Commentaries
Güven Sak, PhD - [Archive]
A business is futile if its value is based on the value of the land 21/12/2012 - Viewed 1785 times
Competition driven by rental income takes place behind closed doors. It is for a reason that polls show a strong perception of corruption within municipalities.
Recently, I was chatting with a store manager at a retail chain. He said, “Guess how I spend a large part of my time at work.” My guesses had to do with analyzing the shopping behavior of people living nearby, taking measures to minimize the fixed inventory in the store, or thinking about measures to minimize costs etc. But he responded, “I spend my time closely following the zoning regulations concerning the land here, near the shopping mall.” I asked why and he explained.
“Can you imagine how bad it would be for me if they give permission for a retail chain store on the land neighboring the shopping mall here? Then I will have to work wonders in order to achieve the performance figures I used to achieve.”
I have saved to my memory each and every detail of this conversation. I have been turning it over and over in my head since then. I would like to state three observations to begin with. First, if the value of a business comes from the value of the land, that business will not be fruitful per se as no one will think about the business activities.
Second, if everyone is busy following urban zoning regulations and rents, the entire economy from commerce to industry will be futile; productivity gains will not matter. Third, a country that is not able to heavily tax unearned rent on land can have neither advanced-technology nor can make it to the league of high-income countries.
If the zoning regulations of a city are not strict and binding, no one will mind his own business. Instead, mesmerized by the unearned rent on lands, they will be fixated on changing or maintaining the existing zoning regulations. No one will do what they are supposed to do. Company managers will not seek to hire an engineer or a basic scientist in order to make innovations. The desire for earning large returns in a short time will infect everyone like a virus. No one will engage in long-term projects. Put yourself in the shoes of a factory owner. If you explore petroleum on your land, the production going on in your factory will become senseless, right? Changing zoning regulations over and over will have the same effect. If the value of a factory rises mainly because the value of the land rises, that factory cannot bring innovations.
This year Turkey ranked 43rd among 144 countries in the Global Competitiveness Index. It used to be at around 60th place. Though in the right direction, the movement is quite slow-paced. The index defines three groups of economies: factor-driven, efficiency-driven, and innovation-driven.
Economies in the first group have a competitive advantage based on endowments. The second and the third groups, however, require successful organization and investment in human capital so as to make better use of the endowments. Competitiveness now requires quality. Turkey in no way has been able to upgrade from the second to the third category. I believe that this has to do with the fuss about rental income on urban lands. If Turkey aims to improve its high-tech export capacity and become a high-income economy, it has to invest in human capital. Competitiveness driven by land rents impedes competitiveness driven by quality. Competition driven by rental income takes place behind closed doors. It is for a reason that polls show a strong perception of corruption within municipalities.
Turkey has to prevent competitiveness based on rental income. This kind of competitiveness is driven first due to the enormous income generated by public regulations and, more importantly, due to the fact that the said income is directly regarded as personal gain. It is not possible to overcome the first, but the second factor is controllable.
I have spoken and saved my soul.
This commentary was published in Radikal daily on 21.12.2012
