Cities without land markets

Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized 40)bPoz? AV4d f fq 227 ZI E World Bank Discussion Papers Cities without Land Markets Lessons of the Failed Socialist Experiment Alain Bertaud Bertrand Renaud Recent World Bank Discussion No. 169 Papers Clon#ot PropenyResouirres: A A1issin.y Dimension aJDevelopment Strattqies. N. S. Jodha No. 171) A C'hitieicNn'ina asa Rebrm Ex7lerionent: 77wr Caseof -lainan.lPaulM. Cadario, Kazuko Ogawa. and Yin-Katil Wcn No. 171 IssnesjirInfrastrurntre Masniamqment itnrhe 1990s.Arturo Isracl No. 172 Ja/panesc NationalRailmaysPrii'ati:ariopiSrtudy:'nac ExpericteofJapatn and L5ssons for DwelopingColmaries. Koichiro Fukui No. 173 Tl7eLivestock Seetor in EIastena E-rolipe: Constraints andOpportunities. 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Anjali Kumar (Continucd on the inside back roter.) 22 7 1Z31 World Bank DiscussionPapers 0~~~~~~~~~~~~~~~ Cities without Land Markets Lessons of the Failed Socialist Expenrment Alain Bertaud Bertrand Renaud The World Bank Washington, D.C. Copyright O 1994 The International Bank for Reconstruction and Development/THE WORLD DANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. Al rights reserved Manufactured in the United States of America First printing March 1994 Discussion Papers present results of country analysis or research that are circulated to encourage discussion and comment within the development community. To present these results with the least possible delay, the typescript of this paper has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. Some sources cited in this paper may be informal documents that are not readily available. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to dhe World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. The World Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibility whatsoever for any consequence of their use. The boundaries, colors, denominations, and other information shown on any map in this volume do not imply on the part of the Wodd Bank Group anyjudgment on the legal status of any territory or the endorsement or acceptance of such boundaries. The material in this publication is copyrighted. Requests for permission to reproduce portions of it should be sent to the Office of the Publisher at the address shown in the copyright notice above. The World Bank encourages dissenination of its work and will normally give permission prornpdy and, when the reproduction is for noncommercial purposes, without asking a fee. Permission to copy portions for dassroom use is granted through the Copyright ClearanceCenter, Inc, Suite 910, 222 Rosewood Drive, Danvers, Massachusetts01923, U.SA The comnpletebacklist of publications from the World Bank is shown in the annual Index of Piblications, which contains an alphabetical tide list (with fuHordering information) and indexes of subjects, authors, and countries and regions. The latest edition is available free of charge from the Distribution Unit, Office of the Publisher, The World Bank, 1818 H Street, N.W., Washington, D.C. 20433, U.S.A., or from Publications, The World Bank, 66, avenue d'lena, 75116 Paris, France. ISSN: 0259-21 OX Alain Bertaud is principal urban planner in the Urban Development Division of the World Bank's Transportation, Water and Urban Development Department. Bertrand Renaud is housing finance advisor in the Bank's Financial Sector Development Department. Library of Congress Cataloging-in-Publication Data Bertaud, Alain. Cities without land markets: Iessonsof die failed socialist experiment / Alain Bertaud, Bercrand Renaud. p. cnL - (World Bank discussion papers, ISSN 0259-210X 227) ISBN 0-8213-2740-2 1. Land use, Urban-Russia (Federation)-Congxresses. 2. Land use, Urban-Government policy-Russia (Federation)-Congresses. 3. Real property-Valuation-Russia (Federation)-Congresses. 4. Land tenure-Russia (Federationj-Congrcsses. I. Renaud, Bertrand, 1939. II. Tide. III. Series. 1993 H1D720.2.Z7B47 9342813 333.77'0947-dc2U CIP iii CONTENTS FOREWORD......... v vii ABSACT. ACKNOWlEDGM T. Viii L INTRODUCTION .1 EL LAND ALLOCATION IN CrITES WTHOUT A. mII. IV. V. AURKES. 4 Major Spatial DifferencesBetween Soviet and Market Cities .......... 1. Absence of Incentives to Recycle Land in Soviet Cities ............... 2. Spatial Structure of Socialist Cities: Rusting Factories in Prime Locations ...................................... . 5 5 6 B. Dynamics of Housing and ResidentialDevelopment in the Socialist City ...... C. The Socialist City Compared With the Market City ........ ........... 8 12 EMERGING REAL ESTATE PRICES .............................. 13 A. Synthetic Land Price Gradients and Normative Prices ....... B. Housing Privatization and Rapidly Emerging Implicit Land Price Gradients .......... 13 MANAGING TIHE TRANSITION: IS THE SOVIET ClTY SUSTAINABLE... A. Market Prices and Affordability of Land Currently Occupiedby Enterprises B. Impact of the Transition to Markets on Housing and Services Areas .... 13 16 16 .... 18 CO MONENTS OF URBAN LANDREFDORM........................ 22 22 .. A. Land and Property Tenure 1. A Russian Overview .23 2. Current Tenure Forms .24 3. Direction of Reform .25 B. Trading of Urban Land and Market-OrientedInformation Systems . 1. Current AdministrativeProcedures .26 2. Direction of Reform .27 .26 iv VI. C. Property Registration, Valuation, and Taxation ......... ............ 1. Current Conditions .................................... 2. Directions for Reform ................................... 28 28 30 D. The New Professions:Role of Urban Planners in Market Cities .... 1. Urban Planning Practice in Russia .......................... 2. The Current Urban Planning Process ......................... 3. Direction of Reform .................................... 4. New Role of Urban Planners in Russian Cities ................... 32 32 34 34 36 ....... CONCLUSION. 36 BOXES Box 1: Sociaist Cities Without LamdMaikets: St Petersburg's Land Use Paerm ............................... Box 2: 7 Land Use ARocation the Market City: The FndamentalLocationalTrade-offMadeby Househols .... ........ 20 FIGURES Fue 1: MoscowLad Use: Industril LandUseand Job DensityPatten .... ....... 9 la Percentage of Industrial Lad in Built-Up Are l.b Job density in Built-Up Area Figure 2: The SociaUist City Compared to the Market-City: Moscow Compared to Pans .. 11 2.a Compartive Popuation Density Gradient BetweenMosow nd Paris 2.b Compartive Population Distribution: Moscow, St Petersburg, Pais Figure 3: Emergng Market Land Pnce Gradients m Moscow, Rusia and Krakow, Polnd 15 v FOREWORD About a third of the world's populationlives in former centrallyplanned economies. The transitionof these countriesto market-based,competitivemechanismsfor resource allocationis one of the dominant issues of the 1990's. However, such reforms raise analytical and operational problemswhichare considerablymoredifficultto addressthan thoseof liberalizationor privatization in market economies. The possibilityto observecloselythe outcomesof a state-run,administrative-command system which has been in operationfor a long time can also throw a powerfullight on critical elementsof a well-functioningmarket economywhich we often take for granted. One such outcome is the patern of land use and resource allocationin socialistcities. There the well-intentionedgoal of cocializingthe collectionof the land rent through total publicownershipand allocationof real estate property has yielded unexpectedand undesirableoutcomes.The resultingstructure of socialistcities rendersthe transitionto marketseconomicallymuchmoredifficultand sociallypainful. Thisevidence also holds major implicationsfor developingcountrieswhichare grapplingwith this sameissue of land rent recovery and may be tempted by various forms of land nationalizationand public allocation. The present paper relies primarilyon data from Russiancities but consolidatesresults from field work in several socialisteconomiesin transition. It providesimportantsystemic insights into the transitionproblemsof socialistcities and pointsat the criticalneed to developefficienturban land markets. The findingsalso stronglyunderlinethe need to identifysuitableurban regulatorysystems for the transition cities. What are the most desirableurban planning regulations, institutionsand professionsfor landdevelopment,commercialand real estateinvestment,and property transactions? How do they affect the provisionof infrastructure?Whatare theirpricingeffects?Findingan answer for transition cities will also be of great value to the rapidly growing market cities of developing economies. Implementinga sound and adaptableurban regulatorysystemis not a narrow technicalissue when one considersthat the internationalcompetitivenessof countriesrest on the efficiencyof their cities where most of the GDP now originates. Land use managementand the urban regulatory framework are not critical only to a city's internalorganization,but also to its economic viability, its adaptabilityto changeas well as its livability.Lookingbeyondthis paper, we thereforehope that these importantregulatoryissuescan soon be successfullyaddressedby the internationalcommunity working on the urban problemsof transitioneconomies,and beyond. Anil Sood, Director TechnicalDepartment Europe and Central Asia Office Middle East and North Africa Office vii ABSTRACT Whathas happenedto the socialistcitywhere all investmentdecisionshave been made without land markets? What are the consequencesfor the nationaleconomy? This paper presents an empiricalanalysisand a theoreticalinterpretationof the spatial dynamicsand urban efficiency of socialistcities. The empiricalwork is based on Russiancities whichhave been operatingwithout land markets for seven decades, precisely at the time when the Soviet economy became fully urbanized. Soviet planners have made urban investmentdecisionsunder three greatly distorted prices: land had no site value, intereston capitalwas not recognized,and energy prices were only a small fractionof world prices. Lacking price signals and economicincentivesto recycle land sites over time, the administrative-command processhas led to a startlingpattern of land use with a perversepopulationdensity gradientwhich rises as one moves away from the center of the city, in total contrast with the market city. Populationdensity in Moscow at 17 kilometers from the center is equal to that in the center of Paris which is know as one of the densest market cities. Equallyremarkable,the locationof jobs has remainedhighly centralizedlike in 19th-centry cities, in contrastwith modernmarketmetropolitanareas withtheir multiplesuburbanemploymentcenters. Today, the Soviet city is characterizedby rustir,gfactoriesin prime locations,a monocentricpattern of job location together with distant residential areas located in the suburbs. Such an intemal structure tends to maximizethe internalinefficiencyof the socialistcity in terms of energy use, infrastructureand commutingrequirements. The share of land allocatedto industrial use in the socialistcity is often two to three times higher than that found in market cities of comparablesize and economicfunction. These major inefficienciesdininish the internationalcompetitivenessof the socialistcity. Moreover, the environmental impactof a ring of older or decayingindustries in the urban core surrounded by high densityresidential areas is likelyto be very significant. These landuse distortionsare causing problems for the transitionto markets. With price liberalizationand the opening of the economy, relative prices are shifting very rapidly; especiallyenergy prices. In Russia, a goodpart of the residentialstockof high-rise suburbanmass housing may have a negative asset value for a significantperiod of time as rents comparedto housingoperatingcostsare out of balance. Meanwhile, opportunitiesfor capitalgains at the center are very significant. The analyticalframeworkpresentedshows why and how these distortionsare generic to the 'socialist city". However, the intensityof distortionsmay vary according to the length of time a specific city has been operatingwithoutland markets. In Moscow, the tradingof housing is now allowed and a clear negativeprice gradienthas emergedin 1992. This gradient is rotatingvery rapidly.Yet, legal, institutional,andadministrativeimpedimentsto clear propertyrights remain large and center-peripheryprice differentialsare still too weak comparedto those found in the market city to stimulatemuch land recyclingyet. The evidence presentedpoints at two key issues: what are the critical decisions required to start-up a viable land market? What are the appropriateinstitutionsneeded to sustain soundurban land markets? The final sectionoutlineskey componentsof the program of urban land reforms needed to support the emergenceof land market Yet considerabletechnical work is neededbeyondthis paper to provideoperationalanswersto these two key questions in Russia and other semi-reformed transitioneconomies. viii ACKNOWLEDGEMENTS This paper reflects extensive discussionswith and contributionsfrom colleagues working in China, Russia, Polandand quitea few other semi-reformedtransitioneconomies. While our concerns were first raised in China in 1988, much of the work reported here was part of the TechnicalCooperationProjecton HousingReformandPrivatizationcarried outwith theGovernment of Russiain 1992. We are particularlygratefulto the urban plannersand economistsof Russiawho assisted us in the collectionof data withoutwhich the evidencepresented in this paper would not exist. Our specialthanksgo in alphabeticalorder to MikhailP. BerLzin,Olga Z. Kaganova,Nataliya V. Kalinina, and Oleg Matiukhin. We thank JosephK. Eckertfor his permissionto reproduce the price gradient analyseswhich he generated as part of our technicalcooperationwork. During the developmentof our analyseswe have benefittedfrom discussionswith our World Bank colleagues, in particularGian CarloGuardawho currentlyworks in Polandand Albaniaand AndrewHamerwho works in China. A more limitedversion of this paperwas presentedat the 1992Seminaron Urban Land and Housing Refonnin Socialistand FormerlySocialistEconomies held to commemoratethe centennialof the foundationof the Universityof Chicago. 1. INTRODUCTION"' 1. The rejectionof private ownershipof capitaland of the means of production, and of the market as a mechanism for resources allocation has been a central tenet of Marxist ideology. The total commitmentto public ownershipof land under the administrative-command systemused to manage the economyhas led to a drarnaticallydifferentstructure of socialistcities. Now that controls over informationhave been lifted, access to actual local urban data can be obtained. It is therefore possibleto carry out empiricalanalyses of the urban land use which has resulted from the absenceof markets to allocate land among competinguses. The combinationof marxist ideology, national institutionsand domestic economic system has produced somewhat differentresults in each socialisteconomy. Yet, the systemicimpactof the administrative-command systemas a substituteto the market is quite clear. The empiricalevidenceprovided in this paper is based on the Soviet Union and Russian cities, because these are urban centers with the longest history of developmentin the absenceof land markets. Russia is also the countrywhere we have workedmost recently. Th.econceptualframework we use, however, is applicableto other socialist citieswith a strong legacyleft by the administrativecommand-system.We observe similaroutcomes in the cities of Poland and China which we have analyzed. 