Chapter 1 Introduction Background Corruption has been a major policy concern across the globe because it is detrimental both to economic development and political stability, and to citizens‘ welfare. Countries plagued by widespread corruption often see increasing income inequality, underinvestment and misallocation of resources (Tanzi, 1998). As a country with the world‘s largest population, China has experienced aggravation of corruption since the late 1970s with the start of economic reforms. In 2009, Transparency International‘s Corruption Perception Index (CPI) ranked China 79th among 180 countries.1 In the same year, China‘s procuratorates investigated 4,1531 public officials for work-related crime, with the recovered amounts on corruption cases valued at 7,120 million RMB (US$1,100 million or S$1,352 million).2 Corruption has spread across various economic sectors and industries, particularly in capital-intensive sectors such as real estate, construction, finance, customs, taxation, and medical health in China. Among various areas of Chinese corruption, this thesis focuses on corruption related to land management, which has grown to unprecedented 1 See Transparency International, ―Corruption Perceptions Index 2009‖, available at http://www.transparency.org/policy_research/surveys_indices/cpi/2009/cpi_2009_table 2 See Supreme People‘s Procuratorate of the PRC., ―Zuigao Renmin Jianchayuan Gongzuo Baogao‖ [―Report on the work of the Supreme People‘s Procuratorate‖], available at http://www.spp.gov.cn/site2006/2010-03-11/0002126662.html. 1 proportions in recent decades and become a major focal point in the country (Deng, Zhang, & Leverentz, 2010). Land corruption encompasses a variety of forms such as bribery in land use rights (hereafter LURs) assignment, embezzlement and misappropriation of land-related revenues, land grabbing, land sales in the black market, and other abusive land use behaviors that violate land laws and principles. A 2009 survey in Guangdong Province found that the construction and land planning departments were perceived to be the most corrupt among government organizations.3 The magnitude of illegal land use by local authorities is substantial; in the 11-year period from 1998 to 2008, over a million (1,215,117) illegal land use cases involving 534,834 hectares of land were filed by the Ministry of Land and Resources, among which 237,094 hectares were farmland.4 The rise of corruption involved in land development remains among the most contentious social, political and economic issues in contemporary China (Chow, 2006; Lin & Ho, 2005). Land is fundamental to successful marketization and urbanization, and the study of land corruption is of great importance for at least four reasons. First, illegal land-use behaviors cause losses of state-owned-assets and government revenues. For instance, corrupt officials may sell urban state-owned land to investors at below market prices in exchange for bribes, making the state suffer from capital losses. Second, 3 See Guangzhou Daily, ―Guangzhou Lianzheng Diaocha Xianshi Jianshe Guotu Bumen Ju Fubai Shouwei‖ [―Guangzhou Anticorruption Survey Ranks Construction and Land Planning Department the First‖], available at http://society.people.com.cn/GB/42735/12390009.html 4 Source: China Land and Resources Almanac, 1999-2009, compiled by the Ministry of Land and Resources. 2 land corruption widens the gap between the rich and the poor by unequally distributing land resources to different groups. In rural-urban peripheries, local governments and developers often take farmers‘ land at low cost and sell the LURs at high prices, reaping huge profits from land transference. Consequently, real estate developers and those in power are better-off, while the under-compensated farmers become landless and often jobless, suffering from welfare loss. Third, land corruption erodes public trust, creates social unrest and political instability. It strikes at the legitimacy of the ruling party and affects the wellbeing of citizens in China. In urban areas, corruption and abuse of power are driving massive toll breakdown by force (qiang chai). Urban residents are constantly reported to protect their property from being destroyed illegally by real estate agencies and local governments. In rural areas, peasants‘ petitions and protests against illegal land-use are taking place throughout the country. Central government officials acknowledge that 40% of peasants‘ petitions are likely related to land disputes.5 Forth, the misuse of land leads to farmland loss, threatens food security, adversely affects economic production and suitable development. China‘s average area of farmland per capita is only 40% of the world average, and 7,950 hectares of farmland were lost between 1998 and 2008.6 The situation is aggravated by 5 See The Beijing News, ―Nongmin Shangfang Sicheng Yu Tudi Youguan‖ [―Forty Percent of Peasants‘ Petitions are Related to Land‖], http://news.xinhuanet.com/local/2011-03/25/c_121230216.htm. 6 See Jianping Ye and Youhui Zhang, ―Chengzhenhua Suo Yinfa De Wenti‖ [―The Problems Caused by Urbanization‖], http://www.qstheory.cn/ts/zxyd/byydtd/201003/t20100325_25146.htm. 3 illegal acquisition and conversion of land in rural-urban peripheries. To address the pressure of economic development and urban expansion, large amount of farm land is converted for non-agricultural purposes and food security will become one of the major concerns for the central government. To make matters worse, many pieces of land are acquired and converted in violation of resources-protection laws and principles. These abusive and illegal land management activities make land resources wasted, overexploited, and ineffectively used. The absence of corruption has a positive influence on the quality of land management. From an environmental perspective, proper distribution of land without abuses and corruption considers the responsibilities of protecting natural resources and overall urban planning principles. Hence the possibilities of overexploiting land resources can be reduced. Second, proper land distribution without corruption is politically beneficial. A corruption-free land administration system promotes citizens‘ sentiment of fairness and alleviate the inequality over land use and serves the interest of local communities and the general public. As a result, we expect the occurrence of inequalities, disputes and social unrest can be prevented. Third, from the economic perspective, proper and corruption-free land distribution strategies intend to make use of land resources more effectively and more efficiently that land-wasting behaviors cannot be tolerated. If land administration officials abuse their power to grant or block access to land, the value of land can be 4 underestimated and underutilized. In short, numerous social problems such as the loss of farmland, social unrest, environment deterioration, deprivation of human rights, poverty and inequality can be attributed to corrupt and illegal government activities in the land sector, while a proper, accountable and corruption-free land management system contributes to the development of a society and the welfare of its citizens. Research Questions and Objectives Land corruption has become synonymous with, and surging alongside, market-oriented land reforms in contemporary China. Both urban and rural areas have witnessed gigantic reconstruction within the land administration system, but urban land reforms are more influential and appear to be the driving force behind rural land reforms in many places. Therefore, this research focuses on urban land, with occasional reference to rural land. Urban land reforms in contemporary China have centered around the commercialization of LURs; more specifically, the introduction of paid land leasing system and abandonment of free administrative allocation of land under the socialist land management system (Zhu, 1999b). The transformation from the state-led to market-led land allocation paradigm has been accompanied by a rise in rampant land corruption in the 1990s (Gong, 1997; Deng, Zhang &Leverentz, 2010). At the initial stage of land reforms (late 5 1980s to mid-1990s), the level of marketization was very low and urban land supply was still subject to heavy state control. Restrictions on land transference and limited access to land encouraged illegal land transactions in the black market, besides, power was abused to obtain inside land-use information for personal gains. In part to address the rampant corruption and black market in the land sector, the Chinese central government decided to reconstruct the urban land supply system. A deepening adoption of market-driven urban land leasehold was witnessed in the 2000s. The previous free and discounted allocation methods were gradually replaced by market-led land pricing and allocation modes such as public tender, auction, and quotation. The main objective was to end the perceived government monopoly in resources allocation and to restrain local officials‘ discretion in land licensing and permitting, in hopes that it would curb unprecedented land-related corruption. The Ministry of Supervision, which worked aggressively with the Ministry of Land and Resources to promote the new policy, claimed that these tender, auction and quotation modes could reduce government intervention in the land market and protect principles of openness and fairness, and would be able to prevent corruption at its source.7 However, it is debatable whether this new policy has succeeded in reducing corruption. Firstly, very few empirical studies have explored the 7 See ―Guotuziyuanbu Jianchabu Guanyu Luoshi Gongyeyongdi Zhaobiao Paimai Guapai Churang Zhidu Youguan Wenti De Tongzhi‖[― Notice of the Ministry of Land and Resources and Ministry of Supervision on the Implementation of the Assigned System of Commercial Lands by Means of Public Bidding, Auction or Hanging out in a Shingle‖], available at http://www.law-lib.com/law/law_view.asp?id=198388. 6 association between new land policy and corruption. Secondly, there is no consensus among existing literature on the outcomes of the new policy. Tao, Zhang and Li‘s (2010) empirical study reported that the tender and auction modes may reduce corruption in land sector, while negotiation and quotation modes may lead to opposite effects. Similarly, Cai, Henderson and Zhang (2009) found that the auction mode has been successful in reducing corruption, whereas quotation (or two-stage auction) fosters corruption. However, according to Liang (2009), the adoption of market-led urban land supply policy (tender, auction and quotation) in 2002 was found to be positively associated with corruption in the years that followed. Deng, Zhang and Leverentz (2010) reported an escalation of land corruption between the late 1990s and 2008, which seemed to imply that the new policy had failed to curb corruption. Given the unresolved debate in the existing small body of literature, there is a perceived need to empirically investigate the relationship between recent land reforms and corruption in China. This research attempts to analyze the impact of the market-led urban land supply mechanism: specifically, the impact of the tender, auction and quotation modes on the occurrence and severity of land corruption in China. The primary objectives are to examine how corruption operates in urban land sector and how it is shaped by market-led land supply modes. Hence, I propose following research questions in this thesis. I. Has the introduction of market-led land leasing modes reduced 7 corruption as academics and practitioners claimed? II. If not, what are the factors that account for its failure? To answer these questions, I empirically tested the relationship between market-led land supply modes and land-law violations. Two hypotheses that capture the features of urban land supply system in contemporary China—rapid transition toward market-led land supply system in the 2000s and growing financial dependence on land resources—were derived from the literature review. Deepening adoption of the market mechanism in land supply is expected to help reduce corruption. Conversely, capitalization on land provides financial motives for local governments to engage in illegal land use. Descriptive and regression analyses were performed on a set of panel data to test these hypotheses. As it turned out, the market-led land supply system failed to curb land corruption. Drawing on an institutional approach, I explore reasons why the market mechanism has failed to deter corruption through examining the legal and institutional loopholes in the current system. Research Design This research used both quantitative and qualitative approaches: quantitative methods, to test the two hypotheses in the first research question, and qualitative method to explain the causal pathways through which 8 corruption is fostered or curbed by market-led urban land supply system to address the second research question. Figure 1 illustrates how this research was carried out. Figure 1. Research Framework Firstly, quantitative research is carried out to estimate the relationship between market-oriented land reforms and corruption on the basis of spatial characteristics and time effects. Two explanatory variables capturing the major attributes of current urban land market are used to operationalize land reform practice: transition toward market-led urban land supply system, particularly the adoption of a new land supply policy in 2002, and financial dependence on land-related revenues. Additionally, I control for various factors that may affect corruption as encompassed by the panel model, such as law enforcement, civil servants‘ wage, government size, and so forth. A set of panel data collected from 31 provinces between 1998 and 2008 is analyzed using panel data analysis model. The focus of this thesis is on the 1998-2008 period because 1998 is the start of an epoch-making point for China‘s land 9 administration regime. In 1998, a comprehensive revision to the Land Administration Law was launched; more importantly, the Ministry of Land and Resources was created in March 1998, marking the beginning of a nationwide land reform. I chose provinces (rather than municipalities or counties) as the unit of analysis, for two reasons: (1) in China‘s administrative hierarchy, provincial-level administrative units are the most important sub-national level authorities. Central regulations and policies are often redefined or modified at provincial level so that policies remain consistent within the jurisdiction of a provincial unit, and any revision to the original regulations by municipal or county governments has to be approved by provincial governments. (2) Statistics are usually compiled and published by provincial governments, and these were the only available data to systematically study land issues in China. Municipalities and counties rarely published their data in a comprehensive and longitudinal manner. The quantitative analysis relies on official statistics compiled by various government bodies. Major sources of data include China Land and Resources Almanac, China Statistical Yearbook, China Financial Yearbook and provincial yearbooks, whose features are summarized in Table 7. Admittedly, corruption is inherently difficult to measure. Land issues strike at the legitimacy of the ruling party hence land corruption data is usually considered confidential and not accessible to the public. However, we can find alternative measures to indirectly capture the level of land corruption. This 10 paper selects land-law violations defined by the Land Administration Law as proxies of land abuses and corruption. It should be acknowledged that official land corruption statistics—land-law violations—have limitations in their quality and reliability. First, the number of land-law violations has seen remarkable fluctuations between 1998 and 2008, which is perhaps caused by shifts in the intensity of land-law enforcement from time to time. These fluctuations may affect the validity of regression results. To address this problem, I integrate the variable of law enforcement in the regression analysis to ensure the fluctuations in official land corruption statistics are under control. By controlling the variations of law enforcement, we can also control the gap between actual land corruption level and revealed land corruption level as many scholars argue that official statistics only reflect the intensity of