Russia: After the Cold War
How to Win the Peace!
Fred Harrison
[Reprinted from Land & Liberty,
November-December 1992]
THE PEOPLE appear stunned, traumatized by the loss of faith, still
needing someone to give them commands, the few live-wires trying to
wheel-and-deal in a commercial vacuum.
In just 70 years, the Russian people have suffered a civil war
(Stalinised by their own leaders), a world war (terrorised by the
Nazis) and the Cold War (materially drained by the fight against a
spectre).
For 70 years there was no fun, no Carnaby Street colour, no period of
joyful abandon, no relief from heavy-handed pressure, so now the
trauma will be protracted; and then there will be die post-traumatic
stress, before they recover composure and creativity.
For 70 years, social relationships were ruptured and remoulded into
the vision of a Brave New World dial offended biology and psychology,
a vision doomed to fail when they could take no more.
A collective therapy is needed, and I perceive it in the Russian love
of their land. They are relearning how to characterise land in the
most loving terms, and relating that love to the need to restore human
relationships.
"Land is feminine, soil ploughing is an act of love; tilling the
land is love," wrote Ceorgi Gachev. "How to plough and
cultivate the Russian land, how to treat it and live with it is
tantamount to how a Russian man should love a Russian woman, how he
should treat her and live with her."[1]
THEY WERE NOT tender with the land, these last 70 years. Taught to
believe that nature had no value -- that all value came from labour --
the Politburo gang-banged the land to death. Today, the rivers are
chemical sewers, almost a sixth of the country is unfit for human
habitation, only 15% of the air that city dwellers breathe is
pollution-free, over 20% of drinking water does not achieve Russia's
(lax) standards.[2]
And yet, awakening in the people is an awareness that, if Russia is
to recover, something special needs to be done about die land.
President Yeltsin's decree that land should be privatised has caused
offence; the bureaucratic inertia to his law is tantamount to civil
disobedience which, in normal times, would be treated as a declaration
of war on die federal government.
It is as if the administrators and politicians in the cities of
Russia are grasping at an idea, barely expressed, that western
nostrums about land rights just won't meet their needs.
How Russia finally resolves her relationship with the land will
define the wholesomeness of her society. But what should she do? Are
there any historical models to guide her decisions? The devastation in
Russia is equal to the scale of damage in defeated Germany and Japan,
whose economies were rebuilt in 10 years. But today there is no
Marshall Plan, no General MacArthur, to wrench Russia out of the
depths. She will have to rely almost entirely on her own inner
strengths. But there is hope, if we compare Russia today with Japan in
1870.
WHEN Commodore Perry's American gunboat dropped anchor and threatened
a feudal society, the Japanese knew they had no choice but lo
industrialise, if they were to retain their independence, and not be
pushed into the depths of what we today call Third World status, they
had to transform their agrarian economy. And they had to do so without
foreign aid. How that miracle was performed, between 1870 and 1890,
ought to inspire the Russians.
The emperor Meiji and his advisers chose land-rent as the revenue to
finance the public expenditures to support the transformation of their
society. At one point, over 70%[3] of public expenditure was financed
out of land-rents. Taxes on wages and profits were so insignificant,
they did not distort the creative efforts of labour and capital.
Alas, the landlords captured the Diet (parliament) in 1890, with the
proclaimed aim of shifting the tax burden off rent. That's when the
slide began, but the land-value tax had done its job: the institutions
and industrial relations that were lo transform Japan into a world
economic power were established in 20 short formative years.
Russia, although she may not know it, is on the verge of repealing
that success today.
SERGEI SAY is deputy head of the land reform committee in St.
Petersburg. His committee is a federal agency; there are 600 of them,
scattered around Russia, all of them struggling to make sense of how
to use land in a free society.
SERGEI SAY is deputy head of the land reform committee in St.
Petersburg. His committee is a federal agency; there are 600 of them,
scattered around Russia, all of them struggling to make sense of how
to When he took up his job, he sought to formulate an approach on the
basis of what he called "a Russian mechanism". But before
Russia can define that mechanism, her technocrats need to understand
what they are dealing with. The process of registering people's claims
to land has barely begun, but of one thing Mr. Say was sure: today, in
Russia, no person or organisation has legal title to land. All they
can claim is the right to occupy the land. The land, in feet, belongs
to the State.