2. Except for the old historical centers, almostall of Russian urban growth has taken place during the socialistera 1917-1992. The fact that urban developmenttook place in a period when land wa- nationalizedand administrativelyallocatedrather than sold on an open market for a price has had a very profoundimpacton the internalorganizationof Russian cities. It is therefore IbThis paper has been prepared by Bertrand Renaud. It is based on joint work done with Alain Bertaudin Russia, China, and Poland. The land use analysesof St Petersburg (formerly Leningrad)and Moscow presented here were carried out by Alain Bertaud with the cooperationof the state planning organizationsof these two cities, and the assistanceof independentRussian urban planners. Joseph K. Eckert contributed the analysis of prices for Moscow, Russia and Krakow, Poland. This analysis of urban land use in Russia originates in a iarger technical cooperationproject directed by Bertrnd Renaud for the World Bank whose results appear in the report Russia: Housing Reform and Privatization, Strategy and TransitionIssues to be published. I empiricallyquite relevantto speak of a distinct 'socialist city"'Y The inabilityof the administrativecommandsystemto evaluateeven approximatelythe value of a land site and its opportunitycost in alternativeuses (under such concepts such as site value according to highest and best use) has generated striking spatial anomalies and urban inefficiencies. The transition to markets and the opening of the national economy requires a shift from administeredprices and bureaucratic allocationto marketprices. This is resultingin major and rapid shifts in relative prices which are bringing into sharp relief the pattern of past resource misallocationin the urban economy. For instance, Russiandomesticenergy pricesuntil 1992were less than 5 percentof world prices. Even an imperfect adjustment to 50 percent of world prices will have a massive impact on urban transport costs and the energy intensive construction sector as well as on the maintenanceof the inordinately energy intensive housing stock. 3. In order to identifygeneric featuresof the socialistcity using Russian cities, this inquiry treats four questions: (1) How do Russian urban land use patterns differ from those in market economies;do those differencesgeneratemajor inefficiencies? (2) What issuesmay arise once marketland pricing is appliedto Russiancities previously developedunder a commandmodel? (3) Will long run market forces correct existing inefficienciesor should Russia adopt specifictransition strategies? (4) What changesin existinglaws, institutions,and professionswill be neededto operate sound urban land markets? 4. These questions are central to the urban economy with the end of the socialist administrative-commandsystem. During the transition toward a market economy, urban infrastructureand housing investmentsmay help restart the constructionsector. Dependingon the geographicpattern of future real estate marketvalues, transitioninvestmentsmight have a negative economicrate of return and might perpetuateland use distortions. Failure to carry out land use reformscould leadto even worse land use distortionsas partial market forces collidewith distorted existing uses. By contrast, recognizing and understandingland market values will help direct investmentsto high return areas and could reduce relatively quickly some of the worst land use inefficiencies. In short, the spatial distributionof investmentin the urban areas is a matter of substantialpolicy relevance during the transition. Far from being an ideologicalor doctrinaire prescription,the developmentof urban land marketsis the only way to remedypast urban distortions and inefficienciesin a decentralized, incremental and organic way in all transition socialist A seminal influence when we started our joint field work in China in 1988 has been the series of papers in R.A. French and F.E. Ian Hamilton eds., The Socialist City, Spatial Structure and Urban Policy, Chichester,U.K.: John Wiley, 1979. Our early findingswere presented in B. Renaud and A. Bertaud, 'Urban Housing Reforms in China: The Main Points", paper presented to the China Leading Group on Urban Housing Reforms, Joint China-World Bank Seminar, Beijing, October, 1989. 2/ 2 economies (TSE's).3' This is particularly true for the far-flung Russian urban system which is spread across 1,030cities and towns locatedin 21 republics, 11 autonomousregionsor districts, six administ-ativeterritories, and51 regions over a land area two and a half times larger than the United States. 5. This evaluationof the Socialistcity is divided into four parts. Part II evaluateswhat h.a«happenedto resource allocationand to the spatialstructureof Soviet citieswithout land markets. It begins with the spatial analysis of Moscow and St Petersburg. This analysis documents the outcomeof administrativedecisionsaboutwhat to build and where to build when such decisionsare made without the guidanceof market prices. The resulting cities have a land-use structure which differs strikinglyfrom market cities. This land use is fragmentedand, perversely, the density of population rises away from the city center. Such a spatial organization tends to maximize commutingcosts and infrastructurerequirementslinkedto the various urban networks. To remedy past distortions, site and property valuation have become a major operational issues for local governments. Part III discussesthis criticalproblem. Over the last three years, activereal estate markets have been emergingin major cities like Moscow. Early analysesof such voluntarytrades are already possible. They show the extent of land misallocation,as the emergingprice pattern is Space in this chapter is too limited to discuss adequately the open letter dated November 7, 1990 addressed to Mikbail Gorbachev, initiated by Nicolaus Tideman and William Vickrey, and signed by 28 very prominent U.S. economists. This letter warned Mr. Gorbachev that 'there is a danger tbat you may follow us in allowing most of the rent of land to be collectedprivately and that wt...] It is important that te rent of land be retined as a source of government revenue [...] Some economist might be tempted to suggest that the rent can be collectedpublicly simply by selling land outright at awution. There are a number of reasons why this is not a good idea'. Among all the advice sent to the Soviet Union and later to Russia, there may have been few letters so well-intentioned, but so poorly cast and ill-timed as this letter. It totally disregards the historical antecedents, administrative reality, political behavior, institutional base, and land use structure encountered in Soviet cities. The recommendationsalso dismiss entire areas of Western economic analysis and evidence regarding public choice economics, principal-agent problems, Ronald Coase's work on property rights, and the impact of imperfectinformation on transactioncosts in land and real estate markets. 3v Put simply, how could land rent on a specific site be even roughly estimated today when the land pricing and site valuation needed to reflect resource cost and opportuity cost are totally lacking in Russia? One may legitimately wonder whether, prior to signing, any of the signatories had spent even one day examining in situ the reality of the urban land system and of political and economic reform in the Soviet Union. Amidst fierce ideologicaland political debates, the deletenous essage that was heard in Moscowwas that U.S. economists were strongly recommending against the privatizaon of land, and by direct implication land markets. In fairness, an annex to this letter recommends a third way for land use and rent recovery. Unfortunately, most people would agree that when switching from left-side driving to nght-side driving, the most accident-proneplace to drive is in the middle of the road. Three years later, far from having been lost in the rush of massive political changes, this letter is still being used as an argument by opponents of land privatization and market reforms. This is a cause of considerable distress for Russian urban specialists and economists. Emerging from seventy years of ideological experiments, they wish that the signatory U.S. economists bad tested their theoretical concepts on their own country first, before proffering their advice on others. 3 exactly oppositeto the current urban populationdensity profiles.4' Sucha completecontrastbetween the new price gradient and the old densitygradient is a cause for concernin managing the transition to land and real estate markets. Part IV concernsthe extentto whichvarious parts of the distorted Soviet city are economicallysustainablewhen key internalprices such as energy prices and capital prices must now be adjustedto worldprices. The impactof the transitionto markets on enterprise, residentialareas, and the servicessectoris examinedbefore discussingthe componentsof urban land reform. Movingfrom diagnosisto remedies,Part V highlightsfour major elementsof urban 6. land reform in the socialistcity: (1) land ownershipand property rights; (2) mechanismsfor the trading of land and informationsystemsand market needs for timely, accurate and easily accessible information;(3) the critical issueof propertyvaluation,and the flawedrecent Russian land tax; and, finally, (4) the new role of urban planners. A leitmotifof reforms in TSE's is that markets are not self-defining. To functionwell, they need proper institutionsand skilledprofessions. There should be no misunderstandingabout the requirementsof urban land markets. Markets for short-lived consumer goods like pencils, tomatoesor vodkado not require much regulationto operate well. In great contrast, markets for the perpetualgood which an urban site is could not operate soundly withoutwell-trainedprofessionalsas well appropriateregulationsto operate. Therefore, the new role of urban planners in Russiancities will need to be exaamined,howeverbriefly. II. LAND ALLOCATION IN CITIES WITHOUT MARKETS 7. In Russia,administrativedecisionsbased on 'needs" andnorms have so far governed the use and quantityof land consumed. By contrast, in a market economy,land price differentials constitutethe most important factors determiningquantity and locationof land consumed. These divergent principlesgoverningland allocationand land use could be expected to produce different spatial and efficiencyoutcomes. A quantitativeland use analysis of Moscow and St. Petersburg reveals that there are indeediinportantdifferencesbetweenRussiancities and market economycities ut The direct fimctional relationship between the residentialland price gradient and the populationdensitygradient which exist in a fee market ecmomy has been establish theoreticallyby RicbardMuth in his classicCitiesand Housing,Chicago:U. of ChicagoPress, 1969. For a full development and application,see Follain, Urn and Renaud "EconomicForces UnderlyingUrban Deenualizi A Stuctural Modelfor DensityGradients" Enironmentand Planning,SeriesA, August1979. This empirical analysiswasappliedto Korea. 4 in the distributionand consumptionof land.5"(SeeBOX 1). Inspectionof land use maps or satellite photos of other Russian cities confirmsthat these are systemic featuresof the socialistcity. 6" A. Major Spatial Differences Between Soviet and Market Cities 1. Absence of Incentives to Recycle Land in Soviet Cities 8. As their economyand their populationgrow, cities expand through the progressive additionof concentricrings, similar to the process for trees in successivegrowing seasons. New rings are added to the periphery as the city grows. Within each ring, land use reflects combined effects of demography, technology, and the economy at the time when the ring was developed. While this organicincrementalgrowth is commonto all cities, in a marketcity changingland prices exert their pressuresimultaneouslyin all areasof the city, not just at the periphery. Changing land prices exert a powerful influenceto recyclealreadydeveloped land in the inner rings when the type and intensityof the existing use is too differentfrom the land's optimumeconomic use. Thus, changingland values bring a built-in dynamism: continuousvariationsin land prices trigger land use changes by putting a constantpressure on the existinguses of land. 9. By contrast, under Russia's commandeconomy,the absenceof land prices removed all incentivesto redevelop built-up areas. Once land was allocated, it was almost never recycled. Withoutprice signals, it was administrativelysimpler to respond to current land demand pressure by developingat the periphery than to redevelopwell-locatedareas with obsolete land uses. While the city expandedoutward, land use in alreadydevelopedareas remainedunchanged. One striking illustrationof this phenomenonis the persistenceand uniformityof housingtpes in successiverings around Moscow. Each type is usually designatedby the period in which it was built. Thus, driving from the centerof Moscow,one passesthroughrings of Stalin, Khrushchev,andthen Brezhnevflats. 10. This socialistland use processcreates sizable enclavesof "fallow' or 'dead land" areas which combine low levels of economic activity with negative environmental qualities. Si The methodology used is based on the measurementof population density in the built-up area, i.e. the population within two concentric rings at 1 km interval divided by the built-up area within this interval. This built-up area does not includelarge parks, physicalobstaclesto land use such as rivers and lakes, and any undevelopedarea. These densities are derived from land use maps, digitalized satellite photographs and detailed numerical databasesof land uses by type of users maintainedby local urban plnning offices. The geocoded data was analyzedwith a graphics-basedGIS software. & We obtained results comparable to those for Moscow and St Petersburg for other socialist cities such as Warsaw in Poland and Beijing, Shanghai and Tianjin in China. In Chinese cities, however, the socialist system has a much shorter and more recent history . As a result, the historical urban core which was developed under a market economy has kept a much larger relative importance than in Russia. Moreover, in China, the absence of large urban infrastructure and public transport investment plus severe underinvestment in housing until 1979 has led to more compact cities and reinforced the population density at the center. Yet, under the rapid urban investment of the last decade, the floor area ratio follows the Russian pattern and is higher in the periphery than in the center. 5 Followingthis process,the Russiancommandeconomyhas generatedan urban developmentprocess with two characteristicfeaturesof large land use inefficiencies: (1) Areas with obsolete land use occupy large amountsof the total city area, and (2) Householdstend to be concentraed in the peripherywith increasingdensitiesfurther from the center and "historically"low densities in central areas. This pattem tends to increasetransport costs and pollutionby requiring higher energy expenditures withoutprovidingbetter amenitiessuch as larger plot size or a better environmentthat would be the normal trade-offfor increasingcommutingdistance in a market economy. 