Taiwan and the "Land to the Tiller" Program

John C. Médaille

[Chapter 14 from the book, The Vocation of Business: Catholic Social Teaching for the Business Person, a work in progress, copyrighted by the author and reprinted here by permission. July 2005The author is adjunct instructor of Theology at the University of Dallas and a Real Estate Agent.]

Land Monopoly and Labor Markets

We have seen that Catholic Social Teaching has made wider ownership of the means of production a keystone of its idea of justice. She has, of course, based this on her authority as a moral teacher, but that moral teaching would be suspect if it could not be shown to have a sound economic base. It is not that the Church makes her moral decisions based on some economic system, but rather that a true morality will eventually be shown to be consistent with economic theory. If She is correct in this view, then redistribution of land will be shown to be the basis of a just and stable economic order. Further, this should be shown be both theoretically and in actual historical circumstances.

To some degree, we have already done this. We have seen how, theoretically, the law of rents is mitigated or abolished in the presence of a frontier or a commons. In such circumstances, wages stabilize at rates far above subsistence; when the frontier is closed and the commons enclosed, the law of rents takes over and the wages tend towards subsistence. We have verified these purely theoretical conclusions by noting the experience of America while she still had a frontier, and of England in the 15th and 16th centuries. In the later case, we noted that by the end of the 15th century, wages had reached nearly 4 times subsistence and attempts to enforce a "statute of laborers" were futile. But after all the land was "privatized" and the commons lost, wages dropped to bare subsistence levels and the statute of laborers became redundant. However, we do not need to look to colonial America or 16th century England for all of our data; we have enough examples in the 20th and 21st centuries; we have enough data from our own time, both positive and negative. Examples of monopolistic land ownership are, alas, all too common and present themselves for our analysis.

The case for land redistribution can be made in pure neo-classical terms. Where there are few owners, and especially when the few combine to control the market, a monopoly in land is created which in turn creates a monopsony for the labor market; land owners become "price makers" rather than "price takers."[1] Further, the economic control of the labor market is often reinforced by a series of institutional controls, such as the difficulty tenants or laborers have of obtaining credit, use of police power to prevent protests or unions, lack of education in rural areas, discrimination, etc. All of these things leave sharecroppers or farm laborers at a disadvantage in wage or rent negotiations, making these contracts leonine. The effect is that the landowners can arbitrarily lower the cost of labor with the results that the marginal costs are higher than the average costs, reversing the situation in a "normal" labor market; to increase the amount of labor would require them to raise wages rather than lower them.[2] This has four consequences from a purely neo-classical perspective.[3] One, the cost of labor is lower than what it would be in a competitive environment resulting in exploitation of the farm worker. Indeed, the low wages make marginal costs higher than average costs. Two, total employment on the farms is lower than what it would be because the higher marginal costs make it inefficient (in terms of profit) to fully utilize the land, resulting in surplus labor. The combination of surplus labor and lowered labor costs in turn lowers the "reservation wage" in urban areas, accentuating urban poverty. The third point follows from the second: since marginal costs are higher than average costs, total output is lower than what it could be, resulting in production inefficiencies. Whenever labor costs are artificially controlled through monopoly or monopsony power, average labor cost is likely to be lower than marginal cost, meaning that optimal returns to capital are reached before full utilization of the resource. Which leads to four, although the farm is less efficient, the total profits are higher, which results in an inequality of income distribution and widespread poverty. In other words, the farm is made "efficient" not in terms of total output, but in terms of total profit.