enforcement rather than the actual level of corruption. Consequently, official land corruption statistics can provide a proper indicator of trends in the actual land corruption level. The second limitation of the quantitative data is that these land-law violations do not equal to land corruption because some violations are committed by urban residents or peasants, which have no connection with corruption. Despite these limitations, land-law violations are entangled with bribery, abuse of power, and fraudulence hence are able to reveal illegal and corrupt government behaviors in land management. Based on above reasons, official land-law violation statistics can be employed as a reasonable proxy of 11 corruption in the land sector. At the second stage, I use a qualitative method to interpret the regression results and to explain the causal mechanisms through which market-led land supply policy affects corruption. If the coefficients of two explanatory variables showed expected signs, then hypotheses in this study are confirmed—i.e., marketized urban land supply system indeed helps to reduce corruption. However, if the explanatory variables showed opposite signs, I would then use the qualitative approach to explain the failure of market-led land supply policy in curbing corruption. To obtain the qualitative data, I conducted fieldwork in Beijing, Hebei and Shanghai between November 13, 2010 and December 18, 2010. In-depth interviews with public officials, businessmen, college professors and local residents were carried out. The selection of participants was based upon the assessment of participants‘ potential to provide valuable information on land corruption and anti-corruption policies. First, public officials‘ knowledge and experience drawn from government positions are useful for understanding the implementation of land policies and anticorruption polices. The selected public officials consists of two groups: one group come from land administration organizations representing experienced influential decision makers who demonstrate the practices of land management, the other group was from procurators, policemen, and officials of petition office who possess experience of handling corruption cases. Second, college professors and 12 journalists specializing in public administration and urban issues may offer unique insight into the outcomes of new land policies and anticorruption policies. Real estate developers can tell stories of how they compete for land use rights in tender, auction and quotation. More importantly, they are able to provide information on the state-business relations which demonstrate a hotbed for corruption. Finally, local residents and peasants as main stakeholders are directly involved in land use activities such as toll breakdown and land expropriation, they can provide in-depth knowledge about government behaviors in land use. Their perceptions on local governments are extremely important for understanding the scope and definition of land corruption. Based on the above considerations, I contacted my acquaintances in China to find qualified participants and used a snowballing technique to establish a valid sample frame. Existing participants who willingly agreed to engage in the research made recommendations of other qualified participants. Finally, 26 male and female respondents aged above 24 were chosen and interviewed: eighteen bureaucrats, two scholars, two real estate developers, two villagers and one journalist. The bureaucrats held positions ranging from department chief to ordinary staff member in land administration offices, inspection and judicial system, and other government bodies that could be vulnerable to corruption. The interviews were conducted face-to-face or via the internet, using self-administered list of questions. As requested by the interviewees, and to ensure anonymity, no names or workplaces are mentioned 13 in the thesis. The questions proposed during interviews can be categorized according to the following: 1) The perceived level of corruption and illegality in urban land market. 2) The policy-making and implementation in land administration. 3) The governance and transparency in the assignment of LURs. 4) Government-business relationship in land market. 5) The supervision and penalty of officials involved in land corruption cases. 6) The interaction between land administration officers and citizens. It should be noted that there were difficulties encountered in obtaining reliable and systematical data through interviews. Interviewees tended to withhold information and refused to reveal any abusive and corrupt activities existing in their workplaces. As such, the contents of the interview may not accurately reflect land corruption with a high degree of certainty. Moreover, the informants‘ personal perspectives and their relationship with the researcher may lead to biased statements that could negatively influence the empirical analysis. In an attempt to overcome such difficulties, many participant observations and informal conversations were carried out. I also conducted documentary research by reviewing existing archives, reports, documentaries, newspapers and websites to collect valuable information related to land corruption. 14 Significance of This Study This thesis finds that the newly established market-led urban land supply regime fails to resolve problems of land abuses and corruption, which have grown continuously over recent decades. While the central government and several scholars have articulated the virtues of the tender, auction and quotation modes in reducing corruption (Cai, Henderson &Zhang, 2009; Tao, Zhang &Li, 2010), this paper demonstrates the inability of market-led land supply modes to curb corruption. It shows that institutional loopholes in the urban land supply regime and a lack of parallel supervision mechanism have made corruption in land sector uncontrolled. Meanwhile, the central policies are often manipulated by local states because of the conflicting interests of state agencies at various levels, resulting in failure in policy implementation. Based on the above findings, this research is expected to contribute to the literature of corruption and land leasing in China in the following aspects: Firstly, this study contributes to current corruption literature by empirically studying land corruption issue in the Chinese context. Although it has been agreed that current land reforms are at the root of many social conflicts, empirical studies on land management problems are few in number. In particular, corruption in land development is under-explored. This research reveals the various forms of corrupt practices in urban land supply, such as extracting bribes, stealing land-related revenues and violating land protection rules and so forth, adding to the body of knowledge on how corruption 15 actually operates in urban land management. Secondly, this research project presents empirical evidence for the effects of market-led land supply regime on corruption in land management. It makes use of both quantitative and qualitative research methods in a multidisciplinary framework. Panel data analysis is complemented by qualitative data obtained from intensive interviews with local officials, business people, journalists and experts. The combination of two types of methodology enables us to overcome the deficiencies of relying on a single method, so that more valid and convincing conclusion can be drawn. Moreover, this thesis employs a multidisciplinary approach incorporating public administration, economics, sociology and geography to study how corruption is shaped by China‘s land reforms. Finally, the findings of this research have important implications in the policy arena. This research intends to show the problems in current urban land management system and provides recommendations for improving land use efficiency and protecting land resources. Additionally, this research goes beyond the land sector and situates the issue of land corruption within the broader context of the central-local relationship and the national legal environment and, hence, sheds light on the bigger picture of institutional reforms in contemporary China. Furthermore, it would provoke future studies in the area of land policy especially in rethinking and redesigning the tender, auction and quotation system. 16 Organization of This study The structure of this thesis is as follows: Chapter 2 presents the basis for understanding the manifestations and causes of corruption in China‘s land sector. An operational definition of land corruption is provided, followed by a narrative report describing the forms and characteristics of land corruption based on 20 corruption scandals. Existing literature on land corruption in global and domestic contexts is then reviewed. The focal point of literature review is on the controversial relationship between market-led land supply system and corruption. Chapter 3 identifies the research questions by tracing the transformation of China‘s urban land supply regime. After analyzing the major characteristics of current land reforms, two hypotheses are derived to predict the relationship between land corruption and market-led land supply system. Chapter 4 utilizes descriptive analysis and regression analysis to test the two hypotheses. Coefficients of independent variables are estimated by panel data analysis and the results are interpreted accordingly. Chapter 5 explains why the market-led land supply system has unexpectedly failed to curb land corruption. Institutional and legal loopholes that produce risks of corruption in urban land supply process will be examined. 17 Chapter 6 summarizes the contributions and limitations of this research and offers suggestions for future study. Finally, policy recommendations are made to enhance accountability and integrity in urban land management system. 18 Chapter 2 Literature Review This chapter reviews recent literature on abuse of public authority springing from China‘s land reforms in recent decades. The objectives of this chapter are to organize the knowledge about land corruption in China and to discuss the contributions as well as shortcomings of existing literature. Firstly, an operational definition of land corruption will be presented based on the literature review to identify the boundary of this research. Then, the patterns and characteristics of land corruption in China are described using 20 sample corruption cases. Finally, major studies of land corruption in global and domestic contexts are outlined and discussed. Working Definition of Land Corruption Corruption is commonly defined as the exploitation of public power for private gains (Guo, 2008; Rose-Ackerman, 1978; Shleifer & Vishny, 1993). In the Chinese context, forms of corruption include graft, bribery, misappropriation, collective illegal possession of public funds, unstated sources of large properties, abuse of power, dereliction of duty, and fraudulent practice. In addition, many misconducts that do not constitute corruption crime but that violate morality or communism ideology are also considered as 19 corruption, such as excessive banqueting and entertainment, womanizing, seeking privileged jobs for relatives, and purchasing excessive facilities (Liu, 1983). Given the unique political culture in China, the concept of corruption shall be broadened in its scope and deepened in depth. Any government behaviors that violate laws, prevailing norms or codes of conduct should be regarded as corruption. Land corruption shares some common features with corruption in other economic sectors; yet, it demonstrates distinct features because land is the fundamental factor in economic production. This thesis proposes an operational definition of land corruption to clarify the boundary of this research. Land corruption is defined in this thesis as the abuse of public power over land resources for private gains or organizational interests, or which violates regulations, principles or prevailing norms of land use. The forms of corruption related to land encompass all types of illegal land use behaviors by local government officials. In this thesis, the terms ―corrupt‖ and ―illegal‖ land use behaviors are used interchangeably as both types of behaviors pursue private gains at the expense of public interests. Furthermore, both are handled by the Central Commission of Disciplinary Inspection (CCDI) and Ministry of Supervision, two major anti-corruption agencies in China. Major types of illegal land use behaviors, such as the illegal purchase, sale and transfer of LURs, unlawful approval of land occupancy, and granting of land at a lower price, directly or indirectly involve abusive and unlawful behaviors of local 20 bureaucrats. Finally, two types of illegal land use activities—illegal approval of land requisition and illegal transfer of land use rights at lower prices—are classified as malfeasance by the criminal law.8 Given the close links between corruption and illegality in land development, the two terms shall be read as referring to the same issue. The next question then arises: how is corruption manifested in the urban land sector? The presence and characteristics of corruption vary significantly from sector to sector; thus, it is necessary to thoroughly investigate the manifestations of corruption in land management. However, given the sensitive and secretive nature of land corruption, it is extremely difficult to accurately describe how corruption operates. Notwithstanding, I collected information on 20 land corruption scandals from newspapers articles, anticorruption report and online medias from early 1990s to 2010; these are presented in Appendix A. While these land corruption cases represent only the tip of the iceberg, they shed light on the forms and characteristics of corruption in the urban land sector; hence, a basic understanding of land corruption can be drawn from these cases. As shown in Appendix A, the magnitude and severity of land-related corruption seem substantial. Many land corruption cases involve high-ranking officials (yao an) and large sums of money (da an). It is commonplace to find 8 See ―Zuigaorenminjianchayuan Guanyu Duzhiqinquan Fanzuianjian Lianbiaozhun De Guiding‖ [―Standards of Malfeasance Crime Registration set by the Supreme People‘s Procuratorate‖], enacted on December 29, 2005. 21 instances of provincial governors or Party secretaries accused of corruption in the land and property market. Of the 20 sample cases, 14 involve provincial or ministerial level officials; 10 officials were sentenced to death, demonstrating the severity with which land corruption is punished. Deng, Zhang and Leverentz (2009) found a positive relationship between the ranks of corrupt officials and the amount of land involved: the higher the official‘s rank, the larger the amount of land that was being illegally used. The average land area involved was 3.31 hectares for provincial officials and 1.25 hectares for city officials. The bribe size is also substantial: at least hundreds of thousands of RMB (several hundred thousand in US and Singapore dollars) are paid to local officials as bribes, as reflected by the Jing Fusheng and Liu Zhihua‘s cases. Secondly, corruption cases in land leasing suggest a massive scale that lead many scholars to label such acts ―organizational corruption‖ (Lin, 2009; Lu, 2000) or ―collective corruption‖(Gong, 2002). Urban land leasing regime is built on a division of labor, with each land leasing deal requiring permits and approvals from various government departments. Horizontally, corrupt land leasing deals require collaboration among multiple government bodies, including party and executive leaders, land and housing officials, urban planning officials, and even banking and judicial officials. Vertically, land related corruption is usually initiated or protected by the chief leaders or the ―first-in-command‖ (yibashou). If the ―first-in-command‖ is involved in 22 corrupt deals, the subordinates have to follow suit,9 as exemplified by Mu Suixin and Ma Xiangdong‘s gang corruption cases. One local land administration official stated the group behaviors as such: There is no real estate developer who does not have guanxi with chief party and government leaders in our area. Normally corrupt land deals have been ‗approved‘ by the leaders; we are just following that command. We land administration officials do not possess such discretion to initiate corrupt land deals.10 Thirdly, forms of corruption such as bribery, nepotism and favoritism are frequently observed in land corruption cases. Among the 20 sample cases, at least 15 officials were accused of accepting bribes, while other forms of corruption such as embezzlement and misappropriation appeared to be regarded as less serious than bribery. This finding is consistent with Wederman‘s study (2004). Continuous budgetary reforms may have prevented the occurrence of direct theft of public assets such as embezzlement and misappropriation, while public-to-private corruption prevails in the reform era, along with a thriving real estate industry. Real estate companies that want to maximize profits tend to bribe local officials to obtain land at the lowest possible costs. The preceding section presented the operational definition and major 9 This behavior is described by the report ―Ten Characteristics of Chinese Corruption‖, China Report 2004, 40, p.107. 