President Yeltsin created a challenging problem when he signed a
decree ordering that people should pay a tax on land. The
municipalities had no idea what land was worth, so the land reform
committees prepared crude zoning maps based on the existing use of
land, and distributed the tax accordingly.
"Everybody used land in an inefficient way, because it was
'free'," said Mr. Say. "That's why many industrial
enterprises don't use it properly, and there was a lot of wasteland.
There's a lot of vacant land, used badly, according to satellite
photographs. Enterprises had the majority of the land, and don't pay
for it, and were not interested in rational land use.
"That's why the first step is to identify everyone who has land
plots. The land-tax also has to be collected, for this one year, to
show them that land is valuable and they have to pay."
Yeltsin's land-tax applies for just one year. Thereafter, as far as
the cities are concerned, the users of land have to pay a rent to the
owners of that land -- the federal and the municipal governments.
Existing users will not necessarily be dispossessed of their sites;
but they have to enter into leasing agreements, under which they would
pay rent for the land.
Right now, no-one knows what the land is worth; which is not
surprising, because rent was never measured before, and today there is
barely a wealth-producing economy capable of generating surplus income
(rent). But that is going to change: the economy will take off. And if
Russia's Parliament refuses to alienate the freehold rights to land to
existing holders, the nation will find itself enriched beyond
imagination by the flow of rent into the public coffers.
The federal government currently relies on traditional western forms
of wealth-destroying taxes) -- such as a 28% VAT. It would be easy to
condemn that tax structure, but we have to realise that the
transformation of the command economy has to be financed. In the
transitional void, the expenses of government have to be covered.
There is no land market; no payment of rent for holding land. So where
else does the government raise its revenue?
But force of circumstances is leading, even now, to the creation of a
land market. State enterprises are sub-letting property and pocketting
the money -- in other words, they are privately appropriating
land-rent which is not only a socially-created income, but also
happens to be the legal income of the state! However, as the system
settles down there will be no excuse for this to continue.
And nor will there be any excuse to con tinue to levy taxes that
suppress those two ingredients that Russia needs most: private
enterprise and capital formation. Premier Yegor Gaidar has already had
to give assurances on tax reforms to the managers of the big
state-owned enterprises. At an emergency meeting with their "centrist"
parliamentarians, last month, he announced concessions which move him
in the correct direction. From January, profits ploughed back into
capital investment will be free from tax.
But such concessions will not be enough if Gaidar's administration is
to survive. People are beginning to support some unholy alliances as
an expression of their frustration. One of these is a coalition of the
extreme right and left: a meeting of nationalists and communists on
October 25 was held beneath the crossed banners of the Soviet Union
and the Tsarist government!
There has been a catastrophic collapse of production, hyper-inflation
and a drop in firing standards for 80% of the population. Discontent
is easy to ferment, so Yeltsin's federal government will have to
bolster die market reforms with the announcement of a rational,
easily-understood programme of reinforcing measures. There is one
solution only at his disposal. He will have to banish the deterrent
taxes, but in favour of what? Well -- if land is retained in publish
ownership -- it will discover that there will be no need for ANY
taxes, for rental revenue will smoothly offset the reduction of VAT,
excise duties and the rest of the plunder on private incomes which is
inflicted on wealth-producers and consumers everywhere else.
Supplemented by user charges, federal and local governments will wake
up one day to discover that the simple act of recovering rental income
is sufficient to meet all public expenses!
Already, 40% of federal revenue is rental income: the "revenue
earned from activities abroad" is mainly the extraction of rent
from the export of natural resources such as petroleum and diamonds.
All that Russia's economic policy-makers need to understand is that --
like Japan (1870-90) -- financing public expenditure out of rent leads
to the swiftest reconstruction of the economy.
But that strategy also has another major implication. Unearned income
would not fall into private hands -- an income which, when
capitalised, is traded in the western economies, and becomes the
primary source of instability (ask financiers why so many banks have
gone bust, or are technically bankrupt. Answer: rotten loans to land
speculators!). By treating rent as its principal source of public
revenue, Russia would be creating a truly "Russian mechanism":
a moral market economy, the likes of which we have not seen in modern
history.