The implications are that wider ownership of land would raise total output and average income by breaking the monopsony over the labor market. There would be a more equal distribution of income and a reduction in both urban and rural poverty. This in turn would broaden the market in the non-agricultural sectors, allowing for more secure investment opportunities and hence advance the broadening of the economy away from the purely agricultural. However, there is a question of how to break up land monopolies. Three solutions have been put forward, a market-based solution, favored by the World Bank; a re-distributive solution, in which land is simply expropriated; or by a combination of the two. All three have been tried extensively since the 1950's, when land reform achieved a high priority on the development agenda; the first two have been shown to have extensive problems. The World Bank solution hasn't worked for reasons which Belloc laid out in The Servile State.[4] In a market solution, by which landowners are simple given the market price for their land, nothing really changes. This is because the "market price" for anything is simply the same thing in a different form. The ownership of land or money is a claim on the output of society; the market price merely converts that claim from one form to another, from land to capital. The practical effects are that the oppressive rents are merely converted into oppressive interest payments. Nor is this effect mitigated by having the national governments pick up the debt, since governments can only pass on the cost to their citizens in the form of taxes. The market solution simply does not change the power relationships involved, which need to be changed, simply because that is not the function of the market; indeed, a free market depends on leaving power relationships exactly in place before and after a market trade. The World Bank solution has therefore merely saddled the so-called Third World with unmanageable debts, crippling interest payments, and even less of a prospect of being properly developed than they would have without the misguided "help" of the Bank.

But outright expropriation has it problems as well. This is because there is an immediate moral difficulty. It is certainly true that monopoly power is both morally repugnant and economically inefficient, and given that land ownership is a social convention society certainly does have the power to limit it. However, it is a stretch to then claim that the current owners have no rights whatsoever that society is bound to respect. Certainly, their monopoly rights ought to be terminated, having neither a moral nor an economic root. But neither can they be reduced to penury without creating as great an evil, both moral and economic, as the one expropriation intends to correct. Outright expropriation turns to outright criminality, as it did in the Communist nations or in places like Zimbabwe, because it begins in criminality, that is, with a denial of justice.

The "Land to the Tiller" Programs

That would seem to leave the third solution, a combination of market buy out and expropriation. Like expropriation, this solution actually changes power relationships within a given society; like market based solutions, it recognizes, partially, the rights of existing land owners. In such solutions, there is no magic formula as to the allocation of rights and power; it is arrived at on an arbitrary basis and is purely a matter of judgment. The primary examples of this form of land redistribution are Taiwan, Japan, and South Korea. The circumstances in which the redistributions took place are somewhat remarkable, involving three historical circumstances. The first was the explication of Chinese nationalism given by Sun Yat-sen (1866-1925), head of the Chinese Nationalist Party (the Kuomintang) which overthrew the Manchu dynasty in China and was in turn overthrown by the Chinese Communists. The second was American ascendancy over the east after World War II. And the third was the imperative to effective action given by the fear of a communist victory in all three places and the need to break the power of an oppressive land owning class whose very existence had been the biggest practical argument in favor of communism.

Sun Yat-sen had made "land to the tiller" a foundation of Chinese state, but the Kuomintang, at war with the Communists, then the Japanese, and then the Communists again never had sufficient control of China to implement any actual reforms. Further, they depended to a large degree on warlords and large landowners, so that real reforms were politically impossible in any case. In 1949, the Nationalists were defeated by the Communists and fled to the island of Formosa, now called Taiwan. The Taiwan that greeted the refugees was an agricultural and feudal society. The war had devastated production, which was at half its pre-war levels. Mostly it was a nation of small sharecroppers with most holding about 2.5-3 acres. Rents were from 50-70% of the crop and there was no security of tenure; the farmers could be evicted at will. Most of the land was owned by members of 20 families. Further, since the returns on land were so high, there was little interest in investing in anything but land. In addition, Taiwan had to absorb 2 million refugees from the mainland and bear the costs of defense. It was expected that Taiwan would soon fall to the Mainland communists, as the Kuomintang had never proved very effective in controlling China. It was necessary to act quickly to reform Taiwan; it was the very failure to enact reforms which had made the Kuomintang unpopular in China and led to the victory of the Communists. They could not make the same mistake twice.