2. Spatial Structure of Socialist Cities: RustingFactoriesin PrimeLocations 11. The failureto recycle land occupiedby old activitiesof little value - this "deadland" or 'fallow land"syndrome- yieldsseveralspatialoutcomes: centrallylocated industrialbelts, large total amount of urban industrialarea, low job density in the industrial belts, and central land areas fragmentedby dense railway networks. There are four major consequences: 12. Of thesepathologies,the most startlingare the old indusrl bels that ring Moscow and St. Petersburg. Developedduring the 1930's and 1950's, these belts are still spread between 4 and 8 kilometersfrom the city centers. These industrialland use bottleneckshave never been recycled, even thoughthe land values would have been prohibitivelyexpensive for the enterprises had market land prices been used. The absenceof market signals resulted in a land use freeze that pushedresidentialareasfurther toward the city peripherythan in market cities. Meanwhile,obsolete and low density activitieshave remained as enclaveson accessibleand well serviced land. 13. The absenceof land prices and the dominanceof industrial planning in govenunent thinldng and policies explainsthe secondphenomenon. Not only are Moscow and St. Petersburg characterizedby centrally-locatedindustrialbelts, but also the total industrialkandarea within these cidesis extraordinarilylarge. For example, in Moscow,31.5% of the total built-up area is used by industries,comparedwith 5% in Paris, 6% in Seoul, and 5% for Hong Kong. In the industrialbelt from 7 to 8 kilometersfrom the center of Moscow, 67% of land is used by industries. (See FIGURE 1.a). The extensiveuse of prime centrally-locatedurban land for industriesis particularly inefficientin Russiabecauseof socialistindustrialorganizationwhich requiresmost industriesto hold large inventoriesof materialsin order to survive in the socialistsystem. These industriestherefore use large areas of landfor warehousingand heavy transportinfrastructure- a peculiar constraint on industriallanduse that results in a low ratio ofjobs per unit of land. In a market economy,such a low job-to-landratio would be incompatiblewith the central locationof these industries. 14. Third, the distributionof jobs by distanceto the city center shows that both Moscow and SaintPetersburg,are still monocentriccities with a high concentrationof jobs in the city center, a feature commonwith most market economy cities. (See FIGURE l.b). As the transition to marketsprogresses,many industrialjobs will disappearand more servicejobs will be created. The 6 BOX I SOCALISTW CITIESWITHOUTLAND MARKETS: St Petersburg's Land Use Pattern The pattern of land use distribution in St Petersburgwithina radiusof 25 kilometersfrom the city center at the intersectionof NevskyProspectand SadowaStreet, showsthe featurestypicalof a plannedurban economywhere site value was not priced, energycosts were heavily subsidized,and the cost of capital was not recognized: * A low percentageof residentialarea of 35% out of the total built-uparea becauseland was allocatedin priorityto non-residentialuse. In market cities a share of 50 to 65% is commonfor residentialareas. * Veryfew residentialareas between5 and 8 km from the city center wheremost of the land is used by old land-intensiveindustries. Because land is not priced, it cannot be recycled when the city grows. Wastefulold users have no incentive to release any of their holdings. New residentialareas have to 'leap-frog' these obsoleteindustrialareas rather thanpush industriestoward the outskirtsof the city. * A spatialdiscontinuityof residentialareas showingthree densitybumpscausedby a supply-drivenhousing systemwhereprojects are plannedwith the objectiveof rationalizinglarge-panelindustrial construction technology. The result is residentialareas without continuitywith the existingcity. e Yet, there are no significanttopographical constraints and a large amount of land is available for expansion. The pattent of population density showsfour distinctconcentriczones: * The pre-socialisthistoricalcore with high populationdensitiessimilar to the ones encounteredin Paris intra muros. * The industrialbelt showinga sudden drop of residentialdensity in the immediatevicinity of the city center. * The 'socialist' residentialbelt where land use is dictatedby uniformurban planningnorms independently from the distanceto the city center. * Fringesuburbanareas wherewe find a mix of individualhousing, dachas and low rise apartmentblocks which finally lowers the average density to levels comparableto the fringes of market cities. Under market conditions,such brutal discontinuites in populationdensitieswould be unlikely to occur. In the socialistcity, householdsare pushed toward suburban areas by administrativefiat, not becausethey are makinga voluntarytrade-offbetween the convenienceof the city center and the better environmentof the suburbs, i.e. betweencommutingtime and housingspace. With the absenceof market prices, land consumption per person is similar in the city center and in distant suburbs. The same residentialdensityof 400 persons per hectare is foundat 2 km and at 15 km from the center. This is symptomaticof the absenceof differentiatedhousingproducts. Actually, averageapartmentsizes tend to be smallerin the suburbsthan in the center, and residentialdensitiesare similar or even higher than in the center. Suchlanduse patternslengthencommutingtimes, increaseinfastucture requirements,andgreatly intensifyenergy costs. Moreover,the old industriesat the center have a greater pollutingimpact on the residents surrounding them. There is alsoa significantshortageof space for servicesactivitieswhichwere under-plannedby the system. With land marketprices to reveal tade-offs, these featureswould correct themselvesover time. 7 majorityof thesejobs will be located in the city centerfurther reinforcingthe monocentriccharacters of thesecities. The histogramsof the geographicaldistributionof jobs for Moscow( FIGURE. .b) and SaintPetersburg (not shown) confirmthat the industrialzones do not sign(ficanrlyincreasethe numberof jobs to justify their prime locationso closeto the city center. No data were availableto conducta more detailedanalysis of present land use and floor space. But the very high spotprices reached by new office space in Moscow and Saint Petersburg are indicativeof an acute supply constraint for land and floor space dedicatedto services in the city center, a typical shortage in socialisteconomiesin transition. 15. Fourth, the land of the industrialbelt of Moscow is servicedby a dense networkof railwayswhichhave the effect of furtherjragmentingthe land and making land on the exteriorside of the industrial belt expensive to service. Only a small part of the volume of traffic on the rail networkwithin MoscowMunicipal boundaryis used for passengerand commutertraffic; most of It is usedfor freight. This fragmentationfurther reduces the usabilityof land adjacentto centrallylocated industrial areas and increases significantlythe cost of the primary infrastructurenetwork whichhas to be developed to service it. This fragmentationof the city land area by railroads is linkedto the SovietUnion's extraordinarilyhigh dependenceon rail transport comparedto any other country (nine times higher than Western Europe), as well as the industrialbias of Soviet economic and urban planning . this problem is encounteredin many Soviet cities. B. Dynamicsof Housing and ResidentialDevelopmentin the SocialistCity 16. The prevalence of unrecycled large-scale industrial belts in Moscow and St. Petersburg is a subset of a larger set of spatial distortionsfound in Russiancities. The process of developmentof housingprojects under the admninistrative command-systemand the activitiesof real estate developers in market cities follow different motivations and yields totally different outcomes.Thekey to understandingtheselarger distortionsalso providesa tool to designpoliciesfor reducinginefficiencies. In a market economy,housing developersare value maximizerswhile in a supply-drivencommand economy bureaucratic housing builders are cost minimizers with little interest in final users satisfaction since these are not the direct clients which are other administrations. 17. In a market economy,private developerscompetefor the samelocation. The winning bid will go to the activityestimatedto be most profitableat that site. Land prices exert their pressure on the whole supply of land, including the already built land. This is the key to economically efficientcities. As the city expands, land prices tend to rise throughoutthe city. Land prices stay the highest in the most accessible areas around the city center and along transport corridors. This triggers a densityrise in those areas. The rise in density triggeredby relativeprice changesis due to the compoundedeffects of two phenomena: (1) Floor-to-landarea ratios (FAR)increasein central locationsbecauseof land recycling through demolitionand reconstruction,and (2) The consumptionof land spaceper job or per resident decreasesbecause the more efficientland users out-bidless efficientland users who then moveto moreperipheral locationswhere land is cheaper. 8 FIGURE 1 INDUSTRIAL LAND USE AND JOB DENSITY PATTERNS Figure L.a MOSCOW - LANDUSE Percentge of Industriui Lnmdwimin Bullt-up Area 1 2 3 4 5 6 7 8 9 1011 12 t3 14 1516 17 8 19 20 21 Oa.tani D bwgs: Ii.uub iy Ceiwu gnp_ of The bM@tmPInof t Id Figure 1.b MOSCOW - LAND USE ANALYSIS Job DOenstyIn But-up Aea 200-- 100- 0. 113 DaEc sWdi 01W CW Source:Instiuft df Master Plan of Moscow 1992 9 15 da 17 19 21 Over time, the interactionof these effects produces a populationdensity profile that is negatively slopedfrom the high-populationcenterto the sparsely-populatedperiphery. The driving forcebehind this density gradient is not master planning by city planners, but the individualdecisions of real estate developers who want to maximizethe differencebetween production costs and the market value of the finalproduct. As a city grows larger and richer, recyclingland in alreadybuilt-up areas offers the opportunityto maximizethis difference. This is an incrementaland decentralizedprocess but it is not slow. In advancedindustrialeconomies,about 2% to 5% of all urban jobs within an urban area relocate every year, dependingon economicgrowth conditions. In a country like the U.S. familiesrelocate every five years and 80% of their moves are within the same urban area. 18. By contrast, in Russia under the administrative-commandeconomy, housing construction organizations, the housing kombinats, respond to very different incentives. A kombinat's performanceis measuredby its abilityto reduce input costs while meetingquantitative production targets. The costs have to be minimizedwhile the "value' of the final product is irrelevant. Land may be free, but it must be allocatedfrom what is available. Due to the lack of incentivefor land recycling,the supplyof land is limitedto the new areasdevelopedthat year in the outer fringe. As a consequence,kombinatshave to meet their productiontargets using land that is almostexclusivelyat the periphery. The densityof the newlybuilt area (definedas the unit of floor space dividedby unit of land) will then reflect the ratio between the developedland availableand the amountof floor space to be built to meet the productionquota. 19. As the Russiancity expands,the land at the peripherybecomesless and less desirable and more expensiveto develop because primary infrastructure- and metro lines in the case of Mvtoscow and St Petersburg - have to be expanded. But in a commandeconomy,housing is entirely supply-drivenand, if the supply of servicedland is laggingbehind the floor spaceproductiontarget, the building density in the outer rings will tend to rise. Over time, housing kombinatshave been stackingup more floor spaceon the more distantland. The failure to price land is compoundedhere by artificially low energy prices. The dynamicsof such a system do not tend to produce the resource-preserving,more efficientnegativedensity gradient of market cities.7' Note also the compoundingdistortionof tfie socialistlow-wagepolicy and the structureof householdincomeswhich is explainedi B. Renaud,HousingReorm in SociaUstEconomies,World Bank DiscussionPaper No. 125, 1991, p.2 0 . Behavioralstudiesin marketcities show that urban residentstend to valuetheir timetravellingto workas a significantproportion(aboutone-third)of the hourly-wageequivalentof their salary (see for instancethe work of Michael Beesley). Therefore, the distortingeffects on land use allocation of the lack of land pricesare further maskedby the artificiallylow value that urban residentsare placingon theirtime. 71 10 FIGURE 2 THE SOCIALIST CITY COMPARED TO THE MARKET CITY Moscow Compared to Paris Figure 2.a COMPARATIVE POPULATION DdNSITYGRADIENT BetweenMow and Paris Bulk-upArea 2500 150- 1 3 7 5 9 13 11 Soumo: Insitu ot MasterPlan d Moso 15 17 19 21 23 1992 Figure 2.b COMPARATIVE POPULATIONDISTIBIUTION MOSCOW.ST.PErERSBURG& PARIS 9.000.040 3010.000ldubd 7 2.000.00, 41000.000 0 Jaoooooo 1 beft 3 2 DtaSounre: Ind Pan COmA1990 4 57 6 9 8 11 13 15 17 19 21 23 25 27 29 31 33 35 10 12 14 16 18 20 22 24 26 28 30 32 34 TheMLser Planof Mooww*St Pntursbughstfti of Urben Thewy 11 C. The SocialistCity ComparedWith the MarketCity: Moscow versus Paris 20. The comparisonof densityprofiles between Moscow and Paris is revealing (see FIGURE 2.a). Both metropolitanregionshave a populationof about 9 million. They are strongly radio-concentric, and have similar peak densities. However, the way densities are distributed geographicallyis strikinglydifferent. Paris shows the typical density profile of a market economy city, with a negativelysloped gradient. In sharp contrast, Moscowhas a posiively sloped density gradient. The net density of Moscowat 15 kilometersfrom the city center is twice as high than in the center. The density of Moscowsuburbs at 15 kilometersfrom the center is the same as in the center of Paris. One should note the drop of density at 6 kilometersfrom the center in Moscow. This drop of density is due to the unrecycled industrial land use producing the enclaves of "dead land in the city fabric. 21. The degree of population dispersion can be measured in a rough manner by comparing the median distance to the center per person. FIGURE 3.b shows the curmulative population distribution curve of Moscow, St. Petersburg and Paris. The cumulativecurves of Moscow and Paris intersect each other at Kilometer 14, correspondingto a populationof about 6 m'illionpeople. This means that within a circle of a 14 kilometersradius, Moscow and Paris serve the samepopulation,and as a consequencethe same averagedensity. But becauseof the difference in the density profile between the two cities, the median distance per person to the center is 7 km for Paris and 10 kn for Moscow,a 42% greater dispersionin tie case of Moscow. 