10 Interview with local land administration officials on November 18, 2010. 23 forms of corruption in China‘s urban land sector. The next section reviews current literature to understand why land corruption prevails in both global and national contexts. Studies of Land Corruption in a Global Context Corruption is a phenomenon that exists in many economic sectors, but it is only in recent years that land-related corruption has attracted close attention at the international level. Land administration is now perceived to be one of the most corrupt sectors in many countries. Transparency International (2009) finds that after the police and the court, land services are the most prone to corruption, ―in the Middle East and North Africa, the most bribe-prone institutions are reported to be those handling procedures related to buying, selling, inheriting or renting land. In EU countries these land services along with healthcare are most vulnerable to petty bribery‖ (p.3). However, detailed documentation of corrupt activities in the land sector is a relatively recent phenomenon. For many years, corruption studies have focused on decentralization, liberalization and privatization of state-owned enterprises (SOEs) while land-related corruption has been given scant academic attention. Nevertheless, corruption in the land sector has emerged an important research subject in urban economics and corruption studies. Recent newspaper articles and scholarly works suggest that developing countries and transitional economies are plagued by corrupt land management 24 that impedes sustainable development (Knox, 2009; Strong, 2003). In a study on urban land privatization in Ukraine, Strong (2003) reported that in Kyiv a builder must pay bribes at various stages of land and construction permitting. In addition, prospective investors had no access to information related to land, which then discouraged investment. Improper land leasing modes also produced risks of corruption, ―a preference for negotiated sales of land rather than auctions sometimes reflects favoritism and bribes in the privatization process‖ (p. 200). Another post-socialist country, Vietnam, has also been plagued by serious corruption in the land sector. The World Bank‘s (2011) report, Recognizing and Reducing Corruption Risks in Land Management in Vietnam, argued that ―corruption is most likely to occur when an official or office has a monopoly, when the official or office has a great deal of discretion over how the decision is taken, and when there is little accountability for that decision or transparency, which might make it harder for the corruption to proceed unabated‖ (p. xiv). The risks factors for corruption embedded in Vietnam‘s land management system include poor dissemination of land-related information, unnecessarily complex and time consuming procedures, improper and non-transparent settlement of complaints, ineffective oversights of media, and so forth. Information dissemination and transparency in land management was also emphasized in another World Bank report on Vietnam, titled Survey Report on Information Disclosure of Land Management Regulations (Nguyen, 25 Nguyen, Tran, Prickett, Phan, 2010). Focusing on the disclosure of land related information in Vietnam, this study insisted that land related information was not readily available and accessible in Vietnam, ―in many cases local officials cannot locate the information,‖ and ―individual citizens do not seem to be aware of their right to access to information in general and land related information in particular.‖ (p. 49) Therefore, the report suggested that accessibility to land information had to be improved to reduce opportunities for corruption. As post-socialist countries in the developing world, China and Vietnam share considerable similarities in land administration, including public ownership, separation between ownership rights and utilization rights, and the introduction of public land leasehold and, hence, the World Bank reports on land corruption in Vietnam would shed light on the same issue in China. In addition to the World Bank, the U4 Anti-corruption Resources Center, a research agency operated by Chr. Michelsen Institute and Transparency International jointly, also dedicates efforts to examine corruption related to land management. One of the queries initiated by this research center focused on corruption in land administration in Kosovo. The publication Corruption in land administration / land management in Kosovo (Nawaz, 2008) proposed multiple reasons for rampant land corruption in Kosovo, such as the manipulation of documents, ineffective inspection system, improper enforcement of laws and regulations, uncoordinated and confusing 26 land use process, weak role of civil society, and so forth. The author suggested reform programs aimed at improving institutional qualities to resolve land corruption problem in Kosovo. Another Transparency International (2010) research project involved a national corruption perception survey in Pakistan, a country that is also plagued by corruption. The survey results suggested that land administration was perceived to be the third most corrupt sector in Pakistan in 2010. At least 8 in 10 (82.04%) of 5,200 respondents reported that they encountered corruption in their interactions with land administration officials. The report cited the lack of accountability in the land administration system as the most important cause of corruption, followed by discretional power, non-transparency, low salaries, land supply shortages, red tape-ism, and so forth. These studies have made significant contributions to the body of knowledge on corruption in land sector; in particular, they provide theoretical and empirical insights into studies on land corruption in developing and transition economies. One important implication is that land corruption occurs due to both sectoral and environmental factors. Sectoral factors such as monopoly of land resources, discretion of land administration officials, qualities of land administration institutions, government accountability and transparency exert direct influence on the incidence of corruption. Systematic factors, such as weak civil society, poorly-designed legal framework, and a 27 lack of the rule of law, can also exacerbate land corruption. The implication is that land corruption cannot be addressed by merely focusing on land administration itself; instead, comprehensive institutional reforms have to be carried out to build a clean social and political environment. Studies of Land Corruption in China’s Domestic Context As a post-socialist country with developmental objectives, China is unexceptionally suffering from rampant corruption in land management. A combination of factors—loss of arable land and food insecurity—in recent decades has raised public awareness on land protection in China. Scholars have devoted their efforts to exploring why corruption prevails in China‘s land sector. These particular perspectives can be divided into the following: (1) central-local contentions and the fierce interregional competition triggered by decentralization reforms may have encouraged rampant land lawbreaking; (2) ambiguous land property rights in China is believed to cause chaotic land management which facilitates corruption; and (3) state control in the ownership and allocation of land resources is the root of land corruption. These perspectives will be thoroughly investigated in the following literature review. Contentious Intergovernmental Relations Intergovernmental relations, including both vertical and horizontal 28 aspects, have been largely redefined in the era of fiscal and administrative decentralization. Decentralization is regarded as a strategy to promote economic growth in local areas; however, it has created conflicts between central and local governments and stimulated contentions among local governments themselves, which can lead to abusive and illegal use of land resources. The causal pathways are described as follows: firstly, fiscal reforms in contemporary China have resulted in a recentralization of fiscal revenues toward the central government and created a fiscal shortage for local governments (Ko & Zhi, 2011). The lack of sufficient financial resources makes local authorities trapped in a dilemma of delivering public goods with insufficient fiscal revenues. To bridge the gap between revenues and expenditures, local governments look for multiple sources to boost their revenue stream; the soaring prices of land and real estate properties have, in this regard, become an important source of capital. Land expropriation and selling are strategies undertaken by local officials to increase their financial power, and these have created to problems in the land sector. Guo (2008) claimed that massive acquisition and selling of land resources have triggered rent-seeking, corruption, and have caused harm to peasants‘ welfare. Lin (2009) also pointed out that overexploitation of land has led to irrational land grabbing and widespread illegal land sales in the black market. The association between fiscal decentralization and illegal land use is also supported by empirical evidence. Liang (2009) conducted a regression 29 analysis using a set of panel data between 1999 and 2005 to explore the relationship between fiscal decentralization and land corruption. After controlling for per capita GDP, provincial population, land revenues and some features of land administration sector, the author found that fiscal decentralization had significantly augmented land law violations by local governments. Scholars also believe that a decentralized land management system can contribute to abusive and corrupt land use activities in local areas. In the era of administrative decentralization, local governments have been given broad discretion in land requisition, conversion, and allocation, such that central government is now facing difficulty controlling these local-based, individual fiefdoms. Meanwhile, local governments continue to focus on local development, effecting policy measures and preferences with their self-interests at heart (Zhu, 1999). Broad discretion in land development has allowed local authorities to act against the central policies for local interests, making the principal-agent problem difficult to control. Gong (2006) drew on the principal–agent approach to explain land corruption in China‘s local areas. Gong asserted that China‘s local states have acquired both monopolistic power and responsibilities in decentralization process. Land corruption occurs as localities—the agents—betray the interests of central government—the principal—in pursuit of their own interests. She explained the causal mechanism as follows: 30 What has taken place in China‘s decentralization process is an increase in all three; that is, while the degree of discretion of local officials has increased to the extent of forming monopolized powers, accountability and transparency of exercising these powers are not established. Such a structure of governance provides enough room for local officials to render favorable treatment to special interests in exchange for personal gain. This is most evident in land-related corruption activities in recent years. (p. 89) Elaborating further on the principal-agent problem, Cao, Feng and Tao (2008) pointed out that local governments which have strong incentives to compete for manufacturing investment will always find ways to evade central policies and that it would be difficult for the center to exert effective supervision over such practices. Zhang, Xu and Wang (2011) conducted an empirical study to examine the effects of central-local contentions on corruption. Using panel data of land law violations between 1999 and 2007, the authors found that when provincial governors were selected from the corresponding province, a situation they termed ―local coalition,‖ the severity of land law violations measured by the amount of illegally-used land areas would likely increase by over 30%. This empirical study confirmed that land-law violations occur because local officials may act against central policies to protect local interests. In addition to central-local conflicts, interregional contentions have also been blamed for encouraging abusive and corrupt land-use behaviors 31 among local officials. Liang (2009) explained that China‘s political system remains highly centralized by controlling the appointment and promotion of local cadres. Under the current cadre promotion system, economic growth is a major criterion in evaluating cadre performance and the motivation of improving economic achievements has stimulated fierce interregional competition. Land holds special status in economic production, as a major market resource to be consolidated and mobilized so as to stimulate economic growth, which provides further incentives and opportunities for cadres to misuse land resources. Wu, Xu and Yeh (2007) described the behavior of local cadres thus: This (assessment of officials based on economic performance and achievement in office) stimulates the officials to develop concrete projects to demonstrate their record. The physical form of the built environment-such as city squares, elevated roads, metro-mass-transit, and development zones-by its nature allows easier visualization of the achievement than ‗intangible‘ social development and public opinion. (p. 14) Such political motives of local officials often lead to irrational and shortsighted activities including excessive land grabbing and an overinvestment in infrastructure regardless of urban planning and land protection regulations. Zhu (1999) claimed that vicious interregional competition and local cadres‘ objective of short-term development has made 32 rent seeking prevalent in the land sector. Ho (2001) also noted that, ―the ambition to achieve in their term of service causes cadres to approve the construction of factories, office-towers and apartment buildings on agricultural land, which opens up large opportunities for corruption‖ (p. 409). A Lack of Protection on Property Rights Another factor on land abuses springs from ambiguous land property rights and its resultant lack of protection. Ambiguity in the definition of property rights exists in both rural and urban land markets; this literature review focuses on urban land areas with occasional reference to urban-rural fringes. According to China‘s Constitution, urban land is owned by the state, while land in the suburban and rural areas is owned by the collectives. However, it is not specific as to who represents the state (Ho, 2001). As Ho pointed out, there is a legal twilight zone with regard to the concept of the state as owner of urban land, which brings about confrontations between state institutions. He acknowledged: ―the imprecise definition of state ownership is the underlying cause of arable land loss as local governments illegally and indiscriminately sell land for construction‖ (p.403). Because of ambiguity in rural collective land ownership, state-collective confrontations can happen in suburban areas during the tide of urban sprawl, a major manifestation of which is that ―collective land and sometimes entire collectives have been sold 33 or appropriated without formal change of land ownership titles‖; worse yet, collective ownership often becomes a hollow clause as ―the decision for land sale is often taken in the cadres‘ private capacity‖ (Ho, 2001, p. 410), leading to a severe problem of land loss. Lin and Ho (2005) also believed that ambiguous property