and foremost driven by its scarcity and by the city state’s strategic geographical location. As demand for land use rose with the expanding economy, the growth in the value of land began to accelerate. To the credit of the Government, the rising land value could also be attributed to good urban planning and effective governance which enabled Singapore to not only foster social harmony and political stability but also put in place highly efficient infrastructures and institutions that make the city-state works like a clock ticks.

 

In short, as Singapore’s demographic dividend dissipated, its land dividend grew.

 

Correspondingly, Singapore economic developments gravitated progressively over time from national income (GDP) generation, through exploiting its demographic dividend, towards wealth generation, through extraction of land dividend.

 

Shifting of Emphasis from Income Generation to Wealth Generation and Extraction

 

All along, any talk about economic developments has always been about national income. In reality, economic activities generate not only national income, which is manifested as gross domestic product (GDP), but also wealth, showing up as the value of assets (e.g. bank savings, shares and properties).

 

While GDP or national income is broadly distributed to different stakeholders (i.e. workers as wages, business owners as profits, capital owners as rents, and government as taxes) based on their respective contributions to economic developments, wealth narrowly accrues to only a minority comprising of capital and asset owners generating passive incomes.  Since the great majority of the working class own few assets, they benefit more from State’s efforts to generate income rather than wealth.

 

Indeed, during the earlier stages of Singapore’s development after its independence, economic gains came predominantly in the form of rising national income because of rapid economic growth. Gains in wealth lagged gains in national income initially because land value was relatively lower then and financial markets were underdeveloped. Singapore was therefore growing its economy using its demographic dividend and the rise in national income was broadly shared by all stakeholders, inequality notwithstanding.

 

By the 1990s, however, with rising land value and a more matured financial market, wealth generation from economic growth began to pick up pace. After the turn of the century, with economic grow slowing as a result of rising external competition and of increasing difficulty in upgrading Singapore’s economic structure amidst a dissipating demographic dividend, economic development appears to focus progressively more on wealth generation through extracting the growing land dividend.

 

The switch from income generation to wealth generation to exploit the land dividend works to the detriment of the workers, especially those in the lower rungs whose skills have been rendered obsolete due to economic restructuring. Wage gaps began to widen noticeably.

 

Wealth Extraction from Public Housing & Commercial and Industrial Properties

 

In fact, the systemic extraction of land dividend had already begun since the late 1980s through public housing when the 2G government re-positioned leasehold HDB flats as an investment asset. Prices of new flats began to rise at rates that outpaced growth in household incomes. Given that the price increase exceeded inflation in construction costs, it could only be attributed to the other component in new flat pricing – land cost.

 

The high housing (land) costs benefits the State but results in inequitable wealth transfer from the households to the State at the expense of their financial resilience and their funding for retirement. The rising prices also benefit the first two generations of homeowners (especially those who bought before the 1990s when prices were still low) but enslave all future generations of young Singaporeans to high housing costs.

By the turn of the century, with public housing prices nearly reaching the ‘optimal’ affordability level, efforts by the 3G government to extract wealth from rising land value were now extended from public housing to include also commercial and industrial properties using real-estate investment trusts (REITs) as the vehicle of rent extraction.

NEXT02 Extracting Land Dividend Through Public Housing 

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REFERENCES

[1] See Ian Tai. (2019). “15 things to know about CapitaLand Mall Trust before you invest.” The Fifth Person. 18 April, 2019.