22. Is the land use andthe densityprofiles of socialistcities like Moscowor St-Petersburg a mere curiosity for land use specialists? Emphaticallynot. It matters a great deal to the Russian urban economywhere three-fourthof the populationlives, for the followingreasons: (1) Average densities being equal, the populationof a city with a positively sioped density profile is more dispersed than one located in a city with a negativelysloped profile. This implies higher transport costs, higher primary infrastructure costs, higher urban operating costs, and a greater share of labor fime wasted in travel. these distortionsare paid for in the form of lower levels of economic development. (2) A large amount of floor space has been developedwhere there is little demand for it, that is, in the suburbs with less accessibility. When transport subsidies are progressively removed and full wages restored, demand - and consequentlyland prices - for this type of high density housingfar from the city center will drop even further. Prices could well drop below replacementcosts and trigger abandonment. (3) The fully-serviced, underused land close to the city center has a high opportunity cost. Russia has used its great natural resources to built an urban system of doubtful efficiency and sustainabilityfor lack of adequateand up-to-dateeconomic informationabout the opportunitycost of its urban land. The evidencesupportthe earlier assertionthat the socialistcity has inordinately high capitalloutputratios and requires more resources for less urban output that market cities. 12 III. EMERGING REAL ESTATE PRICES A. SyntheticLand Price Gradientsand NormativePrices 23. During the late 1980's, Russian local governmentsresources had become severely constrained. Local mechanismsto finance the production of serviced land had to be found to complementinadequateresourcetransfersfrom the central government. It was thereforedecidedto create a land use tax to finance local infrastructure. In the peculiar logic of an administrativecommand system, land officially has no value in construction projects, yet everyone agrees that different locations have very different economic values. The solution chosen was to estimate normativeland prices on which taxes could be based. Various research instituteshave developed models to calculatesyntheticland price maps from which land price gradientscould be calculated and accordingto which taxes might later be raised. These syntheticland price gradientscould also becomehelpful for privatizationand the locationof urban public investrnents. 24. In a market economy,there is a very strong correlationbetween the density profile of a city and the land price gradient because prices drive locationalchoices. While the density profilesof Russian cities can be readily estimated,Russian cities are not yet at a stage where land price gradients can be simply derived from land markets - in part because such markets are operating in a stage of significant disequilibrium. Research institutes have attempted to map anticipatedmarket land values based on locationcharacteristics. The normativevalue of land was calculated using a mrnber of weighted coefficients representing amenities such as transport, infrastructure,environmentalquality etc. Typicallydemand factors were not included, and price estimateswere based on very distortedlate 1980accountingprices. Landvaluemaps were produced and from the data they containedit is possibleto build the city's normativeland price gradient. 25. The resulting normative land price gradients of Moscow and St. Petersburg are negative. Moscow'sgradientis somewhatflatterthan St. Petersburg. The normativeprice variation between the center and the periphery in Moscow is only 2.5 to 1 (from Rb 4,000 at kan0 to Rb 1,600 at 22 kan). Based on what is known of urban land prices in market cities both curves are muchtoo flat. In the absenceof major topographicaland legalconstraintsthe ratio betweenthe land price in the centralbusiness district and the one at the fringe of the built-upperiphery is usually on the order of 10 to 1. The profile of those curvesis highly arbitrary, as we do not know the high and low points, howeverthe directionof the slope is correct. Such normativeprices might improvethe traditional urban master plans made in Russia, but would be of little value for activity-specific individualchoicesof location. B. Housing Privatization and Rapidly Emerging Implicit Land Price Gradients 26. Normativeprices maybe of interestfor researchpurposes,but they are fundamentally flawed for actual decision-makingsince they attempt to infer individualland values from flawed models and simplisticnormativeratios based on partial data and past distortedprices. It is worth restating again here the fundamentalrationale for reviving urban land markets in Russia. This rationaleis that the allocationof land in cities shouldbe drivenby its currentopportunitycost. This "opportunitycost" is commonlyreferred to as "highestand best use" by market analysts to stress 13 that current land use may be inefficient. In practice, the valueof a specific land parcel in its highest and best use can prove difficultto estimate even a stable fully developed urban land market. The next best price are current actual market transactionswhich are the result of private valuationof investorslooking at the future and riskingtheir own-resources. 27. With the beginningof housing reforms, actualapartnent sales transactionsbetween privatepartieshave been taking placein Moscowsince1991. Privatizationand opportunitiesto trade units are now rising dramatically.Y A preliminaryempiricalanalysisof 2,000 transactionscarried in the first trimester of 1992 and of anothergroup of transactionsin the fourthtrimester of the same year provides an importantfirst look at emerging real estate and land prices. The study analyzed the residuals from an apartment sales model that uses only building-specificvariables based on resales of privatizedapartments. It is possible to constructa land price gradient by plotting the residual as a function of distance from the center of the city as show in FIGURE 3. These preliminary results provide some critical information. First, the emerging price gradient is downward slopingfrom the center. Clearly, housing kombinatsare not providing the housingthat householdvaluethe most. As FIGURE3.a shows, the land price index decreasesfrom 100% in the center to 70% at 25 km. - a negative price gradient -- with the greatest decreases coming in the first 8 km. This model suggeststhat, at present, imputedland prices are only about 1.5 times higher at the center than at 25 kmn.This is still a very weak price differentialto trigger the urban restructuring that Russian citiesneed. Various factors can explainthis flat price gradient includingthe collapsing economy, ambiguitiesabout land values, and the disequilibriumstate of an emergingmarket. 28. What is rather strikingand unanticipatedis that the land price gradient seems to be rotatingvery rapidlyduringthe transitionto market.' The analysisfor the secondperiod in Moscow shows that the slope of the price gradienthas steepenedfrom 100 percent in the centerto 58 percent at only 15kmfrom the center. This a real adjustmentof 20 percent in less than a year. It can be expectedthat, with new legal clarificationsof land ownershiprights in december1992, privatization, as well as continuing relative price changes regardingenergy the gradient will continueto rotate rapidly. This expectationis also fed by a similar analysisof land prices in Krakow, Polandwhich shows that in that city the land price differentialhas already reached a market city differentialof about 10 to 1. Polish urban reforms, in particularthe restoration of private land ownershiprights has been more thorough that what has been done so far in Russia. At this early stage in the developmentof the land market, location values are not yet being fully capitalizedinto property values. A more normalprice differentialwill only eh.&erge when investorshave more certaintyabout v For reference,it is estimatedthat about125,000housingunits may have been exchangedor sold in 1992. Sincethere about3.1 millionapartmentsin Moscowthis representsa rate of about4 percentof the housingstock. In amarket city, the annualratio of housingtades is often of the order of 15 peent ofthe stock. Yet mobilityandtradingin Moscoware rising significantly. A majorstructual changeis taling place w.th the rapid privatizationof the housing stock by owner-occupantsin late 1992and early 1993. Theshare of privatelyowned units mayrise as high as 30 percentin dramaticcontrastto a ratio of less thanone percent in 1990. This muscoviterate of privatizationis muchhigherthanany other city in Russiaas of 1993. w This rapid rotationis confumedin the analysisof different Moscowhousingprice data by G.S. Madalla, Y. Toda. and N.N. Nozdrina in "The Price of ApartmentsAuctionned in Moscow:A HedonicApproach' (unpublisheddraftpaper,May 1993). 14 land tenure, when real estate information' institutions become more proficient, and when economic and political conditions stabilize. FIGURE 3 EMERGINGMARKETLANDPRICEGRADIENTS in Moscowand Krakow, Poland ,, , . 85-_ \ . ._, _.__._ l " . * ommy ._.* 139 IS 19 20 21 22 75- -.. 7. 5 -nr-- * ----- * - 60-,,,* __ 855 -_.szwZ.. 50 _ ,, . 4* 302520- * - : . : : : :- . : 1 Jo.p 2(Source.~~~~~~~~~~~~ 3 456 Ecke,rt)9z S :: O~~mice C~~~ CeKftr from (Kln) 0 ti7 Discetorn (Source:JosephK Ecker) 10 ~ ~ ~ ~~~~~1 315 1 l 12, city c_w U1 14 (KI It5 t6 17 IV. MANAGINGTHE TRANSITION: IS THE SOVIET CITY SUSTAINABLE? 29. The passageto an urban land marketis expectedto raise the efficiencyof the socialist city. But what happens to the cities during the transition? What will be the outcome of the interactionsbetween a negatively sloped land price gradient with a positively sloped population density gradient? The answer can be found by studyingtwo problem areas: A. (1) The affordabilityof the land occupiedby existing enterprises, and (2) The pricingof dwellingunits (rents or sale price) after the initial privatizationof the housing stock is completed. Market Prices and Affordability of Land CurrentlyOccupiedby Enterprises 30. The *market value" of land in a given area is a function of the discountedannual return which couldbe derived from the best alternativeuse of this land i.e. the combinationof best type of use and best intensity of use. Most of the land occupiedby enterprises close to the city center (that is, within a radius of 10 km) will have a high value because of the high accessibility providedby the existingtransport network of Russian cities. The best alternativeuse for such high accessibilityareas will probably be a mix of commercial,office and residentialfloor space with a high floor-to-land-arearatio. Developersof such projects, willing to pay market value, would be ableto bid centrally-locatedland away from the low-valueindustrialenterprisesthat currentlyoccupy large areas of centrally-locatedland. 31. Land reform administratorsare presentedwith a difficultdilemma:if enterprisesare asked to pay the market price (as definedabove) for the land they occupy - in the form of rent or land use tax - most of them would not be able to afford it, and some would have to be declared bankrupt. Alternatively,if the financiallyweaker enterprisesare given a reprieve or a waiver on the cost of land they occupy, this will perpetuatethe status quo. The urban communitywill lose the opportunitycost of the land. New infrastructurewould have to be developedelsewhere, while the costlyexisting infrastructurewould remain underused. 32. If the objectiveis to improve landuse efficiencyas rapidlyas possible,one approach for respondingto the above dilemma is to grant to existingenterprisesexplicitproperty rights in the land they now occupy. Then the enterprisewill have the incentiveto use this land as equity in planning to relocate to more affordable,appropriateland. For instance, using a current, very flat land price gradient,an enterprise located at kilometer7 from the center of Moscow and relocating at kilometer22 around the external ring road would need only 20% of the value of the land it presently occupiesto acquire a new equivalentsite. If the enterprisereviews its land requirements and decide to use land more intensively on the new site, say only half of the present area preliminarysurveys indikatethat this is a reasonableassumption-- then only 10% of the value of the present site would be required to acquire a new site. The wealth to be released by the plant 16 relocationis clearly very significant. Under such a scheme, the benefitof relocatingland-intensive enterprises to new sites will accrue not only to the enterprise themselves, but also to all urban households: enterpriserelocationwould reducetransporttimeand increasethe supplyof well-located land for new housingunits, which in turn would thereby reducehousingcosts. Of course, in some cases, where currentindustrialareasare heavilypolluted,the costof cleaningup decreasesthe land's potentialmarket value, and accordinglyreduces also the enterprise's incentiveto move. 33. The value of the land resources involved in industrial land recycling -- even under the emerginglow and still flat price gradient estimatedfor 1992 in FIGURE3-- is very large. If we assume that the percentageof industrialland of Moscowcouldbe reducedfrom the present 32% to 10% -- still a high ratio by international standards -- then about 100 square kilometers of already developedland could be recovered. Using the lowest and most conservativeassumptions,the total value of the land recovered would be about US$ 2.2 Billion, assuming that two thirds of the industrialland recycled is evenlydistributedfrom the center. °' The above evaluationof the value of the land frozenby industriesis too low. Becauseof the way the industrialareas are spreadwithin the built-up area, their total value is not yet sensitive to the location along the price gradient. Howeverthe total value of the fallow industrialland will be sensitiveto the wider range of high and low land prices that will emerge as the land marketdevelops. 34. Followingthis analysis,the affordabilityproblemof non-residentialland can be seen to be a false problem. By definition,the marketprice of land is affordableto new users. The land may not be affordable,however, to existingusers who are asked to pay for it retroactivelyfor the land - but these existingusers are preciselythose who are using land in an inefficientmanner. The affordabilitydilemmacould be solved by recognizingthe land equity interest of present land users and then allowingthese users to trade freely the land they occupy. 