rights, particularly in rural areas, is one possible explanation for the existence of illegal conversion and transactions in the black market. The authors claimed that rural collective ownership brings forth a confused definition. Both rural collectives and peasants believe they have the right to dispose of the land. In reality, peasants‘ rights and related benefits are very limited; often, it is the collective, the villagers‘ committee, which decides on how land is to be used, reaping the lion‘s share of profits in return. The problem of ambiguous property rights was further discussed by Zhang (2006). The author elaborated three types of ambiguities in current land management laws: firstly, the definition of public interest is vague; secondly, compensation to peasants deprived of land is not clearly specified; thirdly, peasants‘ rights to rural land are not stipulated by law which, in effect, allows the village committee to exercise the executive power. These legal ambiguities weakened individual property rights to land and facilitated land grabbing, rent seeking and corruption in localities (Zhang, 2006). State Monopoly and Dual-Track System 34 Within the land management system, debates on the sources of and solutions to land corruption have centered on role of state monopoly. Some scholars employ a public choice perspective to explain how rent seeking and corruption occur under public land ownership. Economists of the public choice school assume that state monopoly in the operation of economy encourages corruption (Tanzi, 1998). Given that China maintains strict state monopoly in land ownership, rent seeking and corruption can be expected. Chow (2006) criticized public ownership of land and bureaucratic power as an important source of corruption, and suggested further reduction on publicly-owned land and the government administrators‘ power to control corruption. As the author put it: by reducing the role of the state, including the sizes and number of state-owned enterprises and banks, the amount of publicly owned land (to be sold by auctions for example as in the case of Hong Kong), the number of government bureaus having authority to grant permit and licenses (some of which are necessary and desirable) and the number of government development projects, we can hope to reduce the amount of corruption substantially. (p.281) Deng, Zhang and Leverentz (2010) also argued that ―officials at various levels use every possible means to seek rent through monopoly in the economic areas that had not been open for market competition‖ (p. 79), which is exemplified in the urban land sector. The authors explained the relationship 35 between state monopoly and corruption in land requisition as follows: Because only the state had the right to obtain land from farmers at very low prices, officials frequently abused their power to approve land acquisitions from suburban or rural areas and then let their relatives or associates act as land brokers to transfer land to developers. Frequently, developers identified good locations for their projects and contacted officials or land brokers to persuade government officials to get land from farmers at low costs. (p.79) State monopoly gives rise to local officials‘ individual control of land and property market, which provides opportunities for corruption. Gong (1997) claimed that ―the authority over land (including planning, developing and leasing, etc.) has provided government officials with means of money making. Possessing the power to decide whether, how, to whom, and at what price to lease the land, they could easily abuse power by requesting bribes from interested individuals or institutions‖ (p. 280). Deng, Zhang and Leverentz (2010) also believed that ―urban land reforms featured by reassignment of property rights provides opportunity for corruption because officials have the power to decide who control property, who have the right for land-related income flows, and who have the right to assign ownership‖ (p. 77). Closely related to state monopoly, the dual-track land allocation mechanism and suppression of market forces are also believed to facilitate corruption. Deng, Zhang and Leverentz (2010) further argued that ―the dual 36 price policy created huge price differentials that in turn provided an enormous opportunity for corruption‖ (p. 74). This is particularly so with regard to urban land sector, which still maintains the dual pricing mechanism. Firstly, under dual-track allocation system, land can be allocated either free of charge, or based on payment. The existence of free and discounted land supply modes, namely administrative allocation and negotiation, gives rise to bribery and corruption (Yeh & Wu, 1996; Zhu 2002; Lin & Ho, 2005; Yeh, 2005; Xu, Yeh & Wu, 2009). The land rents created by the price gap between free allocation and paid acquisition encourage land buyers to be rent seekers. Deng (2003b) pointed out that corruption was a direct problem brought about by free administrative allocation, as real estate developers may bribe local officials to obtain land through free administrative allocation rather than expensive market modes. Negotiated sale of land, which involves partial state control, was also believed to facilitate corruption (Yeh & Wu, 1996; Zhu, 2002; Deng, 2003b; Lin & Ho, 2005; Yeh, 2005; Xu, Yeh & Wu, 2009). As investors can buy land at a much lower price through private negotiations (Deng, 2003b), they may approach land deals through guanxi networks, bribery and fraud (Wong & Zhao, 1999). This argument was supported by Tao, Zhang and Li‘s (2010) empirical study, which reported a positive association between negotiated land deals and illegal land use activities. Secondly, a dual-track allocation mechanism nurtures a black market where illegal purchase, sale and transference of state-owned land prevail. 37 Work-units illegally lease administratively allocated land to other users through the black market, and peasants illegally transfer rural farmland to investors (Yeh, 2005; Yeh & Wu, 1996; Zhang, 1997). Such behaviors may lead to a capital loss of state assets and damage to invaluable farmland. On the other hand, Zhu (1994, 1999a) rejected the notion that dual-track mechanism hinders the land market and suggested instead that the dual land market could become an implicit program to nurture local enterprises and developers, a means of fostering local government-enterprise coalitions, and an instrument to strengthen local government‘s position in local development. Nevertheless, the Chinese central government strongly believes that land corruption is the result of heavy state intervention and low level of competition in urban land market. Led by a neo-liberal paradigm, the central government initiated a series of land reforms to cope with land corruption by building a full-fledged land market. A major reform practice is the abandonment of free and negotiated land deals and strict adoption of tender, auction and quotation methods in urban land leasehold. The state has articulated the merits of tender, auction and quotation modes as a solution to abusive and corrupt land use.11 For instance, an article by Zhang Yanhua, deputy general director of the Department of Land and Resources in Zhejiang Province, stated that the tender, auction and quotation modes can help 11 See ―Jianchi He Wanshan Tudi Zhaopaigua Guiding, Baochi Dijia Pingwenheli Tiaozheng‖ [―Insist and Improve the Land Rules of Tender, Auction, and Quotation, Ensure Land Prices are Stable‖], http://house.people.com.cn/GB/14627461.html; see also ―Guoziwei: Tudi Jiaoyi Zhaopaigua Zhi Shi Haozhidu, Ke Fangzhi Fubai‖ [―SASAC: Tender, Auction, and Quotation are Good Rules to Prevent Corruption‖], http://finance.people.com.cn/GB/11188332.html. 38 improve the quality of land administration, maximize the value of land assets, and prevent corruption by ensuring transparency and fairness (Zhang, 2002). Chinese scholars such as Qiu (2006) also strongly support the new land supply regime. However, the marketization of urban land supply as a solution to corruption turns out to be debatable. Paradoxically, the new land supply policy generates new opportunities for corruption, as suggested by recent studies. Liang‘s (2009) empirical research found that the adoption of market-led urban land supply policy (tender, auction and quotation) in 2002 was positively associated with illegal land use in the years 2002, 2003 and 2004. Cai, Henderson and Zhang‘s (2009) theoretical model and empirical evidence revealed that the quotation mode, or ―two stage auction,‖ as termed by the authors, leads to less competitive bidding and more corruption than one-stage auction. This finding was further confirmed by Tao, Zhang and Li (2010), whose empirical study reported a positive relationship between quotation mode and land lawbreaking. Given such debates, the effects of market-led land leasing modes on corruption remains largely unknown. Implications of Literature Review The literature review has several important implications. Firstly, although corruption has been intensively analyzed by political scientists and economists, corruption related to land development is inadequately discussed by scholars; in this regard, only World Bank and Transparency International 39 have occasionally launched research projects on land corruption; hence, our knowledge about land corruption in the global context is limited. In China‘s domestic context, documentation of government behaviors in urban land use is new to the academic world, and there are only a few theoretical and empirical works available to disclose why corruption is rampant in China‘s land sector. Besides, causal arguments are often derived from anecdotal evidence or individual cases rather than systematic observations and analysis, hence, many have gone untested. Probably because of methodological challenges, empirical studies on Chinese land corruption are rather limited in current English literature (Cai, Henderson & Zhang, 2009). Among Chinese literature, only a handful of local Chinese scholars have studied the land corruption issue using an empirical approach (Liang, 2009; Tao, Zhang & Li, 2010). Given such limited scholarship on the land corruption issue, there is a strong need to thoroughly investigate how and why corruption occurs in China‘s land sector. A major controversy within the current land corruption literature concerns the relationship between marketized urban land supply policy and corruption. Advocates of the neo-liberal theory attribute land corruption to state monopoly in land ownership and land leasehold. Led by neo-liberal ideology, the Chinese central government has carried out market-oriented land reforms to reduce state monopoly in urban land supply. However, scholarly works have reported the failure of marketized land allocation mechanism in preventing corruption (Liang, 2009). Considering such disagreement, this 40 paper intends to probe into the linkage between corruption and marketized land supply regime on a basis of statistical analysis. 41 Chapter 3 Research Questions and Hypotheses This section elaborates on the research questions and proposes two hypotheses for quantitative analysis. The research questions are tabled after clarifying historical events in China‘s urban land reforms. 12 The two hypotheses capture the basic characteristics of China‘s urban land reforms and are used for empirical testing and further discussion. The following section provides a detailed statement of research questions and the two hypotheses. Urban Land Reform in China Urban land reforms became an important developmental issue in China starting in the early 1990s. In addressing the issue of inefficient land resource management, low agricultural production and rural poverty in developing countries, the World Bank proposed and aggressively promoted many market-oriented policies, suggesting that state-led land policies distort the land market. According to Deininger and Binswanger (1999), restrictions on land sales and rentals inhibit investment and cause informal transactions in the land market. State-led land use model is at the root of inefficiency and under-productivity in the agricultural sector, and this is particularly so in 12 In the Chinese context, land reforms in rural and urban areas demonstrate great distinctions, for the purpose of this research, only urban land reforms will be introduced, rural land management regime is beyond the scope of this paper. 42 socialist settings (Deininger, 1995). Led by the pro-market rationale, the World Bank prescribed market-led land policies as the panacea to land inefficiency in Latin American, African and post-Communist countries (Borras, 2003a; Lahiff, 2006; Pereira, 2007). Major reform practices include privatization and individualization of land ownership or LURs, promotion of open land rental and sale market, decentralization of land administration institutions, conversion of land from rural to urban uses, and reduction of government control in land resources, and so forth (World Bank, 1997). Privatization and individualization of property rights are of central concern to policy agenda in post-communist counties such as Central and Eastern Europe, Vietnam, and China (Ho & Spoor, 2006). In the Chinese context, land was publicly owned and allocated free of charge in the pre-reform era. Following a socialist ideology, land possessed no commercial value and could then be traded in the open market. Urban land allocation mechanism was an integral part of traditional central planning system. Land development decisions were made out of economic and political demand rather than economic and efficiency concerns. The urban land users were state authorities, state enterprises, and other public organizations, but there were no private organizations in the urban areas to compete for land. Meanwhile, land could be used for an infinite period of time. Followed a rigid hierarchical approval system, urban construction projects initiated by central and local states had to be approved by the Central Planning Committee. Once approved, 43 local authorities were required to allocate a piece of land to the corresponding project free of charge. The socialist land allocation system was then believed to be incompatible with the country‘s overall market-oriented reforms; in particular, because it hinders efficient land use and investment in urban housing and services (Zhu, 1999). This stimulated the adoption of market-driven land supply paradigm in the reform era. In the World Bank report, China: urban land management in an emerging market economy (World Bank, 1993), the researchers suggested that China create an open land market to promote real estate investment and urbanization and that institutional and legal changes be initiated to accommodate the emerging market economy. Following a neo-liberal rationale, the state gradually abandoned the socialist administrative land allocation system to pursue a market-driven land management paradigm. The following table presents the evolution of China‘s urban land reforms and regulatory regimes in each period. 44 Table 1. Evolution of Urban Land Supply Regime in China Period 1950-1986 Reform Practice Legislation Regulatory Regime Centralization of Constitution of the People's Urban land was allocated to national Republic of China (1954, 1975) users for free and was banned land resources ； creation of National Land to be transferred. Administration Bureau 1987-1989 Pilot reforms of Land Administration Law; LURs were separated from commercializatio Regulations for Valuation on land ownership and allowed to n Urban Land be transferred between users; of LURs; assessment of urban land was granted based land value on payment and kept for a limited period of time. 1990-2001 Nationwide Interim Regulations Concerning Urban land used for public adoption of land the Assignment and Transfer of interest was allocated for free, leasehold; the Right to the Use of the commercial State-Owned Land in the Urban land can be assigned via administrative Areas；Provisional Regulations negotiation, tender or auction. allocation on Granting and Transferring reduction of the Right to the Use and industrial of State-Owned Land in Cities and Towns; The Law on Urban Real Estate Administration 2002-2005 abolishment of Granting of Use Rights in Urban land used for public negotiation for State-Owned Land by Tender, interest is allocated for free, Auction and Quotation industrial commercial land land can be allocated via negotiation, but tender and action are encouraged; commercial land has to be assigned by tender, auction or quotation 2006-now abolishment of Circular of the State Council on Urban land used for public negotiation for Intensifying the Land Control; interest is allocated for free, Provisions on the Assignment of both State-owned Construction Land commercial land has to be Use Bid allocated via tender, auction or and quotation. industrial land Right Invitation, through Auction industrial and Quotation Source: concluded by the author 45 In the late 1980s, urban land reforms starting with the commercialization of LURs began. In November 1987, pilot reform on LURs was initiated in Shenzhen, Shanghai, Tianjin, Guangzhou, Xiamen and Fuzhou. The success of these encouraged institutional reforms in the following year, when transference of LURs was legalized by constitutional amendments. Article 2 of the amendments was explicitly clear: ―No organization or individual may appropriate, buy, sell or otherwise engage in the transfer of land by unlawful means. The right to the use of land may be transferred according to law.