PRIVATISATION is now under way. In St. Petersburg, Anatoli Peibo --
reassuringly impressive in beard and herringbone suit -- presides over
the process in St Petersburg, where he is Deputy General Director of
the city council's Fund of Property. His job is to identify
enterprises ripe for hiving off, and prepare the legal documentation
for the Property Foundation which stages the auctions. Thus are
enterprises placed in the hands of citizens. The new entrepreneurs bid
sums for leases to the land (lease periods are not more than 50
years), and they also agree to pay an annual rent for occupying the
sites, which can be revised every five years. This provision is even
superior to the arrangements in Hong Kong, where all land is leased
from the Crown.
What did Mr. Peibo think of the President's decree on land ownership?
He offered me the St. Petersburg interpretation: "Though they
declare the opportunity to sell land in the federal law, we think it
is not effective and sensible to sell land in St. Petersburg. In St.
Petersburg, the sale of land is not allowed yet."
The Russians are still trying to define the legal status of land, a
process that will take some time. As Mr. Peibo pointed out "It
took western countries many years to work out their legal base, and we
are just starting it."
IN SEPTEMBER, President Yeltsin signed a decree that gave a small
town an hour's drive from Moscow the right to sell the freehold of its
land. This was passed off as an experiment, but political observers
treated the decree as a provocative act aimed at challenging
parliament to pass a law on land ownership.
That law, which will seal Russia's fate, will be passed next year.
There is, then, the great prospect that Russia will retain land in
public ownership, and lease it to users. This lease/rent approach
reflects the practice in Hong Kong, that most successful of capitalist
economies where not one acre of land is held freehold.
In other words, Russia retains the option of adopting the fiscal
strategy recommended by the Physiocrats and Henry George -- defraying
the costs of the community out of the rent of land. That option,
unfortunately, is no longer possible for the last European and Baltic
countries: they have rushed to restore the right of freehold ownership
of land; thereby denying future generation an equal share in the value
of the resources of nature.
In Estonia, December 31 is the government's deadline for the
assessment of the value of the whole country. The assessment process
has already begun, helped to an extent by the black market in land
values (which are being traded, even though the law does not yet
permit the private ownership of land).
Henn Helmut, head of the land management department at the Estonian
Agricultural University, reports that the tax on land values will be
very low, but there are provisions to try and deter people from
speculating in land.
But as we all know, once there is private appropriation of land-rent,
laws do not deter (they merely aggravate) the business of speculation;
in doing so, however, they further distort an already destabilised
economy.
Real estate agencies have sprung up all over Estonia, to help the
owners of buildings cash-in on the new property market. Technically,
they cannot sell the land, but property owners are not mugs. As Mr.
Helmut noted: "Selling land is banned, and you can only sell
buildings. But if we sell the building the price includes the price of
the land!"
He cited the example of the sale of two identical buildings: the
inner city building achieved a price three times as great as the
similar one on the city's fringe! That is the lesson that Russia has
to learn: ultimately, the letter of the law does not matter one iota,
if the community fails to recover the full market rent for land for
the public's benefit.
Initially, rents will be underestimated. Such mistakes won't matter,
if Russia retains the legal right to correct them at an early
opportunity. An immediate task is to get the land and buildings into
the hands of users, to kick-start the economy, while reserving the
legal right of the community to revise the rent charges in line with
economic growth.
If the Russians handle that challenge correctly, they will develop
something that is not available in any other country: a smoothly
operating land market. Such a market can exist only if it is free of
the rent-appropriators, who are the biggest drag on the
wealth-creators in the other market economies. It also guarantees
every citizen a direct stake in the riches of nature through the
social expenditure of rent.
This is a prospect of what has been characterised as a Single Tax
society envisaged by American social reformer Henry George which every
trading country in the world should fear. For it would give Russia an
enormous price advantage on the export markets (rents, unlike taxes,
are not reflected in the prices of goods and services). Having lost
the Cold War, Russia would be on the path to winning the peace.
REFERENCES
- 'Tilling the Land is Love,"
Socium, No.5 (17), 1992, Moscow, p.21.
- David Hearst, "Portrait
revealed of a Russia that is killing itself," The
Guardian, London, Oct. 8,1992.
- Fred Harrison, The Power
in the Land, London: Shepheard Walwyn, 1983, p.158.
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