35. This analysisillustratesa crucialpointof the urban land reforn. The recoveryof 100 square kilometersof misallocatedland will not be obtainedthrough better design or with the help of sophisticatedzoning plans or new master plans. Instead, improved outcomes will arise by establishingthe rules and mechanismswhich would allow the most efficientuser to buy land from the least efficient. For each site, it is impossibleto identify,in the abstract, the most efficientuser or how much land or what floor-to-land-arearatio the most efficientuser would consume. A wellfunctioningland market with a minimum of restrictionson the use of land would allow the most efficient user to obtain the right amountof land in the right place by buying it on the market from less-efficientusers. In market economies, the role of urban planners is not to design cities, but rather to establish the minimum rules that all potential new land users must meet, and the limits within which the land market will operate. In late March 1993, the asking price for a 3-room apartment (70 m2) centrally located in Moscow was reported to be range between $30,000 and $100,000. Taking a low estimate of $4301m2, using a floor-area ratio higher that average (FAR=2.5) and assuming that the economicvalue of land represents a low 20 percent of building cost yields a notional land price per square meter of $27.5/m2. In addition, taking the value at kilometer 7 to be only 80 percent of central locationsyields a unit price for land of $22/m2. Such low assumptions yield a price per bectare of $220,000 which is clearly a lower boundary of actual land value in Moscow at that time. lot 17 B. Impact of the Transition to Markets on Housing and Services Areas The basic price of a housingunit depends on three main paramneters:(1) location, 36. (2) floor area, and (3) land area. Households,when shoppingfor housing, have to make trade-offs betweenthose three parameters. For a givenshelterprice, suppliersare theoreticallyableto provide a dwellingunit in any location. This ispossibleby allocatingdifferentcombinationsof valuesto the three basic parameters: location, floor and land. Thus, the floor-to-land-arearatio of different housingunit types may varies widelywithinthe same city. The net land area required to build one square meter of floor spacemay vary from 0.10 square meter for high rise apartmentsto 15 square meters for detachedhouses. Urban regulationsand the many-dimensionalfeaturesof housing demand impose a 37. limit to the theoreticallyinfinitenumberof permutationsbetweenlocation,floor area and land area. However, in market economies,the clusters of housing types that are built always follow the universaldemand rule: an increasein distance from the center shouldbe compensatedeither by a lower shelter price or by a larger consumptionof land or floor space or both. This basic demand rule explainsthe quasi-mathematical relationwhich exists in a marketeconomybetween land price and density gradient and between land price and total production price. (see BOX 2 on the fundamentalcharacteristicsof the locational decision of households in market economies and matchingempiricalevidence). Duringthe processof housingprivatization,a housingmarketis emergingin Russia. 38. The present occupants are gaining ownership interest in the units they currently occupy. It is thereforeuseful to considerthe likelyvalue of the different parts of the housing stock at different locationswithin each city. The larger part of the housing stock built in the periphery of Moscow and St. Petersburg and the 150 largest cities of Russia (nationally about 55%) consists of prefabricated,reinforced-concrete,large-panel,high-riseaparumentsof 5, 9, 12, 15 and 22 floors.'' The acualaeconomicvalue of suchunits willbe revealedby householdpreferencesfor fte first time. This valuewill be more stronglyaffectedby the locationand the type of dwelling unit than its floor area. For instance, a 1-bedroomapartmentin the center of Moscowwill certainly have a higher market price than a 3-bedroomapartmentin a high rise at 20 kilometersfrom the center. When householdsare requiredto pay for the maintenanceof their building - either indirectlythrough rent increasesor directlybecausethey have acquiredownershipof their unit - the high rise apartnents of the peripherywill have: (1) The highest maintenancecost - defmed to include the cost of maintenanceand operationsof elevatorsand lift pumps, cost of central heating caused by the bad insulation of panel buildings, costs of frequent structuralrepairs required by the buildingtechnologyused, and the cost of maintenanceof large common open space, For a moredetailedcharacterization of theRussi housingstoc andtheconshtuctionindustryreferto B. Renaud 'The HousingSystemof the FormerSovietUnion: WhyDo tie SovietsNeed HousingMakets? D.C.: FannieMae, Volume3, Ise 3, Fall 1992, pages 877-899 and Houing PolicyDebate,Washington V.9 in A Studyof the SovietEconomy,ajoint studyby the Intenin to B. Renaud,-Housing-,Chapter MonetaryFund, dteWorldBank,O.E.C.D.and E.B.RLD., Paris, February1991. 18 (2) The lowest space standardsmeasured accordingto room dimensionsand height of ceiling, (3) The lowest amenitiesqualityincludingdistance to shops, variety of services, and (4) The highest transport costs currently expressed only in time to work, but soon expressed in financialterms when deep transport subsidieswill decrease. 39. Given the above qualitiesof the typical unit at the city periphery,a potentialbuyer's choice of an apartnent in a suburbanhigh rise will not offer a trade-off betweendifferent benefits such as gettingmore floor space or land in exchangefor living so far from the city center. The only reason, then, for a buyer to select a unit in a high rise suburbanarea will be the unit's very low price. The market price whichwill emerge as land and real estate marketsdevelopmay turn out to be muchbelowthe replacementcost of such a unit. Most importantly,the market price of suchunits expressed in terms of market rent, might not even cover maintenancecosts. 40. Viewed throughthe prism of emergingmarketprices, muchof the housing stock in periphery apartment buildingsmay have a discounted present market value of less than zero - a soberinginsight for privatizationpolicy and for future housing investmentprograms. In the case of Moscow, in FIGURE 2.a , the units at risk would be those located abovethe density line for Paris between kilometer9 and kilometer22.121Giventhe current housing shortage, transition policiesof preferentialtreatmentin terms of transportationsubsidies, higher qualitymaintenancemay ease the burdens on residents. But it will remain a fact that these parts of the housing stock have very low and mostlynegativetransitoryeconomicvalue. The high accessibilityof someparts of the suburban areas (around metro stations for instance)shouldprovide the opportunityfor the emergenceof secondaryemploymentcenters. Such centers would contributeto restoring the economicvalue of some of the residentialareas. For this to happen, land use regulationsand local administrative practices should show enough flexibility and speedy responsiveness to allow land conversion wherever firms of all sizes chooseto use this locationopportunity. Allowing this type of land use transformationto proceed shouldbe a high urban policy priority. 41. It shouldbe clear from the quantitativeanalysispresentedthat the suburbanhousing crisis which is looming in the cities of Russia cannotbe attributedto the transitionto markets, but to the legacy of the past. This crisis is the result of the administrative-command which disregarded the practical needs and preferencesof the final users and lacked means of self-correction. The economicvalue of the housingthat was produceddid not matchthe true economiccost of the 12 This siftation arises today because the discounted present value of rents recoverable is only a fraction of the net present value of mainteaance costs. Moreover, there is zero capital cost recovery so far in Russia. ln 1992, total rents and utility payments had fillen to a trivial 0.9 percent of household incomes which themselves had fallen by atbout50 percent in real term following the 'shock therapy' macroeconomic reforms of January 1992. On the other hand, maintenancecosts had risen sharply with increases in the cost of energy and price liberalization. This scissor effect between low rents and low wages on one hand, and rising operation and maintenance costs on the other is not sustainable. Restoration of an economic balance could result from abanldonmentof the least attractivepart of the stock combined with increasing crowding of remaining units and much higher rent to income ratios. 19 BOX2 LAND USE ALLOCATION IN THE AMARKETCITY The Fundamental Locational Trade-Off Made by Households Tbo most strking featr of the socialist city is the inability or unwillingness of the housing production system to provide households with the opportunity to make trade-offs between housing spae and location according to taste, preferencesand the lifeb-evets of the family life cycle. 1. The Two Trade-Offs Facing Households WhE They Choose Their Housing In a market economy, households are free to make their housing choice within the constrint of their total income. In making their selection they face two trade-offs: first, how much of their budget to spend on housing compared to other goods; second, within this budget allocation how much space to get and where. Householdsaim to maximizetheir satisfactionwith respect to the consumptionof housing, goods and comnuting, subject to their budget constraint. This budget constraint says that expenditures on housing, goods, and commuting must not exceed income. In this budget constraint, income must include the money income foregone as a result of commuting. Different householdswill make different choice. But tde genend pastt of choice can be conveniently represented in a simple mathematical relationship. The household budget constaint can be representedby three types of expenditures:(1) goods whose prices do not dependan location QO, (2) housing whose price and size is affected by location 0 (u) and (3) travelcosts which are a function of the distance to the center u and a rate it These three budget items must be equal to the wage w. The budget constrint is therefore: (1) P,.O1 + Pz(u).Q(u) + L u = w The notion of trade-off under a budget constraints also means that when making a choice about its housing, a household may also trade off housingagainst other goods based on their prices. Expressing small variations in madmatical terms, tading-off between housing and other goods means the relation (based an partial derivatives): (2) dQ2 I dQ= -(PI / P) (d represents a partial derivative) The combination of trading more housing with commuting in equation (1) and housing against other household needs in equation(2) yield the location equilibrium condition which is intuitively appealing and yields important insights about the structure of cities, and the basic economic forces at play in Russia now: (3) dP2 (u)ldu = - t I Q.(u) The left side of equation (3) is the slope of the housing price fimction. The equation says that the rate of decline in the price of housing as one move from the city center dP2(u)Idu is directly and negatively proportional to the commutingcost per kilometer (-t). The housing price is more expensive close to the center. 20 BOX2 LANDUSE ALLOCATIONIN THE MARKET CITY The Fundamental Locational Trade-Off Made by Households (Part 2) Further examination would reveal that this relation (3) explains the curvature of the price gradient linked to household budget trade-offs, and also why the price curve is steeper close to the center. To reveal the intuition behind it, this relation can also be rearanged as; (4) Q2(u). dP2(u) J du = - t This new equation says that if du measures a move of one kilometer away from the center, the increased quantity of housing available due to a lower housing price at that location wiU be matched by the increased commuting cost of t. The logic of market housing choice under constuint is that suburban residents will consume more housing than close-in residents. As people locate away from the center, the housing price will fal, but the effect on the budget will be offset by rising commrutingcosts. Since land is cheaper in suburbs relative to other housing inputs, suburban housing wiU have lower capitallland ratios than downtown housing. It must be kept in mind that this analysis applies to two households with exactly the same budget who choose to meet their preferences differently. The fimdamental flaw of the socialist city is that housing unit sizes are uniform irrespective of location. In that case the city housing office is implicitly redistibuting income to those who get the same space downtown. Housing Diversity and EfFiciency in a Market City The preceding formalized analysis is verified very well empirically. In an actual city, not only families have different preferences at the same level income, but incomes also vayr significantly. In response to this diversity, the housing markets are producing a wide range of units. A middle-income city like Kuala Lumpur, Malaysia - where an actual analysis was made- shows such an expected wide choice of units with usable floor space ranging from 20 square meters to 130 m2 and land consumption varying between 30m2 to 500 m2 per dweing unit dependingon location. MALAYSIA. RANGEOF HOUSINGTYPES 40 41 400 / :300/7/ ~~~~~~~SENG %; w 12-0 ;100 0 20 40 60 80 100 120 140 Square Meters of Usable Floor/DwellingUnit 21 resourcesused. This cost was maskedby distortedaccountingprices whichprovided no meaningful guidance to decision makers who resorted to inadequateor perverse physical and administrative criteria. V. COMPONENTS OF URBAN LAND REFO'RM 42. The preceding analysisdemonstratesthe predicamentthat Russian cities face with a built environmentthat is inefficientand unsustainableto such a large extent. Unless an urban land market develops,there will be no way to induceobsolete industrialland users to relocate from their prime land and release it for commercialand residentialuses. However, markets cannot operate in an institutionalvacuum. What are the new institutionswhich can achievesound results now, after the administrativecommandsystem failed to do so for seventyyears? This section focuseson four key componentsof urban land reforrn: (1) land and property tenure, (2) the trading of land and supporting informationsystems, (3) land valuation and taxation, and (4) the entirely new role of Russian urban planners in market cities. To provide a more concrete understandingof the nature and scope of transition problems in other socialist cities, each section provides a brief historical review, describes current practice, and proposes institutionalreforms for the Russian city. There are severaljustificationsto this process. We aim to provide more insights into how the present socialistsystemoperate. We would like to make more concretethe new role of the public sector in supportingemergingprivate land markets and guiding the future growdt of cities, and to clarify how the existing institutions need to change. By detailingthis institutionaldimension of the transition to market we also aim to stress the dominance of proper institutional, economic and financial factors over the wide variety of engineering and tecimical choices availableworldwide in determiningthe soundnessof future urban investmentoutcomes in 'transition cities'. A. Land and PropertyTenure 43. The development of clear and verifiableproperty rights is the comerstone of the development of efficient urban land markets. Among the wide and complexvariety of property rights existing an advanced industrialeconomy, real estate property rights are one of the most ancientform of rights.The centralrole that clearproperty rights play in sound, efficient and modem urban planuingby loweringthe need for state intervention with its inevitablyhigh traction costs is much better understoodtoday.'3' Yet, in TSE's, these rights have to be either restored and their necessary institutionsrecreated, or even fully developedfor the first time. Practical reform 23/ See William F. Fisclhel, lhc Economics of Land Use Zoning, BaltimoreThe Johns HopkinsPress,1984. The linkbeweenpersonallibertieswhich ae sucha sipificant politicalconcemin mostTSE's andpropertyrights sbouldnot be une tad either. U.S. SupremeCot JusficePotter Stewartobsrved in 1972that wThedichotomybeteen prson lbcrtie and property rights is a fias on. Propertydoesnot haverights. Peoplehaverights. In fact, a fimdamt intrdepeence exists betwen the pesonalrightto libertyandthe personalrightin property. Neithercouldhave meaningwithoutthe other.9 (Quotedby GideonKaner, in 'Ruleof Law, WallStreetJoumal,25 August,1993,p. A9). 22 problems differ significandyin this area between Eastern and Central Europe, Russia, the other former Soviet republics,and China. 