‖ Such changes were further confirmed by The Land Administration Law of the PRC, issued in December 1988 and amended in 2004. The law had defined land ownership and right to the use of land as follows: The People‘s Republic of China resorts to a socialist public ownership, i.e., an ownership by the whole people and ownerships by collectives, of land. In ownership by the whole people, the State Council is empowered to be on behalf of the State to administer the land owned by the State. No unit or individual is allowed to occupy trade or illegally transfer land by other means. Land use right may be transferred by law. The state may make expropriation or requisition on land according to law for public interests, but shall give compensations accordingly. (Chapter 1, Article 2) After the commercialization of LURs gained constitutional support, several other legislations were enacted to create a regulatory regime of new 46 urban land supply.13 Under the new policies, LURs are granted either of two ways: free allocation (wuchang huabo), or paid land leasehold (youchang churang). Under the free allocation system, land used for public interest intent can be allocated to the final users (state, party, military, non-profitable organizations and SOEs) without any fee. In 2001, the Ministry of Land and Resources published a Directory of Allocated Land (huabo tudi mulu), which gave detailed explanation of the administrative allocation process. Potential land users submit land use applications and qualifications to the local land administration departments for an evaluation. Only public welfare-oriented projects qualified for free allocation, such as the construction of office buildings for public organizations, urban infrustructure, energy and transport facilties, prison and public security projects, and so forth. Once approved, one parcel of land would be supplied to the applicants with no fees charged and no limitation on duration. Free allocation is a legacy of the socialist land allocation system, but differs from the previous system in that land use applications are now approved by local authorities instead of a central Economic Planning Committee. Deeply rooted in socialist ideaology, the free allocation mode is incompatible with the emerging market economy and brings considerable amounts of capital losses. To remedy the inefficiency and economic loss, further legislations were issued in the early 1990s, including Interim 13 The laws and regulations on the transference of LURs include the Interim Regulations of the PRC Concerning the Assignment and Transfer of the Right to the Use of the State-owned Land in the Urban Areas; the Provisional Regulations of the PRC on Granting and Transferring the Right to the Use of State-Owned land in Cities and Towns; and the Provisional Administrative Methods for Developing and Operating Vast Tracts of Land with Foreign Investment, all were issued in 1990. 47 Regulations of the PRC Concerning the Assignment and Transfer of the Right to the Use of the State-owned Land in the Urban Areas and the Provisional Regulations of the PRC on Granting and Transferring the Right to the Use of State-Owned land in Cities and Towns, allowing urban state-owned land to be supplied through paid leasing, gradually giving rise to a market-oriented urban land supply system. Under the paid land leasing system, land used for profit-making purposes are leased for a sum of money, and the LURs are owned for a specified number of years, e.g., up to 70 years for housing, 50 for industrial use, and 40 for commercial purposes. Each land parcel in the urban areas is professionally assessed and valued, and the price updated regularly. In the process of land appraisal, a benchmark price (BMP) is set. This represents the average price of land at a particular location within a specific time period. Land prices vary according to heterogeneous properties of land. According to Ding (2001), the components to be considered in BMP setting include: (1) the amount of land use rights fee paid to the government; (2) infrastructure costs paid to the government for land improvement; (3) demolition cost; and (4) land acquisition cost. The BMP values are updated every five years to reflect socioeconomic changes. This functions as a guide to price decisions made in land leasing, and provides a tool by which to protect land assets, and to facilitate land management and promote land development, even though it has its problems as well. 48 Besides the establishment of land pricing mechanism, the paid leasing system also introduced new land supply modes—negotiation, tender, auction and quotation—to simulate urban land and property market. Negotiation is a quasi-market or quasi-administrative allocation method that aims to achieve land deals based on agreement between land supplier and buyer. There are multiple circumstances under which there is room for negotiation, such as when land is not used for profit-making purposes, or when the original land user applies to continue possession of LURs.14 Similar to free allocation, the negotiation mode is applied to subsidize the projects that intend to promote social welfare, local employment and to facilitate economic reforms. Prior to 2006, many technological and capital-intensive manufacturing enterprises were allowed to obtain land through negotiation. The negotiation mode is used to address complex issues generated by the privatization of SOEs—the major holders of urban land in pre-reform era. As land buyers are often required to relocate laid-off workers and repay SOEs‘ debts, this entails private negotiation between local government and land buyers. In negotiated land sales, land administration departments and land buyers negotiate on price, location, size, usage, duration, planning requirements, and so forth. Land price is the central concern of negotiators, 14 For detailed explanations regarding the applicability of negotiation mode, see ―Xieyi Churang Guoyou Tudi Shiyongquan Guiding‖[―Provisions on the Agreement-based Assignment of the Right to Use State-Owned Land‖], article 4.3. 49 according to Article 5 of the Provisions on the Agreement-based Assignment of the Right to Use State-Owned Land; prices of land in negotiated sales shall never below 70% of the benchmark price of the land. Based upon this requirement, a floor price is decided collectively—in private, —by land administration officers. Then land administration organs and the buyer then negotiate on the price, which are never to go below the set floor price.15 There are several drawbacks to negotiated land sales: firstly, the process is not open to the public but instead, a secretive deal is struck between land administration organs and potential land buyers; secondly, as the land prices are not decided by any form of price mechanism but by the bargaining power and guanxi between both parties, the negotiated price is often much lower than the market price. Developers‘ incentive to replace market allocation modes with negotiation can be a source of rent seeking and bribery. Aware of the dark side of negotiated sales, the center decided to abandon quasi-market mode and promote market-led allocation modes (tender, auction and quotation). In July 2002, Regulation Governing the Granting of Use Rights in State-Owned Land by Tender, Auction and Quotation was officially adopted, requiring all land used for business purposes (commerce, tourism, entertainment and commodity housing) to be allocated through market transaction modes (tender, auction and quotation), although industrial land can still be supplied by negotiation. The official abolishment of negotiated land 15 See ibid. 50 deals for industrial companies occurred on August 31, 2006. As the State Council issued Circular of the State Council on Intensifying the Land Control, all land used for industrial purposes should be distributed via market modes the same as commercially-used land. Abrogation of negotiation mode was further institutionized by the Provisions on the Assignment of State-owned Construction Land Use Right through Bid Invitation, Auction and Quotation promulgated in 2007, since when industrial enterprises are no longer subsidized by cheap land. Of the three land supply modes, auction is the most straightforward as the successful bidder is the one that bids the highest price. In a public tender, invitations are sent to potential land buyers who then submit their tender documents and materials to the corresponding governments. Instead of selecting the highest bidder, the evaluation of tender bids considers multiple factors such as the design and reputation of the bidders (Deng, 2003a). Quotation is a process similar to auction, but allows more flexibilities in decision-making. When the land use information is disclosed, bidders submit their prices to land administration organs and are allowed to update their land prices in the listed period of time. The winning bidder is the one who offers the highest price (Xu, Yeh & Wu, 2009). Similar to negotiated land sales, there is also a floor price for market-driven land supply modes; in addition, the tender mode requires a minimum tendering price, while auction and quotation requires an opening bid 51 price and a starting price respectively, all of which are collectively determined by land administration officers after taking into consideration the benchmark and floor prices. Usually, any individual or organization may compete for LURs in tender, auction and quotation, unless otherwise stipulated by law and regulations.16 Figure 2 shows the procedures of obtaining land use rights through different channels. Figure 2. Procedures of Urban Land Supply in China17 Research Questions and Hypotheses According to the preceding section, China‘s urban land supply regime has shifted from a state-led to a market-led paradigm. Based on this historical 16 See ―Zhaobiao Paimai Guapai Churang Guoyou Jianshe Yongdi Shiyongquan Guiding‖[―Provisions on the Assignment of State-owned Construction Land Use Right through Bid Invitation, Auction and Quotation‖], article 11. 17 See Ministry of Land and Resources, ―Zhaobiao Paimai Guapai Churang Guoyou Tudi Shiyongquan Guifan(Shixing)‖[―Rules on the Assignment of State-owned Land Use Right by Means of Bid Tendering, Auction and Hanging Out a Shingle (for Trial Implementation)‖], promulgated May 31, 2006; and ―Xieyi Churang Guoyou Tudi Shiyongquan Guifan(Shixing)‖[―Rules on the Agreement-based Assignment of State-owned Land Use Right (For Trial Implementation)‖], promulgated May 31, 2006. 52 background, research questions and hypotheses are derived in this section. Table 2 shows the differences between state-led and market-led paradigms of urban land supply. Table 2. Comparing Free Allocation, Negotiation, Tender, Auction and Quotation Features Modes of Land Allocation Free Quasi-administrative/Quasi-market Market allocation administrative allocation (negotiation) (tender, auction, State control Land transfer Qualified allocation High Banned State, party, Medium Allowed Some non-profit organizations; quotation) Low Allowed Real estate Land users military, private enterprises in high-tech and developers; non-profit capital-intensive industries (before individuals; private organizations and SOEs 2006); original land users (e.g., SOEs), etc. enterprises (including private high-tech and capital-intensive enterprises after 2006) Decision Government makers leaders and land administration Land value No price (free of charge) Transparency Government leaders, land Land administration administration officials and one organs and multiple land buyer land buyers A BMP is decided by land A BMP is decided by evaluation agency; a floor price is land evaluation decided by land administration agency; starting organs, upon which a transaction prices are decided by price is negotiated between land land administration administration organs and land organs; the highest buyer bidders win Non-transparent Non-transparent Transparent Source: constructed by the author Table 2 (above) shows that market-led land allocations possess advantages in instituting good governance and preventing corruption in land 53 administration. Firstly, administratively allocated land was not allowed to be transferred for investment purposes, which was an obstacle for more efficient land users to access to the land (Zhu, 1999). The restrictions on transferring of LURs gave rise to pervasive ungovernable and illegal land transactions by state units in the black market (Xu, Yeh & Wu, 2009), resulting in losses in land assets and government revenues. Under the new system, LURs can be legally transferred for reinvestment, and this reduces the incentives for illegal land transference in the black market. Secondly, under the administrative and negotiated allocation models, decisions are made in a rigid and secretive fashion, which gives local officials opportunities to abuse their power for self-enrichment. The new market-led allocation system lowers state control in land market by increasing the number of bidders and the level of competition. Land-related information is publicized prior to the beginning of the competition process, making urban land supply more open and transparent. Each potential buyer possesses equal opportunities to compete for the land in bidding process, and to monitor government behaviors. As the land supply process becomes more transparent, fair and user-friendly, it is likely that corruption will be curbed. Based on the above merits of various market allocation modes, the central government hopes that the adoption of completely market-led leasehold of land will reduce land-related corruption. To achieve this, I propose to explore the following research questions: has the new land supply 54 policy succeeded in reducing corruption? If not, what are the reasons for its failure? With an objective to answer research questions, I derived two hypotheses for empirical testing and further discussion. The hypotheses have captured the major characteristics of current land reforms; hence, they are able to elaborate on the relationship between market-led land supply system and land corruption comprehensively. The first hypothesis is defined as follows: H1: Adoption of market-led land supply policy (tender, auction and quotation) reduces corruption. This hypothesis reveals the fundamental issue of market-oriented land reforms in China—is the free market ―cleaner‖ than the state? As discussed in the preceding section, mechanism—coexistence China‘s of land state-led market features allocations a dual-track (administrative and negotiated land deals) and market-led allocations (tender, auction and quotation). There is a strong belief among Chinese leaders and scholars that administrative and privately negotiated land allocations encourage rent-seeking and corruption because of the pricing gap between state track and market track (Deng, Zhang & Leverentz, 2010). Hence, tender, auction and quotation modes were adopted as a solution to the rampant behind-door deals in urban land supply. It is expected that corruption can be reduced through restraining state control and enhancing market forces. However, many scholarly works have challenged the effectiveness of market-led land supply regime in curbing land corruption. According to Liang (2009), the new policy 55 has triggered a surge of land corruption in the years that followed. Tao, Zhang and Li (2010) and Cai, Henderson and Zhang (2009) found that corruption was likely to take place under the quotation mode. Due to the lack of consensus among scholarly attempts, there is a strong need to rigorously test the relationship between market land supply modes (tender, auction and quotation) and corruption. H2: Financial dependence on land-related revenues aggravates corruption. Capitalization on land is one of the objectives of market-oriented land reforms in contemporary China. As shown in Table 2 (on page 43), the land pricing mechanism on public land leasehold had the effect of strengthening local governments‘ financial power. Along with soaring land prices, land conveyance fees become an important source of revenue for local authorities.18 Xu, Yeh &Wu (2009) reported that land sales contributed 30% to 70% of municipal revenue in many cities. One official working in a city-level procuratorate said: Chinese local governments are solely relying on selling land to collect fiscal revenues. Compared to other sources of revenues, capitalization on land is convenient, quick and highly profitable; the governments acquire land from peasants with almost zero cost 18 According to Land Administration Law (2004), 30% of land conveyance fees shall be submitted to central government, the remaining 70% is distributed in localities. 