What Drives Korean Land Use Regulations? ASRES Presidential Address

1. What Drives Korean Land Use Regulations?ASRES Presidential Address July 5, 2002 Kyung-Hwan Kim Sogang University In collaboration with Chung-Ho Kim Center for Free Enterprise, Seoul, Korea

2. An Introduction: “Can Korea break with the past?” (Renaud 1993) • “Due to the cumulative long-term effects of piecemeal public regulations,…, Korean housing market distortions have become a serious burden on the economy and they hold the dubious distinction of being among the most severe market economies in the world.” (p.291) • “Improvements are needed in at least four areas: urban planning reforms and a streamlining of the process of producing residential land decentralized at the local level; financial sector liberalization which is neutral to housing; efficient and equitable taxation of land, housing and other forms of real estate; and genuine programs of direct assistance to low-income households, not middle-class programs” (p.326) • Given the necessary scope of such an alternative policy program, its political feasibility may be an important obstacle.” (p.325)

3. Progress made since then… • Urban planning reforms • New law to take effect in 2003 “Comprehensive planning and land use act”: an overkill? • Gren belt reform: motivation and outcome • Decentralization? Some , but low trust in local government • Financial reform • Increases in housing credit, diversity of products, sign of demise of chonsei? : access has improved a lot • Taxation of real estate • Lower transactions taxes and raise holding taxes? • Targeted subsidy for low-income groups • Min. housing standards & housing allowance; being discussed • Rental housing supply through National Housing Funds

4. Economics, Ideology, and real estate policies • The public do not understand the economics of land use regulations. For example, the linkages between green belts and high housing prices, or the relationships between speculation and real estate price increases. • It is much easier to subscribe to an ideology. For example, environmentalists claim that green belts are crucial for protecting the environment. Speculators are believed to be an enemy of the public. People will stick to such views because they have little incentive to change their views. • Media often initiate or propagate irrational beliefs. Editorials are usually sympathetic with the public perception because they have no reason to upset their audiences. • Risk averse bureaucrats have little incentive to make decisions against the public beliefs: Three taboos in MOCT. • Demand and supply forces prevail in the market for beliefs and policies reflecting those beliefs.

5. Read all about it: Can economics and journalism ever live happily together? Economist, January 13th 1996

6. Korean land use regulations and their driving forces • There are more than 100 regulations regarding land use. • The regulations can be categorized into; 1) Those on the conversion of non-urban land into urban use 2) Those on the use of land already in urban use 3) Those on the use of non-urban land into non-urban use. • Is it rent-seeking or ideology? Compare the outcome predicted by rent seeking interests and the actual public policy decision. • We focus on the first type: Green belts, regulations on agricultural and forest land, and control of growth of the Capital Region. (Kim and Kim, Urban Studies 2000)

7. Stigler’s on rent seeking (Rubin, Pennington 2000) • Virtually all economically relevant political behaviors can be explained by economic self-interest. • Economists liked this hypothesis for reasons related both to their own self-interest and to ideology. • A special interest generates substantial personal benefits for a limited identifiable number of constituents, while imposing a small individual cost on a large unidentified members of the public. • Collective action problems: An individual’s contribution to the achievement of a common interest is unlikely to have a sufficient impact on the advancement of that interest to warrant the costs of political engagement. • This theory implies that a well-organized minority interest will win in the regulation game.

8. Does ideology matter? • Traditional theory of rent-seeking: Ideology does not matter: Stigler(1971), Peltzman(1984). But it was challenged on empirical grounds. • Ideology matters: Kau and Rubin(1979, 1981) Kau, Keenan and Rubin (1982), Kalt and Zupan(1984), Pool and Rosenthal (1997) • Whose ideology? Constituents’ or representatives’ own ideology (Shirking)? A principal-agent question. Shirking : Wittman(1983), Kau and Rubin(1993), Kalt and Zupan(1990). No shirking: Lott and Davis(1992), Bender and Lott(1996).