Land reform was based on a program initiated in Japan by General Douglas MacArthur, who after the war was the virtual ruler. MacArthur's plan had both a political and economic purpose: politically, it weakened the landowning class that had supported Japanese militarism; economically, it distributed both income and incentives to innovate among the people. The success of the program in Japan encouraged its application to both Taiwan and Korea. Most of what we say here could apply to all three countries, but mostly we will take the case of Taiwan.

Taiwan's land reform took place in three phases. In the first phase, starting in 1949, rents were reduced to 37.5% and landlords were required to give 6 year leases. Further, the tenants were no longer required to pay rents in advance. The farmers now had an improved income and at least some security of tenure. This also had the immediate effect of lowering land prices since the returns were now lower, which later facilitated the process of land redistribution. Further, during times of crop failure, tenants could apply for a reduction in the rents. The tenant also acquired the right of first refusal if the landowner attempted to sell the land.[5]

In the second Phase (1951), public lands were sold to the farmers at a fixed rate of 2.5 times the average yield. These were lands which had been abandoned by the Japanese and taken over by the government and represented 20% of the arable land. Each farmer could buy .5-2.5 hectares of paddy land and 1-4 of dry land. The farmer was loaned the money and could repay in kind over 10 years. 266,000 families received land in this phase. The third phase (1953) was the "land to the tiller" proper. The landowners were forced to sell all their land over a small amount at the same terms the government had sold its own land, a price of 2.5 times the yield. 166,000 families received land under this phase. So in total, about 432,000 families came into possession of their own land. The tenancy rate dropped from 64% to 17% and the farmers were now paying 25% for 10 years rather than 50% forever.

Note that 2.5 times revenue is a very low price to pay for any asset. Further, no account was taken of the externalities of any piece of land, which in a free market is usually a critical portion of the price. Land prices are normally set not by the productivity of the land, but by the externalities; things such as how close a piece of land is to a population center, what are the off-site improvements (such as roads or utilities), and so forth, are normally the major determinants of price; all of these were ignored. Thus the program can be considered a partial compensation and partial expropriation of the land. As such, it actually changed the power relationships within the economy and the government.

The results were dramatic. Farm production increased as farmers used more fertilizer, went to multiple cropping with as many as four crops/year and diversified production to higher value but more labor intensive crops. Production increased at an annual rate of 5.6% from 1953 thru 1970. The farmers suddenly had something they never had before: relatively large amounts of disposable income. Now they needed some place to spend it.

The owners were paid with 10% cash, 30% in stocks from four government-owned companies, and 60% in industrial revenue bonds. In other words, the government simply printed the money to buy the farms. Normally, when governments merely print up so money to accomplish some project, the result is merely an inflationary spiral. But this did not happen. Why no inflation? This is where the Taiwanese strategy really becomes clever. The bonds that the landowners received were negotiable industrial bonds which they could then invest in any light industry they choose;[6] indeed, there was nothing else they could do with the bonds; it was a case of "invest or die." The strategy was two fold: get capital, in the form of land, into the hands of farmers; get capital, in the form of industrial investment, in the hands of entrepreneurs. Note that the strategy provided both goods to buy and purchasers to buy them; it was a binary strategy, giving equal weight to production and consumption. A tremendous number of capitalists were created overnight; the former landowners, who previously had no interest in manufacturing, were converted into instant urban capitalists and had to find places to invest the proceeds from the lands sales; the landless peasants became proprietors. By this method, the government provided support to Taiwan's fledgling industrial base. But the fact that the actual companies to invest in were picked by the former landowners meant better investment decisions than if the government had tried to pick the winners itself. Industrial production expanded, giving the newly empowered peasants some place to spend the money buying locally produced goods.