1. A Russian Overview 44. The outstandingfeaturesof the history of the Russianland tenure system are: (1) no traditionof individualland ownershipand (2) divergenttracks alongwhich land and property tenure have developed. The absenceof ownershiprights in Russia can be traced back before the Soviet period through a long history of anti-mobilitypoliciesthat tied peasantsto the land. Even after the Emancipationof the Serfs in 1861, peasantsremainedtied to their communeswhichheld title to the land. The Stolypinreforms of the early 20th century brought land ownership to only 20 to 30 percent of peasant households. Following the 1917 Revolution, land and structures were collectivizedand the "propiskawsystemof residencypermits institutedto control mobility.141 45. During the socialist period, the land regime was consolidatedaround the basic principle of state ownership of land and a complex system of allocation of land use rights. Managementof most urban land was delegated to the municipal governments, although central ministries controlledland reserved for industrial uses. Municipal governmentsallocated land for specificuses to publicagencies,enterprises, chartred organizations,or householdswho then could use the land for the specifiedpurpose for an indefiniteperiod, but the user could not lease or sell the land and the "right of use" could be revoked by the municipalgovernment. "Kitchengarden" plots were typicallyheld in this form of tenure. This "revocableright of use' was the only form of land tenure recognizedby the USSR. 46. It is importantto note that unike land itself, structures on the land were held in somewhatdifferentforms of tenure in the USSR. Enterprisesoften had "limitedownershiptenure" in buildingsthat had been built especiallyfor their use. They carried the buildings as depreciable assets; and could lease but not sell surplus space. 'Leaseholds' in buildings owned by the municipalitywere allowed. Residential rental tenants had a "hereditary, indefinite right of occupance"paying nominalrents and being virtuallyimmunefrom eviction. Apartmentexchanges were allowed. Housing cooperativemembers, who supplied the capital to build their buildings, received "cooperativetenure" under which they held joint title to the building, and could lease or sell their apartmentsthrough the cooperativeassociation. Finally, a small number of single-family urban houses were held in "full ownership,"althoughthe household held only a revocable right of use on the underlyingland. 47. This divergence between land and structure tenure forms has developed because socialistlaw broke up rights in ways totally different from normal market uses, and incompatible with them. Land and housing law were different branches of socialist law written by different legislativecommittees;while in market economies, ln and buildings are generaly considered 1N A detailed analysis and two city cases studies for St Petersburg and Ryazan are provided by V. Renard, J. Coiby, and R. Acosta in The Russian System of Land Tenure and UrbanDevelopment, World Bank Technical Coopertion Project, mimeo, June 1992,and in Annex4 of Renaud el al. Russia. HousingReform and Privarizauion, Strategy and TransitionIssues, Volume II, World Bank, to be published. 23 jointly as "real estate". In Russia, restricted land tenure rights now impair ownership rights in structures. For example, a factoryowner must assumethat usefultitle to improvementswill expire at the end of any leasehold period. In addition, separate systems of tenure create real estate valuation and taxation confusion as privatized flats carry valuable, but uncertain claims on the underlying land. Also, as discussedin more detail below, separate tenure systemsare leading to expensiveadministrativeduplicationand confusionas cities create parallelregistrationand valuation systems for land and buildings. WhileArticle 37 of the Land Code is supposedto ensure that land and building tenures are reconciledwhen ownership of a building is transferred, in practice, such a procedurecan create a significantadministrativebottleneck. 2. CwurentTenureForns 48. Duringthe past threeyears, tenure confusionhas increasedas three new forms of land tenure have been created,each limitedto certainkinds of owners or certain land uses. The objective of land privatizationis to convertthe traditional "rightof use" to one of these three forms as quickly as possible. (1) HereditaryLife Tenure. This type of tenure was reasonablyadaptedto single family dwellings or garden plots by providing a legal guaranteeof permanentuse and the right to pass on the property through inheritance. The main drawback is that the property can not be sold or leased to others. Municipal authoritiesretain the right to cancelpossessionrights with compensationfor the cost of the dwelling,but not for the land. (2) Lease Recent legal changeshave introducedthe leaseholdform of ownership with terms up to 49 years allowedunder the responsibilityof municipalauthorities. (3) Ownership of Agricultural Land. Private ownership of agriculturalland is now allowedsubjectto the restrictionthat it not be resold for ten years or leased for more than five years. 49. These three forms of land tenure are imperfectalternativesto allowing full private ownership of urban land, a reform that has remaineda controversial issue until now. Long-term leases remain the main form of tenure for urban development- a serious bottleneck to fiuther reforms. '5' 50. In December 1992 The Seventh Congress of People's Deputies passed two amendmentsto the current Constitutionof the Russian Federationwhich are critical to housing reform, yet do not deal adequatelywith the full requirementsof urban land reform. The Amendment to Article 12, part 3 removesthe restrictionon the right to freely possess, use and dispose of land plots owned by individuals. It eliminates previous 'anti-speculation' restriction on sales. The amendmentremains inadequatesince such land can only be sold without any restriction only if it See Vincent Renard et al, op. cit. 24 remains in residential uses. The large-scale needs for land recycling across land uses of Russian cities still remain unanswered. An amendmentto Article 58, dealing with the rights of citizensto housing has been made more consistentwith market-orientedreforms since the state's obligationto provide housing can be consideredsatisfiedthrough a household's purchase or constructionof its own dwelling, the provision of housing through a naym (social housing) contract, payment of housing allowances,or constructionand maintenancesubsidies. The December 1992Law on the Fundamentalof RussianHousingPolicyalso createsthe possibilityof full privateownershipof urban "real estate" defined to include land. 3. Direction of Reform 51. The key elementsof any reform strategy for the Russian govermmentare to: (1) define further rightsto tull land ownershipgrantedby the 1992 HousingPolicyLaw and (2) integrate land and property tenure forms. 52. The first step on reforming land ownership rights is to clarify, coordinate, and publicizethe rights granted in the various decrees, laws, and codes over the past few years. There are still many restrictionson types of uses and users associatedwith existingtenure rights that are incompatiblewith a well-functioningland market. For example, the Land Code allows full land ownershiponly for Russiancitizensfor agriculturalor residentialuse, with restrictionson alienation; the law does not appear to allow developmentcompaniesor groups of households in joint stock companiesto own land for residentialdevelopment. Enterprises retain traditional "rights of use" until they convert to a land lease through negotiationswith the municipalauthorities. But, land leaseholds are not necessarily included in property leaseholds from municipalitiesor as part of apartment property in privatized residential buildings - a potential source of uncertainty. Presidential Decree 301 appears to allow full ownership by corporations in acquiring land of privatizedenterprises;whilethe December1992HousingPolicyLaw appearsto allowfull ownership rights in real estate irnthe marketlegal sense. In the face of such complexityand ambiguity,prudent investorswill not act. The present legal patchworkmay freeze developingland marketsby greatly raising transaction costs and unnecessarilyraising the level of uncertainty of transactionswhose effectsreach far into the future. 53. Consistentwith this first point, a secondpriority in land tenure reform is to unify land and propertytenure forms in order to simplifytradingof real estate. Corporateownershipof land, or long-termleases (such as 99 years) with provisionson the dispositionof improvementsat the end of lease term, are a prerequisitefor residentialland developmentand industrialarea redevelopment. Institutionalreforms are necessaryto establishthe procedures, at a local level, by which clear titles to well-delineatedland parcels may be obtained. WhileRussia's land and property codes descnbe permissibleforms of tenure, they are unclear abouthow to achievesuchtenire. It appearsthat more than half of all land users lack adequatedocumentationof their claimsto title. Many claimspredate the 1917Revolution. Even recent claims to land seldominclude a careful parcel boundary. 25 B. Trading of Urban Land and Market-Oriented Information Systems 54. Once again, property rights are not self-defining. The trading of land and other forms of real estate betweeneither private parties, public entities, or private and public entities requires a major overall not only of the legal framework,but also of the existingregistrationand informationsystems, and administrative proceduresand practices in all TSE's. 1. CurrentAdministrativeProcedures 55. The land informationsystemof the City of Moscowcan be used to illustrateseveral general points about current obstaclesto the developmentof urban land markets: (1) land and property registries are developingseparatelyfrom one anotherrather than as a single system, (2) improper incentivesdiscourage those making market iransactions from recording accurate sales prices, (3) normativeprices for valuation and property taxationbear no relation to market prices. Becauseof the size of Moscow,bureaucraticfragmentationandthe administrativelack of cooperation are probably more pronouncedthere than in other Russian cities, but the nature of the problems is usually similar. In Moscow, the followingare the current parties in the land informationsystexn"' 16 (1) Geotrust is responsible for all mapping, but has no titling or adjudicatory role. Geotrustprovidesstaffto the MoscowLandReformCommitteefor surveyingparcel boundaries. (2) The MoscowLand Reform Commitee is responsiblefor granting rights to use land, recording the rights, conditions, and contractsrelating to the use of each parcel, inventoryingland resources, and establishinga policy for land valuation. Currently, the Committeeis undertaidnga cadastral survey to fui the boundaries of existing parcels and documentingthe initial registration of existing tenure rights. Many boundarydisputeswill arise and will require mediationor adjudication- in Poland, this process of parcelization has proven quite cumbersome as municipalites, enterprises in the process of privatization,and individualsbegan to recognizedthe value of strugglingoverboundarydefinitions. New tenure laws seemto requirecaseby-case privatizationand re-registrationof these titles, quite a lengthyprocess. (3) The Bureau of TechnicalInventory(BE7)is responsiblefor ffiephysical inventoryof buildings- both residentialand non-residential. BTIhas no mappinginformationon the buildingsit records, althoughit has a nearly completeregister of buildingsin the city, includinga detailedsite map, with measurementsof building perimeters. The building dossier or "passportocontains a register of owners and leaseholdersthat occupythe buildingwith a referenceto the documentthat grantedthe title. However, this passport is infrequentlyupdated and now quite out-of-date. This description drawsexeunsively na field reportby . Eckertas wel as on V. Renardet aL, op. dL 26 (4) The (City not GKI) Propeny Comrniueeis responsible for registering contractson non-residentialbuildings only. Individuals or enterprises initiate registration by requesting registrationof their rights; and the Committeedoes not perform on-site verification of information on rights in registration requests. Neither does the Committeehave any mappinginformation,nor does it send informationback to BTI. (5) The Comnuitteeon Housing, also known as the Residential Affairs Comunittee, registers contracts only on residentialunits - includingmunicipal, cooperative,or private units - for a small fee. The actual registrationsare performed by a private company, "Mosprivatization"whichhadregistered 135,000first-time privatizations' and 5500 'subsequenttransactions,"as of end-June 1992. Subsequenttransactions of privatized apartmentslist the reported price paid for rights. Sometmes prices are accurately reported as a means of legitimizingfunds, or if a bank is used as an intermediary. Often prices reflect the extremelylow BTI book value as a method to avoid paying the extremelyhigh transactiontax. (6) Genplana or the Master Plamnnig Instinwe is responsible for planning city developmentand keepingtrack of land usage. In order to get a land passport with permission to build, Genplana's signature is required, along with the requesting enterprise, the raion, and the local architect's office. 56. Facedwith this bureaucraticstructure,what steps are normallyinvolvedin a property transaction? First, the seller obtains a copy of the building's technicalpassport from the local BTI office, which lists the normativeprice of the building, derived from a non-indexedhistorical cost, itself derivedfrom very distorted administrativeprices. Second, buyer and seller go to a notary who checks the BTI passport, among other documents, and then oversees that the buyer signs a "price setting" certificate. The seller is then required to pay the transfer fees or taxes, which are set at between 10 to 20 percent of declared value - a strong incentiveto under-report the actual sales price. The notary then validates the transfer; while the buyer registers the property in the appropriateoffice which issues an "ownershipcertificate." 2. Directionof Reform 57. The developmentof localmarket-orientedland informationsystemsfor Russian cities has too manylegal, technical,institutional,and economicdimensionsto treat them adequatelywithin this chapter. The scope of the technical work to be done to arrive at a market-orientedland informacen system covers a wide array of issues that remain unsettled in Russia: (1) the legal framework, (2) the institutionalframework,(3) the strategicinformationsystemsthat cities should develop, (4) identificationand procedures for the registrationof all property interests related to a parcel, (5) a GIS developmentstrategy, (6) the choiceof geographicinformationsystem and related hardware and software issues, and (7) objectives,function and organizationof cadastral mapping. 27 C. PropertyRegistration, Valuation and Taxation 58. Many local governments in socialist cities have backed into property valuation activitiesfor the purely opportunisticaim of increasing local revenues. They have typically failed to grasp the central role of accurate propertyvaluation as a measure of the opportunity cost of a site, or the possibleallocativeeffectsof property taxationon the use of land. Due to its inuovable nature, land is simply seen as an easy target of opportunityfor fund raising. Such a myopicand often disruptivebehavior is very noticeablein Russia. 