56 and sell it to rich developers by charging millions of yuan. In addition to that, there is no tax burden on land revenues; hence the money is entirely under control of local governments.19 Table 3. Financial Dependence on Public Land Leasing Year Budgetary Revenues (100 million RMB) Extra-budgetary Revenues (100 million RMB) Land leasing fees (100 million RMB) Land leasing fees /Total revenues 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Total 4983.95 5594.87 6406.06 7803.30 8515.00 9850.00 11893.40 15100.80 18303.60 23572.60 28644.90 140668.5 2918.14 2912.99 3154.72 3578.75 3952.99 4039.38 4187.46 4348.49 5141.57 5318.83 5752.75 45306.07 249.93 514.33 595.58 1295.89 2416.79 5421.31 6412.18 5883.82 8077.64 12216.72 10259.80 53343.99 3.2% 6.0% 6.2% 11.4% 19.4% 39.0% 39.9% 30.3% 34.5% 42.3% 29.8% 28.7% Source: China Finance Yearbook, 1999-2009; China Land and Resources Almanac, 1999-2009 Above table illustrates the degree of financial dependence on urban land leasing. It shows that land conveyance fees have contributed significantly to local government financial power. On the one hand, this allows local states to carry out more developmental projects and provide more public goods (Zhu, 1999). On the other hand, local governments become overly dependent on the revenues generated by land sales, which is an unwanted consequence of current market-oriented land reforms. Overdependence on land revenues could 19 Interview with one local official on November 18, 2010. 57 hinder the efficiency of land management and gives rise to corruption. Scholars point out that strong economic incentives make it difficult for the state to control and monitor the sales of LURs (Ding, 2002). Capitalization on land and overdependence on land revenues has motivated local governments to engage in irrational land grabbing and widespread illegal land sales in the black market to gain substantial revenues (Lin, 2009). This demonstrates the paradoxical nature of current land reforms, and leads to the second hypothesis. Summary As an integral part of economic reform, China‘s land sector has witnessed its transition from state-led socialist system to market-led, neo-liberal paradigm. However, corruption in land sector started to become more prevalent from the early 1990s when the reassignment of property rights began (Gong, 1997;Ding, 2002; Deng, Zhang& Leverentz, 2010). Land policy reforms have produced both wanted and unwanted consequences. One of the problems arising from the land reforms is widespread black market, bribery and corruption (Ding, 2002). The central government has initiated a deepening adoption of market mechanism in urban land supply to address land corruption. However, whether the marketized land supply system is a successful solution to corruption remains controversial in scholarship; hence, it is necessary to empirically study the effects of current land reforms on corruption. This chapter started by tracing the history of land reforms in China, and then 58 identified the research questions and hypotheses of this paper. In the next chapter, the hypotheses will be tested using descriptive and regression analyses. 59 Chapter 4 Empirical Study of Land Corruption in China This chapter aims to empirically test the relationship between market-led land supply modes (tender, auction and quotation) and land corruption. Firstly, descriptive analysis is performed to trance the historical pattern of land corruption in China. This allows us to see whether land corruption is influenced by the new land supply policy. In the second step, regression analysis is performed to gain more robust conclusions on the association between market-led land supply modes and corruption. A set of panel data covering 31 provinces between 1998 and 2008 is then analyzed using two-way random-effects panel model. Based on the regression results, the hypothesized impact of tender, auction and quotation modes on land corruption can be identified. Data The data on land corruption is inherently difficult to obtain due to its sensitive nature in the Chinese context. As numerous conflicts, protests and riots have been attributed to land disputes and as many local officials enrich themselves through illegal land-use activities, land corruption data is usually considered confidential, and thus not accessible to the public. Although the 60 data that directly reflects land corruption is not available in a systematic and longitudinal manner, we can find measures indirectly capturing the level of corruption related to land. This paper selects five types of land-law violations defined by the Land Administration Law as proxies of land abuses and corruption. They include: (1) illegal purchase, sale and transfer of land use rights; (2) damage of cultivated land; (3) encroachment of land without approval; (4) unlawful approval of land occupancy; (5) granting of land at a lower price, and other illegal behaviors related to land use. These land-law violations are intertwined with bribery, abuse of power, and fraudulence and are, therefore, abusive and corrupt in nature. The criminal law classifies two other types of land-law violations—unlawful approval of land occupancy and granting of land at a lower price—as crimes of malfeasance. 20 Moreover, these land-law violations are processed by disciplinary and supervisory organs in the same manner as corruption cases. As a result, although land-law violations are not completely accurate in reflecting land corruption, they can be employed as a reasonable proxy of corrupt and abusive government behaviors in land use. The data related to land-law violations and land transactions is compiled by the Ministry of Land and Resources and obtained from the China Land and Resources Almanac. Other relevant data is collected from China Statistical Yearbook, China Financial Yearbook and provincial yearbooks, and summarized in Table 7. 21 See the Ministry of Land and Resources, ―Bu 39 Hao Ling Xiangjie‖ [―Elaboration of Circular No. 39‖], http://www.mlr.gov.cn/zwgk/zcjd/200712/t20071212_666999.htm. 61 Describing the Trend of Land Corruption in China This section attempts to show the impact of tender, auction and quotation modes on land corruption by looking at the trend of land lawbreaking. Our primary interest is to find out whether the level of land corruption has declined after the market-led land supply system was adopted. In the history of land reforms in contemporary China, tender and auction modes were initially adopted in the late 1980s but accounted for an extremely small fraction of urban land deals (Table 4). Marketization process gained a strong momentum in 2002 when the Regulations governing the Granting of Use Rights in State-Owned Land by Tender, Auction and Quotation (Circular No. 11 of the Ministry of Land and Resources) was officially implemented across the country. This regulation aggressively promoted the development of the market-led urban land supply, in effect institutionalizing the tender, auction and quotation system. Nationwide implementation of such new policy implies a strong will of the central government in abandoning state control and introducing market forces to manage urban land resources. Opposite to free and negotiated land deals which are subject to intensive state intervention, tender, auction and quotation modes respect market competition and serve clients‘ interests. This circular is so influential that the Chinese view it as the ―second revolution in land‖.21 The following table shows urban land supply 21 See the Ministry of Land and Resources, ―Bu 39 Hao Ling Xiangjie‖ [―Elaboration of Circular No. 39‖], http://www.mlr.gov.cn/zwgk/zcjd/200712/t20071212_666999.htm. 62 deals via different methods between 1998 and 2008. Table 4. Urban Land Supply Via Different Means, 1998-2008 Year Total Free Administrative Negotiation Allocation Tender, Auction, Quotation plots plots percentage plots percentage plots percentage 1998 529467 399050 75.37% 117266 22.15% 13151 2.48% 1999 267788 168771 63.02% 83692 31.25% 15325 5.72% 2000 279130 160284 57.42% 99632 35.69% 19214 6.88% 2001 311325 141168 45.34% 145228 46.65% 24929 8.01% 2002 333258 104491 31.35% 203866 61.17% 24901 7.47% 2003 255721 48334 18.90% 157381 61.54% 50006 19.55% 2004 221694 36844 16.62% 138111 62.30% 46739 21.08% 2005 192693 30581 15.87% 117642 61.05% 44470 23.08% 2006 217414 30747 14.14% 140933 64.82% 45734 21.04% 2007 187313 26909 14.37% 109748 58.59% 50656 27.04% 2008 149688 26330 17.59% 68093 45.49% 55265 36.92% Average 267772 106683 33.64% 125599 50.06% 35490 16.30% Total 2945491 1173509 39.84% 1381592 46.91% 390390 13.25% Sources: China Land and Resources Almanac, 1999-2009. At first glance, free and negotiated allocations dominated the urban land supply throughout the 10 years between 1998 and 2008, accounting for 86.75% of total land allocations, while only 13.25% were achieved through complete market modes. However, a close examination of land allocations between 1998 and 2008 (see Table 4) suggests that the marketization process accelerated after 2002 when the new land supply policy (tender, auction and quotation) was officially adopted. In 1998, the market modes accounted only for 2.48% of total land supply plots. However, the percentage of tender, 63 auction and quotation modes saw a big increase in 2003, from 7.47% to 19.55%, while the free administrative allocations were significantly reduced. Also in the same year, the total number of market modes exceeded free administrative allocations to become the second important land allocation channel. After 2003, institutional changes to the land system have resulted in a steady increase in the usage of market land allocation modes. Considering the substantial influence of the new land supply policy, we incorporate it as an indicator of a transition toward market land supply system and predict that the land corruption rate will decline after 2002. In the following stage, we select two indicators to show the national trend of land corruption: the number of illegal land-use cases and the amount of land being illegally used. These two indicators reflect different aspects of land corruption: illegal land-use cases suggest the occurrence of land corruption, while the amount of illegally-used land indicates its severity. Relying on a single indicator does not capture the complete picture of land corruption in China. Hence, both indictors are illustrated in Figure 3. 64 200000 150000 100000 50000 0 1998 1999 2000 2001 2002 Illegal Land-Use Cases 2003 2004 2005 2006 2007 2008 Illegally-Used Land(hectare) Source: China Land and Resources Almanac 1999-2009. Figure 3. Trend of Land Corruption at the National Level As Figure 3 illustrates, the two trend lines of lawbreaking present conflicting results. Between 1998 and 2008, the number of illegal land-use cases progressively declined, albeit with some fluctuations, from which we can infer that land corruption occurred less frequently. However, an opposite trend was clearly observed in the total amount of land being illegally used. From 1998 to 2002, the amount of abused land remained stable, with a big jump in 2003, maintaining an increasing trend thereafter. Given the opposite trend in the two indicators, one may conclude that the impact of market land supply modes on corruption remains unknown because it is unclear whether land corruption has worsened after 2003. However, the answer emerges if we reconsider the meaning of each indicator based on following information. 65 Table 5. Breakdown of Land-Law Violators (Illegal Land-Use Cases) State Organs Illegal Land Percentage Use Cases Enterprises & Institutions Illegal Land Percentage Individuals Illegal Land Use Cases Percentage Use Cases 1998 5713 4.86% 19549 16.64% 92221 78.50% 1999 15069 9.08% 15030 9.05% 135943 81.87% 2000 18075 9.61% 15152 8.06% 154845 82.33% 2001 11243 8.59% 13425 10.26% 106235 81.16% 2002 12671 9.16% 16734 12.09% 108978 78.75% 2003 20067 11.23% 29654 16.60% 128933 72.17% 2004 10277 8.97% 21192 18.50% 83057 72.52% 2005 8054 7.21% 21037 18.83% 82632 73.96% 2006 11445 8.73% 27697 21.13% 91935 70.14% 2007 11987 9.72% 27877 22.60% 83479 67.68% 2008 8481 8.46% 16382 16.34% 75403 75.20% Total 133082 8.87% 223729 14.91% 1143661 76.22% Source: China Land and Resource Almanac, 1999-2009. Table 6. Breakdown of Land-Law Violators (Illegally-Used Land) State Organs Illegally-Used Percentage Land(hectare) Enterprises & Institutions Illegally-Used Percentage Land(hectare) Individuals Illegally-Used Percentage Land(hectare) 1998 10358.09 29.91% 15128.32 43.69% 9141.85 26.40% 1999 8892.58 31.01% 14088.80 49.13% 5693.44 19.86% 2000 13745.40 43.38% 9622.12 30.37% 8319.71 26.26% 2001 12239.48 44.10% 9022.19 32.51% 6494.45 23.40% 2002 10868.23 34.43% 14182.13 44.93% 6511.75 20.63% 2003 20468.47 29.94% 33313.30 48.72% 14592.12 21.34% 2004 20208.70 25.02% 48294.34 59.80% 12255.97 15.18% 2005 9999.38 19.16% 27656.89 52.99% 14536.55 27.85% 2006 22029.02 23.88% 42244.60 45.80% 27963.80 30.32% 2007 25689.91 25.93% 52364.50 52.86% 21014.55 21.21% 2008 12452.00 21.60% 34284.40 59.46% 10923.46 18.94% Total 166951.26 27.61% 300201.59 49.56% 137447.65 22.73% Source: China Land and Resource Almanac, 1999-2009. 