We can see the Taiwanese experiment for the conjuring trick it was: the government sold land it didn't own, bought with money it didn't have and managed to expand both the consumer market and to provide the industrial production necessary to serve that market and serve it from local resources. There was no inflation because the money supply expanded at the same rate as production by a sort of automatic method. Redistribution allowed for expansion of the consumer base which allowed for expansion of the industrial base. It is not often in business and economics that one gets to see solutions which are elegant and beautiful, but certainly the land to the tiller program qualifies. We can also note that all of this was accomplished with relatively little "foreign aid" or development assistance; the United States provided the 10% cash that the landowners received, but the rest was pure monetary "magic."

The story in Korea was much the same. In 1945, the American military government reduced the rents from 50-60% down to 33%. Later the provisional government forced the larger landlords to sell their land at a price of three times the annual output to be repaid in 15 years. However, the actual price was in reality only 1.8 times the produce, since the price was set using the depressed post war averages.[7] In 1949 and 50, there were further forced sales, the owners being compensated in bonds that could be used to buy the industries left behind by the departing Japanese, which represented 80% of Korea's industrial base.[8]

Industrial Policy

The benefits of land distribution would not have been half so great had it not been coupled with an intelligent industrial policy. The monetary conjuring trick which provided land to the peasants and capital to the entrepreneurs worked in concert with the industrial policy that began where Taiwan actually was: in a very primitive state. The "light industries" in which the bonds were invested were very light indeed. Few had more than 25 employees and the average number was just eight. But a business-any business-always depends on a network of other businesses. To set up shop, one first needs land, then a building, office supplies, telephones, delivery services, furniture, machinery no matter how primitive, etc. Business breeds business. But the Kuomintang was especially interested in a particular kind of business: Import substitution. Since Taiwan's own industrial capacity was limited, most manufactured goods had to be imported. The government encouraged import substitution industries, first in such things that were easy to make, such as shoes, clothing and textiles.[9] Import substitution is a key part of development strategy; local resources were used to produce what had previously been imported and a judicious but limited use of tariffs were designed to give an edge to local businesses.

Taiwan was still a low labor cost state and hence there were transplant factories, what we now call "outsourcing." Manufacturers in Hong Kong and Japan contracted out some work to Taiwan. This gave the Taiwanese valuable experience in setting up factories and managing production. In learning how to make things cheaply for others, they learned how to make the same things for themselves. But the skills learned were then used to set up their own factories.

To encourage efficient use of the land, a Georgist tax policy was followed. Georgism was a 19th century theory developed by Henry George (1839-1897). George was probably the most well-known and popular economist of his day; some measure of his popularity can be gleaned from the fact that at his death, over 100,000 people filed past his coffin, while thousands more were unable to get in. His major work, Progress and Poverty, was a best seller for many years, and his ideas had a tremendous influence up until recently. Basically, George noted that while the law of rents allocated all values above subsistence to the landlord, the landlord did not actually do anything to earn those values. George also noted that the claim to the land the landlord held was based not on any natural right, but on government power alone. Further, the rent of land was due totally to the external factors: population and off-site improvements. In other words, the landlord added no values to the land per se. Yet, land tends to be taxed lightly while the improvements on land tend to be taxed heavily. For George, this reversed the logical order. Land should be taxed to its full rental value, while improvements should not be taxed at all; land after all was pure gift, while what a man made of the land was his alone. Thus Georgism is often called the single-tax theory, since there would be only land taxes. George believed that the single tax would force down the price of land by making it unprofitable to hold parcels for speculation, while encouraging development by leaving both labor and improvements to the land untaxed. One can say that George socialized the land while privatizing its development; it is an interesting view of the questions of the social and the private values of land that we have previously examined. Sun Yat-sen was an admirer of Henry George and made his ideas a part and parcel of Chinese nationalism; hence George's theories were spread through the East. In fact, both Singapore and Hong Kong are based on Georgist principles. In Hong Kong, all the land is owned by the government and leased to developers (which is equivalent to a 100% tax rate), while in Singapore, the government owns 65% of the land. Needless to say, both are very prosperous states. Georgism deserves a lot more space then this.[10] But for our purposes we can note that Taiwan followed a Georgist policy to encourage development while keeping other taxes relatively low.