1. Cwrrent Condftions 59. In 1991, the Law on Land Tax was introduced. This new tax is part of a larger set of taxes and fees, and paymentsassociatedwith privatizationand use of land and buildings. Four types of paymentscould be considered: 171 (1) Payments for privatizationof tenure rights to non-residentialproperty have been fairly limited to date, including lease payments for land and buildings based on formula-drivenpayments. Auctionsof rightswillpresumablybecomemorecommon. (2) For residentialunits, the federalLaw on HousingPrivatizationspecifiesa guaranteed free transfer of up to a certain quantity of space per household member with paymentsfor extra space or amenitiesto be decidedby local governments. Formula for determiningpayments have been hotly contested, but generally based on the depreciatedhistoricalreplacementvaluesreported by the BTIs, withoutreference to current construction costs. Article 17 of the Land Code assigns municipal governmentsthe obligationto allocateland to citizensfor single familyhouses and gardenplots, but does not specifythe proceduresor tenure types for such allocation. (3) Propertytransfers between private individualsrequire paymentof a transfer tax of 10 percent of the transfer price - a prohibitivetax that encouragesunder-reporting of actual transactionprices. With under-reportedvalues, it is difficultto establish accurateproperty valuations. (4) Recurring payments, in the form of real estate taxes, are required under the 1991 Law on Land Tax, and the 1991 Law on Taxes Levied on the Property of Natural Persons. (i) The Land Tax requires all owners and users of land to pay tax, while those who lease municipalland must pay annual land rents. 10 percent of revenues go to the federal govermmentfor public works in the city; 90 percent goes to the municipaltreasury. Unfortunately,the Law has many flaws.17 ' It sets the actual For a good overviewand critique of the land tax as of 1992see Ira S. Lowry and Olga Kaganova, Real Estate Tenureand Taxation in the Russian Federation, Urban Institute and USAID Technical Assistance Project, Moscow and WashingtonD.C., June 1992. Seealso in French: Joseph Comby, VincentRenard, Rodrigo 28 land tax per unit area, rather than allowinglocal governmentsto set a rate; it allows city to vary the land tax by district as long as a citywideaverage tax is maintained. The law also sets residentialtax rates at 3 percent of the general city rate. Finally, the Law introducesthe concept of a normativeor standard land price -- at 50 times the promulgatedland tax -- to govern terms of transfer of land to private ownership, establishmentof collectiveownershipshares,transferby inheritanceor donation,and to obtain mortgagecredit. (ii) The tax on residentialpremises is set at 0.1 percent of "assessed value," a term defined in the implementationorder to equal BTI's depreciatedreplacementvalue. 60. In many countries, the payment of property tax has been a first step in defining property rights. In Russia, this may be happeningbecausethe tax rates and tax base are quite low, while the incentiveto stake out claimsto land parcels is high. Enterprises pay the tax in a simnple declarationprocedureaccordingto the land area they claim; aparunent occupantspay accordingto their proportion of total floor area, once the land area of the building is determined. This process will help to define the land area that firms and aparanent buildings are using, thus clarifyingtheir holdings or pointingout conflicts. On the other hand, the current tax has numerous shortcomings. (1) The law determinesan actual Ruble paymentper hectare, a number that becomes increasinglymeaninglessin a high inflationsetting. A better approachis to allow local governmentsto set a rate whichthen allows revenuesto track market values. (2) The normative assessments are not based on real transaction prices or actual construction costs, but instead on "depreciatedreplacement costs," a book value maintainedby the BTIs on all buildings. This number could only be a good proxy if related to current prices or real constructioncosts. Estimates indicatesthat the June 1992 replacementcost for residential constructionwas 35 times the official normative value. Assessed value should be based on either the market value of property calculatedfrom actual replacementcosts or transactionsprices. (3) Specified tax rates are also quite low, so that combined with the low normative assessments,the amountscollectedfrom this tax are trivial for most users - they may even be below the cost of collection. As a collateralissue, the extremelylow rate for residential property, 3 percent of the citywide rate, overly discourages local governmentsfrom promoting residential construction, once assessmentsare more realistic. (4) A seriousdrawback of the law is that it allows a high degree of arbitrarinessin the value assessmentof individualbuildings. Article 13 allows negotiationof the value on a case-by-casebasis. Also a highly discretionaryseries of exemptionsmay be applied for particulartaxpayers, includingfor example, young people, artists, large families, or veterans. Such discretionarypower over assessments is prone to Reard, Rodrigo Acosta, - Russie: privatisafionsho?s march6 , Etudes Fondares, No. 55, June 1992, pp. 4 6 60. 29 corruptionand mightencouragemunicipalitiesto interferetoo much in the enterprise decision-making.Allowingindividualnegotiationmaximizesthe transactioncosts of administeringthe tax, while encouragingevasion and corruption. 2. Directionsfor Reform As the above suggests,the key elementsof a reform strategy in the land information61. valuation-taxationareas are: (1) the establishmentof a reliable, public cadastre with incentivesfor private individualsto report transactionsprices accurately,(2) better valuationtechniquesthat move from normativeto market prices, (3) the reform of the land tax law to set more realistic, consistent, and non-arbitraryrates at a local level. Necessityof a Cadastre 62. The most urgent step is to createa reliable, transparent,public cadastre that identifies partiesto real estate transactions,the land andproperty rightsconveyed,the type of transaction, and the actual purchase price. Land markets require a clear identificationand delineation of land parcels. This requirementof marketsis reinforcedin Russiaby the 1991Law on the Land Use Tax of the Russian Federationwhich introducedthe annual paymentof a tax for use of land (analoga): cadastral informationis necessary becauseland appraisalmust be based on current, complete, and accuratecadastralmaps that showboundaries,areas, legal constraints,alongwith identificationdata Thus a public, accessible cadastre serves several purposes: providing information about the functioningof the land market, facilitatingcollectionof a land use tax, and providing information for land use planning. Access to such a register shouldbe broadly open to the public, with only a small fee sufficientto cover cadastraladministration. 63. While a cadastre does not exist presentlyin Russia, most of the basic informationis already availablein the municipalBTI offices, whichcould be comparedto the GermanGrundbuch, or property registry which was familiar in pre-1917 Russia. As discussedabove, the key missing elementis the lack of a general cadastralnap that gives coherenceto individualbuildingpassports, or allows continuousmaps of new subdivisionsor land pooling. The second key missing element is a reliablelink between land andpropern titles. Thus, the Land Reform Committeesare planning cadastral surveysand registrationproceduresthat would clarify parcel boundaries,identify owners, and document forms of tenure, and the Property Committees and BTIs have good building information,but the land and property agencies are not unified. There should be in each city a single, centralizedarchive of property records that includesboth land and property transactions. 64. Creatingincentives(positiveand negative)to encourageparties to report the actual transactionpricewill require a creative approach. One possibility is to give the municipalitythe right to preempt transactionsthat clearlyunderstatethe transactionprice, by allowingthe city to buy the property at, say, a 10 percent premiumand then auctionoff the property. Another mechanism is to require a notarized statementas to the veracity of the reported price, with stiff penalties for fraudulent reporting, such as forfeiture of the property or voiding the contract. The Italian experience shows that a properly designed capital-gains tax collectedat the time of sales can eliminate the collusionincentiveto underreport betweenthe buyer and the seller, the buyer being 30 exposed to the risk of a greater tax in the futurethan is actuallyowed in the event that he resells the property. "' Land and Property Valuation 65. Bettervaluationtechniquesare a difficultundertakingin the present unstableandhigh inflationenvironment. The paucity and low quality of economic informationwhich is one of the many legacies of the administrative-commandsystem could be corrected relatively rapidly consideringthe extensivesize of Russianadministrationsand the educationlevel of the workforce. It is at the conceptuallevel that the greatest needs exist since there is no data collection system without an underpinninganalyticaland decision-makingframework. At present, the information requirementsof real estatemarketsremain imperfectlyunderstood. The problemexistsat every level of government. Regardingthe price of land in particular,the analysispresented in Part I[I andthe early price analysesillustratedin FIGURE2 indicatethat modernmass-valuationmethod to identify the market value of land can be adapted to Russiancities with great benefit. The critical difference between such methods and the current Russian attemptsto derive "normativeland prices" is that mass valuationmethodscan embodythe general conceptof "highestand best use" and therefore of the opportunity cost of a site which is missing in Russia today. 66. In the longer-term, the goal is valuation based on actual transaction prices. Professionalassessorsshouldbe trainedto estimatemarketvaluesbased on standardproceduresthat look to actualprices of comparableproperty sales. The assessmentprocedure shouldbe established in a manner that ensures its relative impartiality,includingwith appeals procedures for property cwners. Tax preferencesor tax exemptionscouldthen be implementedthrough differentialtax rates rat through preferentialvalue assessmentsgranted on a case-by-casebasis. 1mprovingthe Land Tax 67. Overall, the Land Tax is a good start. It encouragesowners to declare their land and to begin to think about definingtheir land parcelboundaries. It prepares the public for the concept that along with ownership comes responsibilitiesin the form of paying taxes. It encourages municipalgovermmentsactivelyto developand improvetheir cadastre.And, if assessmentsand tax rates are made more realistic, it is an incentiveto use well-locatedurban land more efficientlyby increasingthe costs of land hoarding. 68. However,two glaring flawsof the present versionof the law are, first that it specifies land prices and taxes in rubles, and second, that these values are written directly into the law. Soon inflationwil]requires a new act of parliamentto modify and updatethis nationa' law. Prices are elements of managerial decisions which should be kept to the lowest level of government possible. The Russia federationis a countrytwice as large as the United States and there is more than a small elementof economicirrationalityto assigningimplicitlythe sameeconomicvalueto land everywhere, even regional adjustmentsare made. Second, the perspectiveon taxati-"nshould be different. The present law assigns differentprices accordingto current land use: tw contiguous IV We owe thispointto Gian-CarloGuarda. A decadelater, marketvaluereportingprevailedin Italy. 31 parcelswith differentuses couldbe prices totally differently.This will ensure long-termland resourcemisallocation.The betterperspectiveis to price landaccordingto highestand best use. Thena tax ratecan be selected.If certainactivitiesneedto be encouragedor buildingsor historical sitesneedto be protected,the tax rate canbe adjustedaccordingly. 69. The LandTax shouldbe primarilya localtax -- it can be one of the few reliable sourcesof revenueto supportinfrastructureand publicservicesprovidedby cities. Municipal governmentsshould be able to set real estate taxes and rates -- indexedto market values - within theirjurisdictionsas theydeemappropriatefor theirlocalrevenueneedsand localvoters'willingness to pay. D. The NewProfessions:Role of Urban Plannersin Market Cities 70. Becauseof the complexityof housing and otherformsof real estate as economic goods,the informationrequirementsto operatesoundandefficientmarkets are met by a wide varietyof professions,twonoticeablymissingones beingvaluer-appraisers anddevelopers. The transitionto marketswill alsorequireprofoundchangesin the role and skillsof urbanplanners. 1. UrbanPlanningPracticein Russia 71. The reality of urban planningand developmentdiffered substantiallyfrom its principlesin the Sovietcity. The basisfor socialistcity planningderivesfrom decreeson land, homeownership,andnationalization of industryduringthe period1917-1920."l'Twodistincttypes of planningemergedfrom the first five year plan (1928-1932):with 'planirovaniia'or socioeconomicplanningby industrialdevelopment ministriesdominatingover 'planirovka'or physical planning. Keyprinciplesof urbanplanningincluded:(1) the nationalization of land;(2) normative ratherthan marketdeterminedland use; (3) standardization of urbanserviceprovisionto reduce residentialsegregationand increasethe role of publictransport;and (4) centralizedeconomic pl-nning. Despite reform efforts during the 1950s and 1960s, local physical planners and *-icipalities had littleor no powerin shapingurbanplanning,plantlocation,or housingallocation. Tne dih,ributionand characterof housing fo!7u-7;.centralbureaucraticindustrialplanning. 72. As was showr.in Part II, Sovietcitieswere not plannedas entitiesand theirlayout hampersratherthan enhancestheirefficiencyand livability.The reasonsfor the shortcomingof Sovieturbanplanningthroughoutthe Unionhavebeen cogentlysummarizedas followsalmost15 yearsago:20' 191 For an upto-date, comprehensiveand multi-disciplinaryreviewof housing in Russia during the Soviet em and beyond, including a critical evaluation of Soviet urban planning by Judith Pallot, see William C. Brumfield and Blair A. Ruble, eds. Russian Housing in the Modern Age, New York and Cambridge U.K.: Cambridge University Press, July 1993. See Thomas M. Poulsen, 'Urban Forms and Infrastructurein the Soviet Union' in Steven A. Grant, editor Soviet Housine and Urban Design, U.S. Departmentof Housing and Urban Development, September 1980. This work was based on a US-USSRtechnicalexchangeagreement carried out in 1979. 