66 Tables 5 and 6 show the distribution of land corruption among different violators based on the data from 1998 to 2008. The information of illegal land-use cases in Table 5 gives the impression that individuals were the most frequent violators of land laws, accounting for 76.22% of total cases, followed by enterprises and institutions (qishiye danwei). However, in Table 6, close examination of the illegally-used land reveals that enterprises and institutions accounted for about half of the land being abused; local government organs were responsible for 27.61% while only 22.73% were caused by individuals. Since many enterprises and institutions are state-owned or strongly supported by the governments, they can be regarded as state organs or quasi-state organs. In which case, state agencies were responsible for 77.27% of illegally-used land. Moreover, the average size of land illegally used by individuals is 0.13 hectares; in sharp contrast, the number is 15.34 hectares for state agencies. Thus, local state agencies constitute major violators of land laws and regulations. To summarize, the indicator of illegal land-use cases reflects many individual behaviors rather than state violations, while the amount of illegally-used land is an accurate indicator on the misuse of land by local states, which is why I choose to select the former to decide the level of land corruption. As Figure 3 illustrates, land corruption was aggravated in the 2000s, and market-led land supply policy (tender, auction and quotation) 67 adopted in 2002 failed to prevent the growth of land abuses in the following years. This finding is similar to an earlier study by Liang (2009), who also found that adoption of market-led land supply policy in 2002 was positively related to land law violations in 2002, 2003 and 2004. However, to obtain more robust results and convincing conclusion, it is necessary to perform rigorous regression analysis to test the relations between the two. Regression Analysis The descriptive analysis in the previous section investigated the impact of the 2002 market-led land supply policy and showed the fact that land corruption worsened, in terms of the size of land being illegally used. Chapter 3 looked at the transformation of urban land supply regime and discussed some drawbacks of the current land reforms. On that basis, two hypotheses were proposed on the association between market-led land supply system and corruption. In this section, I run regressions on a set of panel data to explore the effects of tender, auction and quotation modes on land corruption. Empirical Model Specification In this paper, the panel data has spatial and time specific effects. When I first conducted the Breusch-Pagan LM test to decide between random effects regression and simple ordinary least squares (OLS) regression, the results gave an extremely small P-value, implying that differences across provinces 68 are significant. Therefore, I determined that the OLS estimation method was not appropriate, and that either fixed-effects model or random-effects model should be used. Hausman test gives a P value larger than 0.05, hence a random-effects model is preferred in analyzing the panel data. Furthermore, the panel data have provincial and time specific effects and hence, a two-way random-effects panel model is more appropriate. The model is specified in the following: LnYit =α+ βXit + ui +λt +εit Where: Y is a land corruption rate of a province in a particular year, β is a vector of coefficients of X, Xit is a matrix of the independent variables of the i province at the time t; α is a constant, εis residuals, ui and λt indicate the effects of provinces and time respectively, i denotes the provinces (i=1 to 31), and t denotes the year (t=1 to 11). Dependent Variable The unit of analysis in this research consists of 31 provinces in China, and the dependent variable is the level of illegality and corruption in land sector within a specific province. There is no ideal method available to precisely measure the level of corruption, particularly with regard to land-related corruption. This study uses documented instances of land-law violations to reflect abusive and illegal land-use behaviors of local governments; both illegal land-use cases and areas involved in those cases 69 were utilized to provide a more comprehensive picture of land corruption in China. For normalization and controlling for large variations due to outliers, I use the log of illegal land-use cases per million local residents (LnLandcase) and the log of illegally-used land areas in hectares (LnLandarea). Explanatory Variables The first hypothesis assumes a positive role of market-led land supply system on corruption; thus, marketization is incorporated as a major explanatory variable of the regression analysis. In terms of the measure for marketization in urban land supply, some scholars use the real number of land allocations through different modes (negotiation, tender, auction and quotation) to measure the degree of marketization in land sales (Tao, Zhang &Li, 2010). However, the real numbers of land allocations are less advantageous than percentages in showing the relative weight and importance of different allocation modes. Instead of using real number of land allocations, we create a measure for the level of marketization in urban land supply (Mkt) using the percentage of market-led land supply modes (tender, auction and quotation) in total urban land allocation plots. The rationale is that tender, auction and quotation modes encourage competition, transparency and fairness, while free and negotiated allocations have heavy exposure to state control and intervention.22 The measurement is defined in the following: 22 In the study by Tao, Zhang &Li (2010), the effects of tender, auction and quotation are tested separately, however, this method is inappropriate for this research. First, the plots of 70 plots of tender auction and quotation total plots free allocation negotiation tender auction and quotation The second hypothesis illustrates the relationship between financial dependence on land corruption. As explained in Chapter 3, local governments are heavily relying on the commercialization of LURs to finance local public service delivery. Such financial motives of local government lead to irrational grabbing and selling of land resources, which opens doors for abuses and corruption (Ding, 2002; Lin, 2009). Hence we incorporate the second explanatory variable, which is the local governments‘ financial dependence on land-related revenues. The measure of financial dependence on land-related revenues is controversial in existing literature because the definition of land-related revenues remains ambiguous in China. Broadly speaking, land-related revenues encompass diverse items ranging from land conveyance fees to various taxes charged on land and real estate market. Liu, Zhang &Ma (2008) believe land-related revenues consist of four major categories (Figure 4). tender and auction modes are much smaller than that of quotation; second, tender, auction and quotation are integrated as one policy package that is difficult to be separated. In order to study the policy outcomes, it is more reasonable to show how the three modes influence corruption as a whole. 71 Land-related Revenues Land leasing fees (most important) Taxes on land (about 6 items) Officially known Figure 4. Administrative fees Other invisible income from land Officially unknown Land-Related Revenues Contrary to the broad definition of land-related revenues, a narrow definition only counts the most important component of land-related revenues—land leasing fees. Studies by Du, Huang and Wu (2009) and Liang (2009) adopted this narrow definition to measure financial dependence on land—the percentage of land conveyance fees in total government revenues. To minimize the measurement error, this paper adopts a broad definition. However, due to the unavailability of data related to administrative fees and invisible income from land, this paper only counts land leasing fees and land-related taxes. Land-related taxes in this research include six items: house property tax, urban land using tax, land value increment tax, agriculture tax (abolished in 2006), tax on the use of arable land, and tax on contracts. The land leasing fees are the total payment for obtaining LURs.23 The variable of financial dependence on land (Dep) is measured by the percentage of 23 Normally local governments use some amount of land leasing fees to pay the cost of demolishing, compensation and relocation of residents, etc., therefore government revenues collected from land conveyance should be the net income with the cost being excluded. However, the exact number of net incomes of land conveyance are not documented before 2003, but based on the data from 2003 to 2008, the payment of cost is rather small compared to the net income. Take Beijing as an example, the size of net income accounts for an average number of 77.6% in total land leasing fees annually, while the remaining 22.4% is accounted for by cost. 72 land-related revenues in total amount of government revenues in a particular province. Sources of data include China Statistical Yearbook, China Financial Yearbook and China Land and Resources Almanac. Control Variables To isolate the effects of explanatory variables, we hold constant the effects of other factors that may influence the level of land corruption. The control variables in the empirical model include law enforcement, GDP per capita, government size, real estate investment, relative wage in public sector, and citizens‘ education.  Law enforcement (Law). The first control variable concerns the level of law enforcement in local areas. In Dong and Torgler‘s (2010) work, the level of law enforcement was measured by regional expenditure on police, procuratorate, the courts and judiciary per capita. This paper constructs the measure for law enforcement following Dong and Torgler‘ s approach, that is, per capita expenditure by law enforcement agencies (police, procuratorate, court and judiciary). This measure indicates how many efforts have been made to detect crimes and to maintain order. The data of law enforcement expenditures is collected from China Statistical Yearbook. 73  GDP Per capita (GDPpc). We incorporated the level of economic development in the empirical model because it is the critical part of local officials‘ achievement within their term. Earlier studies pointed out that since land can be used as a subsidy to attract investors contributing to local development, chances of land abuses and corruption were high because of the focus on short-term economic growth. In addition, regional economic development level is commonly employed as control variables by corruption studies (Treisman, 2000; Drury et al., 2006; Del Monte & Papagni, 2007; Lessmann & Markwardt, 2009; Dong & Torgler, 2010). Following a similar approach, I measured the regional economic growth level using the log of Gross Regional Product per capita in RMB (LnGDPpc), using the China Statistical Yearbook as the source.  Government size. Pro-market critique suggests that a larger government leads to more rent-seeking behaviors (Tanzi, 1997; Rose-Ackerman, 2008). In many empirical studies, government size is frequently employed as explanatory variable or control variable (Gerring & Thacker, 2005; Goel & Nelson, 1998; Husted, 1999). In the Chinese context, Zhou and Tao (2009) used government employment and fiscal expenditure per capita as two indicators of government size; Wu (2008) used government expenditures relative to local GDP to measure government size; Dong and Torgler (2010) proposed the ratio of regional consolidated revenue to local GDP and the employment share of the public sector as indicators of 74 government size. Following these approaches, I construct two measures for government size: the relative size of government employment to private employment (Govemploy), and the ratio of total government expenditures (budgetary +off-budgetary expenditures) to local GDP (Govspend). The data was obtained from China Statistical Yearbook.  Real estate investment (Rei). The rationale to control real estate investment in the model is that a burgeoning real estate industry produces need for land expropriation and allocation, creating chances of land disputes, policy distortion, abuses and corruption as well. In other words, the real estate industry encourages land corruption on the demand side. This paper uses the ratio of real estate investment to regional GDP to measure the development of real estate industry. The source of data is China Statistical Yearbook.  Relative wage (Wage). Empirical studies show that low salary paid to civil servants is associated with corruption (Rijckeghem & Weber, 1997), while an increase in wages significantly lessens corruption (Herzfeld & Weiss, 2003). Wu‘s (2008) study of corruption in China suggests that an increase in wage levels in public sector can reduce corruption to a certain level. Thus, the relative wage of public sector is considered as a control variable in the model. Empirical work by Dong and Torgler (2010) also reported that high relative wages within the public sector prevent officials from corruption. In this paper, the wage level is measured by the ratio of 75 government employees‘ wage to local average wage, which is consistent with the studies by Wu (2008) and Dong and Torgler (2010). The source of data is China Statistical Yearbook.  Citizens‘ education (Edu). Citizens‘ education level is employed as a proxy of social and cultural factors of corruption. The level and quality of citizens‘ education vary significantly across China‘s vast local areas; hence its influences should not be overlooked. Well-educated citizens are more likely to supervise and scrutinize government behaviors as they have more demand over public goods and services. They may show little or zero tolerance for corruption and possess strong intention to reveal corruption cases. Furthermore, citizens‘ education contributes to a participative civic culture which is counterproductive to government corruption (Putnam, 1993), and a participatory populace can exert constraints on the politicians‘ ability to accumulate and arbitrarily use rights (Kaufmann,1998). The level of citizens‘ education is measured by the average number of schooling years in local areas. 76 Table 7. Variable Definition Dependent Variable LnLandcase Definition Sources of data The log of illegal land use cases per China Land and Resources million residents Almanac; China Statistical Yearbook LnLandarea Explanatory Variable Mkt The log of illegally-used land areas in China Land and Resources hectares Almanac Definition Sources of data The plots of land allocations via tender, China Land and Resources auction and quotation modes divided Almanac by total plots of land allocations Dep The land-related revenues divided by China Land and Resources total local fiscal revenues Almanac; China Statistical Yearbook; China Financial Yearbook Control Variables Law Definition Per capita Sources of data expenditure of law China Statistical Yearbook enforcement agencies (procuratortes, courts, police and judiciaries) LnGDPpc Log of Gross Regional Product per China Statistical Yearbook capita Rei The ratio of real estate investment to China Statistical Yearbook regional GDP Govemploy The size of local governments China Statistical Yearbook measured by the ratio of government employment to private employment Govspend The spending size of local China Statistical Yearbook governments measured by the share of government expenditures in regional GDP Wage The relative wage in public sector to China Statistical Yearbook local average wage Edu Average schooling years of local China Statistical Yearbook residents Descriptive Statistics The descriptive statistics of dependent variables and two explanatory variables 77 are highlighted in Table 8. Statistics of other variables are described in Appendix B. Table 8. Descriptive Statistics of Dependent and Explanatory Variables Variable Mean Std. Dev. Landcase overall 104.0846 87.03091 between 65.33989 within 58.45929 Landarea Dep Mkt overall 1862.66 between within overall 0.349633 between within overall 0.195743 between within 2600.415 1625.623 2050.351 0.293009 0.143274 0.25677 0.168861 0.081189 0.148471 Min Max Observations 4 719 N = 319 33.81818 317.6 n = 31 -83.3699 505.4846 T-bar = 10.2903 0.46 21346.52 N = 306 80.665 7894.271 n = 31 -2916.5 19665.23 T = 9.87097 0.008 1.784 N = 341 0.111364 0.661818 n = 31 -0.20018 1.536088 T = 11 0.001 0.798 N = 331 0.047182 0.390818 n = 31 -0.17508 0.687016 T-bar = 10.6774 The panel data used in this study should consist of 341 observations for 31 provinces during 11 years (from 1998 to 2008). However, because of missing data in some provinces, the observations were not equal across different variables. Finally, 240 to 258 observations were taken in the random-effects regressions. The mean of provincial illegal land-use cases per million residents is 104, with a standard deviation of 87. With regard to the Landarea, the mean of illegally-used land areas in the provinces is 1862.66 hectares, with a standard deviation of 2600. Descriptive statistics suggest that frequency and severity of illegal land-use activities vary substantially across provinces and time periods. For instance, Tibet had only 0.46 hectares of 78 illegally-used land in 2000, while Guizhou had 21,346.52 hectares in 2004. The degree of provincial financial dependence on land-related revenues is, on average, as high as 34.9%, with a standard deviation of 29.3%. In some provinces, land-related revenues account for only 0.8% of government fiscal revenues; in others, however, the amount of land-related revenues may be 1.78 times of government fiscal revenues. As explained earlier, land-related revenues in this research do not exclude the cost such as demolition fees and peasants‘ compensation, nevertheless we can estimate the contribution of land-related capital to local finance, as the cost is rather low compared to revenue. In terms of the level of marketization in urban land supply, between 1998 and 2008, only about 19.6% of land sales were via tender, auction or quotation modes. China‘s urban land market is still subject to heavy state intervention and far from mature. Figure 5 shows regional variations in dependent and independent variables. 