Equality and Development

Taiwan followed an import replacement scheme right up the industrial scale from cheap cloth shoes to shipbuilding, steel making, and electronics, to become a great trading nation. At the same time, she was able to create an economy with greater equity, in complete contradiction of the Kuznets curve. The Kuznets curve states that development and inequality first rise together before falling in later stages of development to form an inverted "U". Despite the lack of empirical evidence for this thesis, it is standard development dogma.[11] It is often used as an excuse for development programs which seem only to widen the gap between rich and poor without any discernable benefits to the people. But in Taiwan, along with Korea and Japan, rapid development and increased equality went hand in hand.

One of the standard measures of inequality is called the Gini Coefficient, which measures the distance from a "perfect" equality; a Gini score of zero would indicate "perfect" income equality and 100 would indicate a situation where one person had all the income. Taiwan measures .33 on this scale; the U.S., by comparison, measures .41. The ratio between the earnings of the top 20% with the bottom 20% declined from 15 to one in 1950 to 5 to one by the 1970's. Taiwan has managed 50 years of high growth rates, increased equality, and low tax rates (comparatively). Unemployment was low to non-existent through most of Taiwan's post war history. Before 2000, it rarely exceeded 3% and usually was less than 2%. Since 2000, the rate has risen as high as the low 5's before dropping back to the 4% range as Taiwan struggles to adjust to outsourcing to mainland China. Further, Taiwan and the other "Asian Tigers" were able to achieve these successes despite having population densities among the highest in the world, a fact which contradicts the prevailing dogma that population density is an impediment to growth.

Taiwan is, of course, far from utopia. For one thing, its very success has brought with it a corrosive consumerism which threatens the very roots of the social order and cohesion upon which these decisions were made. For another thing, the ownership was that was granted to farmers was not often extended to industrial workers. It is likely that coping with the challenge from China will require the same redistributive will require the same kind of redistributive programs for urban workers that were extended to farm workers. Nevertheless, Taiwan, Korea, and Japan have demonstrated the great effectiveness of redistributive policies in providing development with equity. In only a single generation, Korea and Taiwan were able to transform themselves from feudal and highly unequal societies into industrial powerhouses while overcoming poverty and inequality. As such, redistribution of productive assets should provide a model for development. This is an especially important question, given the destabilizing inequality and lack of development that exists in the world today; moreover the question is made more important today by both the phenomenon of "globalization" and the precarious security situation in the world. But despite the evident success of these models, they are not the models that have been followed by the World Bank and other development institutions; these have followed different dogmas, with tragically different results.

REFERENCES AND NOTES

1. Keith Griffin, Azizur Rahman Khan and Amy Ickowitz, "Poverty and the Distribution of Land," Journal of Agrarian Change, Vol. 2, No. 3, p. 289.
2. Griffin, p. 289.
3. Griffin, pp. 289-91.
4. Belloc, "Appendix on 'Buying Out'", pp. 163-170.
5. Griffin, p. 304.
6. Jane Jacobs, Cities and the Wealth of Nations: Principles of Economic Life, (New York: Vintage Books, 1985), p. 100.
7. Griffin, p. 306.
8. Griffin, p. 306.
9. Jacobs, p. 100.
10. See Henry George, Progress and Poverty, originally published in 1880 and available in many editions. As a sidelight, one element at least of Georgism remains in popular culture, the board game "Monopoly." It was originally developed by Georgists as a teaching tool.
11. Klaus Deininger and Lyn Squire, "Economic Growth and Income Inequality: Reexamining the Links," Finance and Development, (International Monetary Fund, March, 1997), available at http://www.imf.org/external/pubs/ft/fandd/1997/03/pdf/deininge.pdf.