201 32 (1) 'Despite voluminouswritingson the ideal socialistcity, no viable theory or set of principles emergedto providea coherent set of guidelinesfor the future; (2) "Althoughcities since 1971 have been required to produce plans for their orderly development, they have generally lacked adequate staffs to elaborate such plans, relying instead upon special contractingagenciesin Moscowand Leningrad whose personnel usually have little knowledge or sensitivity concerning local planning problems; (3) "Planners whether from the local governments, or from the national contracting agencies,mustmakedecisionswithoutadequatedata on demographictrends or future investments by central ministries that will have fundamental impacts on their communities; (4) 'Completed plans are not implementedbecause local authorities lack their own finances for capital constructionand they also lack political authority to compel industrial ministries and other agencies that have funding resources to build in conformitywith their plans; (5) "These central bodieshave their own priorities for constructingfactories, worker's housing, and utilities in a given community, and in seeking to balance their own budget have felt free to overlookboth local planning objectivesand even nationally set norms for auxiliaryretail and service facilities; (6) "The staff assignedby thesecentralbodies to developfactoryhousing complexesare too unfamiliarwith urban planning needs and problems and are prone to serious errors in siting decisions; (7) "Becauseof a chronicshortageof housing there is a reluctanceto tear down existing accommodations. 73. Somepeople familiarwith urban affairs might very well argue that there does not seem to be so much differencebetween urban planning ts still frequentlytaught or attemptedin countriesof WesternEurope or NorthAmericaand the shon ,mingsjust ascribedto socialist urban planning.The AthensCharterof 1936couldbe cited as suppo, ve evidence. However, in the cities of advanced market countries, several forces usually restr, - normative impulses and correct tendenciestoward any omniscientarbitrarinesson the part of urb n plannersin position of authority. In additionto broadly availableland values, two in particular are: the publicityof decisionswhich facilitatesthe financialand broader evaluationof planning decisions; and, administrativeand legal processesallowinginjuredpartiesandthe publicto challengegovernmentactionsconsideredharmful 33 or unwarranted.The devolutionof urbanplanningpowersover all publicand privateownersto electedlocalgovernmentsis a third important factor.211 2. The CurrentUrbanPlanningProcess 74. Russianphysicalplanningis basedon masteror structureplans and local plans. Masterplansprovidethe maindirectionsfor futuredevelopmenton a scaleof 1:10,000and remain validfor 25 years;whilelocalor siteplans,usuallyverydetailedat 1:600are oftenpreparedfor a singleproject. In practice,masterplansare oftenobsoleteby the timetheyare preparedand local plansare preparedon a case-by-case basisfollowingprojectcompletion.Conceptssuchasfloor-area ratios,servitudesandeasementsdid notexistin Sovietplanningpractice.Modemzoningtechniques whichfocuson localnoticeand disputeresolutionproceduresare entirelyabsent. 75. Second,no referenceis madeto the notionof infrastructurecost. Infrastructure constructionandmaintenance wereconsideredto be socialservicessuchashealthor education.No specificaccountability for infrastructurewas requiredof municipalauthorities,nor were costs apportionedamongspecificprojectsor betweeninitialinvestennt,maintenance,or improvement costs. There are now no proceduresfor calculatingthe implicitsubsidiesbeing transferredto privatizedhouseholdsor enterprisesinwell-serviced areas,norare thereproceduresto allocatecosts and responsibilities for provisionandproductionof newinfrastructure betweenthepublicsectorand privatedevelopers. 76. A third problemarea of currentsocialistplanningpracticeis the absenceof clear rightsandproceduresfor conversionof agriculturallandto urbanuses. Manycountriesexperience severedisruptionsin urbanlandmarketsbecauseof policieswhichoverlyrestrictsuchagricultural land conversion.Citiesand oblastspreviouslynegotited for conversionof oblast-controlled raw landat the urbanfringe. Citiescompensated oblasts,but notthe kolkhozes,for the supposedlyfree landby makingcontributions to regionalfundsfor agriculturaldevelopmentunderthe Ministryof Agriculture. Thesecontributions wereimplicitprices,whichshouldbe clarified,madeexplicit,and paid to currentright-holdersin the land. Newlyprivatizedfanners at the urbanfringeare now in a precariouspositionbecausethey can not alienatetheirlandfor a minimumof ten years. 3. Directionof Reform 77. First, localgoverments willneedto ensurethe availabilit of landfor newhousing constructionin areaswherethere wil be the highestdemand. Whilethis newdemandhas not yet manifesteditself,the roughoutlineof its characteristics can be anticipated:landconsumption per unit of floor spaceshouldincreasefromthe centertowardthe periphery. Thisnew trendcouldbe summarizedas: high rise in the center, mediumdensityin the closeperiphery,low rise (town a1 Anotherimportantdevelopmentin improvingWestem urban planningpracticebas been the developmentof ffiefields of urban economics,rea este development and urban plaing with resuting improvementin relationsbetweenthe professiona amdacademicfields of urban planing and economics Urban plannes and economiststoo frequentlyignoreor even dismisseah other at great cost to their urban work. The workby WilliamFischelalreadycited representsa very significantcontrbution in this regard. 34 houses and individualhouses) in the far periphery. As can be seen, most of the new demand for land will be located in the existing built-up area. Making this land availablewill require the followingsimultaneousactionsby local governments: (1) Establishing a legal framework to allow present land users to trade the land they occupy and retain a large part of sale proceeds;this would require streamliningthe legal land registration system; (2) Amendingzoning and buildinglaws to allowthe maximumof flexibilityin land input and land use; (3) Identifyingareas by urban planners which are more likely to be transformedin the near future; inventoryingland and infrastructureupgradingrequired under different density scenarios;and (4) Close monitoringof land use changesand land prices, formal and informal, in order to anticipateinfrastructureinvestmentand upgradingwhich will be neededto support changes. 78. Second, better planningpracticesare not the most importantfactor for improvingland use efficiencyin Russian cities. Rather, the most importantfactor will be establishingtradableland prQpcry rights. When those rights are establishedand a real estate market starts functioning,the role of urban planning will againbecome important. A new role for planning will consist mostly in monitoringand anticipatingland use changestriggeredby demand,and in designinginfrastructure and a new set of urban rules which will allow the new land uses emerging from the market to functioneffectively. 79. Third, the governmentwill need to supportnew or improvedinfrastructureand social facilitiesrequired by land use changesunder market conditions. Provisionof this new infrastructure must be guided by the referenceto land market forces, so that investmentsare made in areaswhere they will provide maximumbenefits in a short period. For exarnple, from the analysis above it appearsthat the reinforcementof infrastructureand reclaimingof a number of railroad right-of-ways in areas immediately adjacent to the center will provide high economic rates of return. The temptationto run away from urban problems by investingheavily in new peripheral areas and satellitetowns should be avoided. 80. Fourth, in the area of the urban environment,new regulationsand tax incentiveswill have to be drawn quicklyto protect the limitedamount of land occupied by historical monuments and valuabletraditionalneighborhoodswhose economicvalue to the community is greater than the financialreturn that private owners of individualpropertiescouldexpect in the short run for various reasons such as dilapidatedneighborhoodconditions, or a shortage of central commercialspace. In addition,Moscowand St. Petersburgcontainsome valuablenatural featuressuch as forests, lakes, river, or sea shores which should be clearly protected. The slight decrease in the supply of land involvedin the protectionof naturalenviromnentand historicalmonumentsmay increase the market pressure on obsoleteland use within the built-up area and therefore contributeto the accelerationof recyclingland toward a better land use efficiency. 35 4. New Role of Urban Planners In Russian Cities 81. Land use planners will have to upgrade their skills considerably to monitor and forecasts land use trends and infrastructure needs in a manner consistentwith the anticipated medium-termgrowth of the city and its financialcapabilities. They would have to be trained in modem methodsof joint public-privatedevelopment. In short, they would have to be trained for a completelynew approach to their job combiningurban planning, real estate finance, and legal negotiatingskills under both public and privatehard budget constraints. Insteadof "designing"new areas with the sole supply constraintsof a monopolistdeveloper, they will have to: (1) (2) (3) (4) (5) (6) Monitor land use trends brought by householdsand enterprisedemand. Monitor market land prices, and rents. Monitorthe supplyof developableland andthe recyclingof already developedland. Review the affordabilityof land use standards in relation with land prices and constructioncost. Relate the cost of primary infrastructurewith the value, the type and intensityof use of the land it serves. Analyze the spatial, economic and financial consequences of land development alternatives. This neededevolutionof the job contentof urban plannersparallelsthat of the new urban professions emergingin Russia such as propertyvaluers, bankers, land developers, and real estate developers. VI. CONCLUSION 82. The absence of land markets has profoundly impaired the internal efficiency, productivity,environmentalquality, and liveabilityof the socialist city. The reference to the Wfailed socialistexperiment" in the title of this paper was not intendedin a polemic or ideological sense. Rather, the magnitudeof land use misallocation and the degree of rigidity caused by the absence of land markets in the Soviet city is starding. The consequence for the national economyis that the socialistcity tends to have very high capital/outputratios. The well meaning attempt to socialize the collection of the land rent through total public ownership and public allocation of land has not achievedthe intendedresults. This paper has not presented direct evidence on the distributive impact on various social groups of state ownership and municipal administrationof urban land. Yet, the analysisrevealsthe internaldistortionswithinthe socialist city and the differential economic impact of the transition to markets on urban residents and enterprisesaccording to their location in city centersor at the periphery. 83. The socialistcity has suffered from what might be called an 'ideology of means' not from an ideologyof goals. There is nothingpresentedin this paper that would call into question the social goals of any community. Rather, it is the allocation of land by administrativemeans to assure equitableand productive use of this truly basic resource whichhas demonstrablyfailed on an inordinate scale. A broad variety of social goals can be accommodatedunder market conditions.What is most valuable in market mechanismsis their pricing ability to show how 36 the current and future use of land is valued by individualsand society - and to reveal how site valuation shifts up or down over time. In order to move to markets, the main componentsof the needed urban land reform are: clear and tradable property rights; efficient market-oriented information systems; a taxation system coherent with efficient land use; and, the publicity and constestabilityof urban planning decisions. 84. The findings of this paper raise two critical issues for the transition cities. First, what are the privatizationdecisionsrequired to initiatethe process of competitiveland allocationand recyclingat the city level? In other words, what should be done in order to release land from state control and have it allocated on a competitivebasis anong prospectiveefficient users? Second, what are the appropriateinstitutionsand processesneeded to sustain sound urban land markets? In its last section,the paperpoints at the generaldirectionto take andprovidesthe outlineof urban land reform and its main components. Yet, a separate paper is required to present and document adequatelyoperationalanswers to these two key questions. Otherwise, blanket proposals may be misunderstoodor prove too simplistic and not well suited to each country's national and local context. 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JohnI-I.JohisonandSulainianS.Wasty No. 2100 Siial Infrastruenurr Coestneaiic'i n in rlee Sael: Optionsfor Inpron'inV Cue rmc Practices. BcrnardAbeilUand Jean-Maric Lantran No. 201 Urlvmiizatione, AgriculturalDevrioprmernt, and lardnfAllocarion i. Dipisis Bhhadra and Antonio SalazarP. Brandlo No. 202 IlakingMotehrhoodSaf AnicTinkeramidMarjoricA. Koblinsky No. 203 AnrrtyReduction in EastAsia:Thne SilentRetvolntion. FridaJoliaIsenC No. 2(14 Mavaigingq ticeCiil Service: 77ee Lessons of Refovuc in hidustrial Contitries. BarbaraNunbcrg No. 205 Designintg a Systeym of LaborMarketStatistics andInfornnaion. Itobert S. GoldfaTrb andArvil V. Adams No. 2(16 hIfonnation Technology inrWorldBatikLendintg: Increasin.f tiieDevelopmental hnpaea.NagyHannaamid SandorBoyson No. 207 Poeedings ofa Conferenece onCenrency Substitution andCerrrncy Boards. Editedby NissanLivatmn No. 208 Developring Effective Emtployment Serices. 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BIonnivanBlarcom,Odin Knudsen. andJohnNash No. 217 MVfanageirn Fishery Resources: Procecdirngs ofa Symposimn Co-Sponisored by thez WorldBankaned Per:ivian Ministryof Fislheries heldin Lmna,PermJenee 1992.EduardoA. Loayza No. 218 Cooperatimes and:licBreakup of Large Mediaccized Fanns:Theorctical Perspectives aned Empirical Enidencr. KlausW. Dcininger No. 219 DeveloptnLrit ofRuralFinanicial MVfarkets ie Serb-Salharac Africa.Sabaparliy Thillairajah No. 220 fleeMaritimeTraeisport Crisis.HansJ.Peters No. 221 Policy-Based Fieianrce: TheExperience ofPoswarjapana. TheJapancsc DcvclopmcntBankamid TheJapanEconomic Research Institute No. 222 Macroeconomic Management in Ciciuca: Proceedings ofa Conferenrce in Dalian. June1993.Editedby PetcrHarrold.E. C. Hwa,andLou Jiwci No. 223 lee Developmtent oflthcPrivate Sertorina SmallEconomy in Transition: fluc CaseofiMottgvolia. HongjooHahm No. 224 Toward anF-tnirorimental Strategy for Asia.CarterBrmndon andRameshRamankutny No. 225 "Fortuess Eeurope" acidOtherMythsAboutTrade:Policies Towards MWerrclandise hnportsin riceIC andOthter Alaajor hiduistrial Economnies (andWhat 7hreyMeanforDevelopint Countries). JcanBaneth No. 226 Atlmocolia: Financirni Eduscation durin.g Economnic Transition. Kin BingWu The World Bank Headqucnerst la EuropeanOllce Tokyo Otrlce 181811IStreet.NM. Whdungton. 1) C. 2t433. U.S.A. 66,tiavenuediena Koku%aiBluildinig 1-1 Marunioucihi3-cltonic Chiyoda-ku. Tokyo 1l0.Japan 'icl plronlc: (20t2) 477-1234 Facsimile:(202) 477-6391 Telephonie: (1) 411t69.31N1, lclex: WUI64145WOKLILLANK RCA 248423wt)wnUK 75116Paris.France Facsimile:(1) 411.69.311.06 elecx:640651 r 9Z ' TIlcplhone: (3) 3214-51X11 Facsimilc (3) 3214-3657 Tclex: 26838 Cabtle Address: INMlIAFLAI) WAXHIN;TONI)C. a2 X re, 0. :3 a4 ISBN 0-8213-2740-2~~~~~2