9. Green Belts Key features of regulation: • Designated around all major cities in the early 1970s • Land use conversion & urban development strictly prohibited. • GB land accounts for 5.5 % of the nation’s total land area. • About 60 % of the land is forest. Potential interest groups • Winners: Original owners of non-GB urban land • Losers: Original owners of GB land, urban renters

10. Actual politics • Advocates Environmentalists, planners, bureaucrats, media, and the general public. • Opponents Owners and residents of GB land Members of national assembly representing the local government most of whose jurisdiction is designated as GB Is Stigler right? • Not really. Opponents of the regulation have larger individual interests, are smaller in numbers and better organized, but have been losing the game. Is it Ideology? • Probably Yes. Consistent with the results of opinion polls and the attitude of the media.

11. Land use conversion Key features of regulation • Agricultural land use to be classified into Agricultural Promotion Zone(APZ) and the Semi-Agricultural and Forest Areas(SAFA; removed in 2003). • The former category is subject to a more stringent set of regulations than the latter, both categories are treated essentially the same in that land-use conversion is banned. • Currently, about 22 % of Korea’s total land area is in agricultural use, while less than 6 % is used for urban purposes (housing, commercial, industrial, schools, transport infrastructures)

12. Potential interest groups • Winners Bureaucrats and white collar workers related to agriculture Politicians representing the regions with agricultural base Owners of urban land • Losers Owners of agricultural land (Mostly farmers) Urban renters Actual politics • Advocates Bureaucrats and white collars, the media, the general public • Opponents Some economists

13. Is Stigler right? • Yes, for the bureaucrats and white collars. But no for the media and the general public. • An Interesting point: Farmers do not oppose to the regulation and the Association of Farmers strongly support it. Ideology? • Yes. Consistent with the national aspiration for self-sufficiency in food, and the deep-rooted respect for agriculture. • Recent incidences of unplanned and irregular developments in SAFA drew a lot of attention from the media and the environmentalists.

14. Growth control of the Capital Region Key features of the regulation • The Capital Region consists of the city of Seoul, the city of Incheon, and the Kyong-Gi Province surrounding the two cities. The region covers about 11% of the national territory but holds 46 % of the nation’s population. • Construction of factories, universities, and governmental offices are discouraged or banned altogether. • Conversion of agricultural and forest lands into large scale residential sites, sites for the industrial complexes and the universities is not allowed.

15. Potential interest groups • Winners The immobile labor in the Non-Capital Regions. • Losers Residents, businesses, investors and students in the Capital Region. Actual politics • Advocates Politicians from and residents of other regions, environmental activists, planners, the media and the general public. • Opponents Politicians representing the Kyong-Gi Province, Some economists

16. Is Stigler right? • No. The elected Governors and the national politicians representing the Kyung-Gi Province have been lobbying actively for a policy change, without success. Ideology? • Yes. Consistent with the majority view that Seoul and the Capital Region are too large, and that economic prosperity of the other regions is in conflict with that of the Capital Region.

17. Economics of Ideology-driven regulation A C $ D B n n1 n2 n : # of the constituents A : Aggregate Willingness-To-Pay for activities to realize the economic benefit B : Individual WTP for psychological satisfaction C : B * n D : Total Cost of organized action O < n < n1 : Stiglerian Regulation n2 < n : Ideology-driven Regulation

18. Interpretation • Some people take psychological satisfaction from the existence of a regulation itself regardless of the economic benefit that they derive from the regulation. The individual benefit is likely to be small. • However, the total willingness to pay for the existence of the regulation rises as the number of such people increases.(A network externality) • When the number reaches a certain threshold, the total willingness to pay for the regulation exceeds the cost of organized action.Thus, ideology prevails. • The victims of land use regulations with concentrated stake can lose to the general public with much more dispersed and smaller individual stake.

19. Self-correcting mechanism or compensation requirements? • Compensation on regulatory takings could be a remedy for the inefficient and excessive regulations that are conceived to originate from the rent seeking behavior. (Kim and Kim, JoHE 2002) • But when it becomes evident that a regulation is the result of rent seeking by the interest groups against the welfare of the general public, the regulation is very likely to be struck down by some politicians and NGOs even in the absence of a compensation requirement. • On the other hand, ideology-driven regulations lack such correcting mechanism, because there is an inherent support for them. Since most land use regulations in Korea are ideologically driven, a stronger case for compensation can be made. (cognitive errors vs motivational errors)