350 300 250 200 150 100 50 0 Average number of land corruption cases per million residents, 1998-2008 Source: China Land and Resource Almanac, 1999-2009. 79 Figure 5. Regional Variations in Illegal Land-Use Cases, 1998-2008 As shown in Figure 5, provincial variations in land corruption cases were significant. Provinces ranking high in land corruption cases include Zhejiang, Fujian and Gaungxi. Surprisingly, Guizhou province had the largest number of land corruption cases per million residents during this period. Provinces such as Tibet, Tianjin, Beijing, Heilongjiang, Shanghai and Jilin had smaller number of land corruption cases. The regional gap of land corruption was as large as 300 cases per million residents. From Figure 5, it is difficult to claim that the distribution of land corruption cases follows a geographical rule because both coastal and inner land provinces can have large number of land corruption cases (refer to the map of China in Appendix C). 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 Average amount of illegally-used land areas between 1999 and 2008 Source: China Land and Resource Almanac, 2000-2009. Note: the author has tried to find the data of provincial illegally-used land areas in 1998, but the complete version of China Land and Resource Almanac of 1999 is not obtainable. Figure 6. Regional Variations in Illegally-Used Land Areas, 1999-2008 80 In comparison with Figure 5, Figure 6 shows the distribution of illegally-used land among different provinces. Surprisingly, Qinghai province had the largest average amount of illegally-used land during this period, followed by Jiangsu, Ningxia, Tibet and Gansu. Except for Jiangsu, the other four highly ranked provinces are all located in inner land and underdeveloped areas. Among the most corrupt provinces in urban land sector, Beijing and Ningxia have smaller geographical sizes compared to other provinces, yet their amounts of illegally-used land areas are large, suggesting that neither territorial sizes nor geographical locations determine the distribution of land abuses. The capital, Beijing, deserves attention. In Figure 5, it ranks as one of the cleanest provinces in terms of land corruption cases, but ironically, the amount of abused land turns out to be very large in Figure 6. All in all, the two indicators—illegal land-use cases and size of illegally-used land areas—give confusing results in explaining regional variations. Deciding which provinces have relatively cleaner urban land sector is secondary to the more important question: does the newly created market-led land supply system (tender, auction and quotation mechanisms) exert influence on land corruption? Figure 7 presents information about the degree of marketization in urban land supply regime across provinces. 81 45 40 35 30 25 20 15 10 5 0 Number of tender,auction and quotation modes/total land alocation plots Source: China Land and Resource Almanac, 1999-2009. Figure 7. Different Levels of Marketization in Urban Land Supply, 1998-2008 Figure 7 shows regional variations in terms of marketization in urban land supply. Provinces with a high level of marketization (or low level of state intervention) in urban land supply include Jiangxi, Hainan, Henan, Yunnan and Guizhou, which are economically underdeveloped and located at the inner land of China. By contrast, Beijing, Sichuan, Xinjiang, Tainjin, Shanghai and Jilin, which are larger economies, have the lowest level of marketization in urban land management. Coincidentally, Jilin, Tianjin, and Xinjinag show smaller size of illegally-used land, according to Figure 6. This phenomenon contradicts with the conventional knowledge that state intervention (or a low level of marketization) leads to more corruption. Similarly, Jiangxi, Hainan and Henan are among the most marketized provinces in terms of land supply. However, neither land corruption cases nor illegally-used land areas have a 82 smaller size in these three provinces. Does this mean that market-led land supply system exerts no influence on the level of land corruption? The following section will answer this question based on regression analysis. Regression results To estimate the correlations between land corruption and two explanatory variables, I run four regressions using different indicators of land corruption—illegal land-use cases and the amount of illegally-used land areas. The following table presents estimation results of two-way random-effects panel model. Table 9. Results of Two-Way Random-Effects Regression Dep (1) LnLandcase 0.285* (0.172) Mkt Law LnGDPpc Wage Govspend Govemploy Rei Edu _cons 0.00233*** (0.001) -0.737*** (0.187) -0.143 (0.443) -0.338 (0.446) -0.808 (0.510) -2.419 (1.517) 0.0306 (0.093) 11.10*** (2) LnLandcase 0.0213 (0.347) 0.00239** (0.001) -0.684*** (0.196) -0.146 (0.456) -0.331 (0.448) -1.004* (0.517) -2.007 (1.460) 0.0390 (0.096) 10.64*** (3) LnLandarea 1.011*** (0.269) -0.00131 (0.001) 0.690** (0.290) -0.543 (0.721) -0.182 (1.109) -2.141** (0.853) -9.513*** (2.491) 0.409*** (0.147) -1.336 (4) LnLandarea -0.813 (0.610) -0.00256* (0.002) 0.628* (0.332) -0.101 (0.762) -0.704 (1.127) -2.349*** (0.829) -6.743*** (2.318) 0.367** (0.153) -0.386 83 lns1_1_1 _cons lns1_2_1 _cons lnsig_e _cons N (1.546) -0.673*** (0.074) -2.181*** (0.044) -0.790*** (0.022) 258 (1.604) -0.660*** (0.077) -2.037*** (0.048) -0.796*** (0.022) 251 (2.481) -0.234 (0.122) -2.390** (0.098) -0.287*** (0.037) 245 (2.755) -0.257 (0.128) -0.911** (0.177) -0.333*** (0.036) 240 Note: Standard errors in parentheses * p < 0.10, ** p < 0.05, *** p < 0.01 The first finding is that financial dependence on land resources, measured by the share of land-related revenues in local fiscal revenues (budgetary+ off-budgetary), has indeed aggravated corruption in land management. The coefficient of Dep has a positive sign and remains significant above 0.90 confidence level in both specification (1) and (3). In specification (1), the coefficient of Dep is 0.285, suggesting 100 percentage points increase in financial dependence on land resources leads to 28.5% increase in land corruption cases; for instance, there were 320 land corruption cases per million residents in Fujian province in 2008, if the percentage of land-related revenues in total government revenues increases by 10 percent points, an additional 9 cases will ensue, which gives a total of 329 land corruption cases per million residents. In specification (3), Dep presents stronger influence on land corruption that 10 percentage points increase of Dep causes 10.1 percent increase in the total amount of illegally-used land. This find has supported the prevalent opinion that ―fiscalization on land (tudi caizheng)‖ is the root of corruption. 84 Throughout the above specifications, the major explanatory variable—marketization of urban land supply—shows no statistically significant impact on either illegal land-use cases or illegally-used land areas. This regression result has confirmed the finding of descriptive analysis that tender, auction and quotation modes failed to produce the intended outcomes. In this being said, the first research question can be answered: the introduction of market mechanisms does not reduce land corruption in China. The failure of policies can be attributed to various reasons, such as bad policy design, unsuccessful implementation, distortion, and numerous obstacles in policy environment. The failure of market mechanisms—tender, auction and quotation—will be analyzed comprehensively in next chapter. Among the control variables, the level of law enforcement shows positive association with occurrence of land corruption cases (specification (1)) but negative association with the size of illegally-used land (specification (4)). Law enforcement is measured by per capita expenditure of legal agencies (police, procuratorate, courts and judiciaries); hence, greater spending on law enforcement may suggest a higher level of detection on land corruption, thus more cases may be disclosed in the short period. However, harsh detection may only target at individual behaviors rather than government‘s violations, since individual cases account for a dominant percent in total illegal land-use cases. Given that individuals are responsible for a small proportion of illegally-used land, the effects of legal detection on the amount of abused land 85 are marginally significant (90% confidence level). Another control variable per capita GDP also exerts conflicting influence on land corruption. In specification (1), per capita GDP is significantly negatively correlated with illegal land-use cases. Furthermore, the influencing magnitude is as large as 73.7%. In other words, an 1% increase in per capita GDP will reduce land corruption cases by 73.7%; economically developed areas have fewer land corruption cases than underdeveloped areas. In sharp contrast, when the dependent variable is measured by the amount of illegally-used land, the association between per capita GDP and land corruption becomes significantly positive. One possible explanation is that rich areas, for instance, Shanghai, are highly urbanized and industrialized, individual residents in those areas are less likely to be involved in misuse of land resources as they are employed in manufacturing and service industries rather than agriculture, hence, the number of illegal land-use cases is much smaller. On the other hand, industrialized areas demand large-scale land conversion and allocation to serve manufacturing and construction industries; hence, misuse of large amounts of land resources is rampant. Summary of Empirical Study In this chapter, I described the national trend of land corruption to show the impact of the market-led land supply policy adopted in 2002. I also conducted regression analysis to test the hypotheses proposed in the preceding 86 chapter. Firstly, I found that land corruption in China has escalated with regard to the amount of land being abusively used. The central government‘s aggressive promotion of market-led land allocation policy in 2002 failed to prevent the misuse of land resources; ironically, land lawbreaking witnessed a new surge after 2002. The regression analysis finds no empirical evidence to support the relationship between land corruption and market-led land supply modes, which confirms the finding discovered through descriptive analysis. In addition, regression results suggest that the money-centered land development paradigm has stimulated predatory land use behaviors in localities. To grab financial resources, local governments are irrationally and abusively using land resources, opening another door for corruption. All in all, why does the market-led land supply policy fail to fulfill the objective in reducing land corruption? Why does land continue to be misused after tender, auction and quotation modes were implemented? The questions will be answered by examining the conflicting and paradoxical nature of the newly established urban land supply regime in the next chapter. Employing an institutional approach, Chapter 5 investigates how market-led land supply system has shaped corruption in land sector. 87 Chapter 5 Discussion of Regression Results The introduction of land market is a strategic remedy to the socialist inefficient land management system and rampant illegal land deals in the black market. In the preceding chapter, I tested the relationship between market-led land supply modes—tender, auction and quotation—and illegal land-use activities. Descriptive and regression analyses reveal that tender, auction and quotation modes fail to prevent land from being abused; on the contrary, land corruption continues to escalate even after the new land supply policy was adopted. This finding raises an important question in this study: why has the market-led urban land supply system, originally designed for reducing corruption, failed to achieve its goal? This chapter attempts to discuss and interpret this finding from an institutional perspective. It argues that tender, auction and quotation modes are not to be blamed for rampant corruption in land sector, instead, it is the legal and institutional loopholes in current land management regime that jeopardize the functioning of urban land supply system and makes land corruption difficult to control. Institutional Loopholes in Market-Led Land Supply System According to North (1990), ―institutions are the rules of the game in a 88 society or, more formally, are the humanly devised constraints that shape human interaction‖ (p. 3). Institutions include both formal constraints—the laws and regulations devised by governments, and informal rules—conventions and codes of conduct existing in social life. The significance of institutions lies in their functions to reduce uncertainty and provide a guide to human interactions. North (1990) further elaborated that ―institutions affect the performance of the economy by their effect on the costs of exchange and production‖ (p. 5). Well-designed institutions reduce transaction cost and enhance revenue production, whereas poorly designed institutions cause inefficiency and corruption, which, in turn, undermines economic performance. The value of institutions is demonstrated by many other scholars. Williamson (1985) has emphasized the role of formal institutions in reducing transaction costs and thus in enhancing the performance of economic organizations. Another scholar Ostrom (1990) also discussed how institutional design resolves the misuse of common resources by individuals under the dilemma of collective action. The author proposed that to resolve the problems of commons, cooperative institutions must be carefully designed with effective monitoring and enforcing mechanisms, and those resource users shall participate in governing the rules. The term ―institutions‖ in this chapter focus on the official rules in dealing with land management issues. The capacity and quality of institutions is of great importance to the healthy functioning of urban land administration 89 system in China where a transitional economy has its uncertainties. Strong institutional capacity enables land polices to be effectively carried out; however, when institutions are poorly designed and weak, the efficiency and integrity of land management is severely undermined, resulting in abusive and corrupt practices. The institutional approach has been widely employed by scholars to analyze urbanization and land reforms in China (Zhu, 1999; Ho, 2001, 2005; Qian, 2007; Wei & Zhao, 2009). Drawing upon a similar approach, I conduct a preliminary study to identify the institutional loopholes in current tender, auction and quotation system to explain its failure in curbing corruption. The discussion is based on the 20 land corruption scandals (Appendix A) and national data of illegally-used land areas (Table 10). Table 10. Breakdown of Illegally-Used Land Areas at the National Level, 1998-2008 illegally-used Year land areas in current year Illegal Damage Encroachment Unlawful Granting Purchase, of of Land Approval of Land at Sale and Cultivated Without of Land a Lower Transfer Land Approval Occupancy Price Others 1998 34628.26 4614.80 763.43 22728.29 925.67 20.26 6885.02 1999 18553.81 2523.85 682.16 8644.58 300.41 63.70 6339.11 2000 22312.72 2591.51 775.87 12792.35 2262.89 213.07 3677.03 2001 17084.57 1859.32 875.02 12186.56 556.26 6.86 1600.55 2002 18100.17 1395.55 643.73 14519.62 96.95 5.89 1438.43 2003 28836.37 1823.67 889.92 24347.26 319.86 39.11 1416.45 2004 33122.15 1731.16 1013.92 28015.66 337.80 250.22 1773.38 2005 24501.27 859.15 1252.10 20997.84 37.69 0.40 1354.09 2006 55562.78 1872.57 1552.64 44173.21 4417.49 846.58 2700.29 2007 56705.65 2176.17 1266.50 49778.91 1026.40 14.08 2443.59 2008 22019.5 696.14 457.39 19847.62 227.47 0.05 790.83 332736.46 22143.89 10172.68 258031.9 10508.89 1460.22 30418.77 100% 6.66% 3.06% 77.55% 3.16% 0.44% 9.14% Total 90 Source: China Yearbook of Land and Almanac 1999-2009, unit: hectare. Table 10 (above) shows that illegally-used land areas are concentrated on encroachment of land without approval (weijing pizhun zhandi), which accounts for 77.55% of total land areas, followed by illegal purchase, sale or transfer of LURs (maimai huo feifa zhuanrang), accounting for about 6.66%. In addition, an increasing trend is clearly observed in two types of land-law violations—damage of cultivated land, and encroachment of land without approval. It appears that illegal land occupancy is the driving force of growing illegally-used land areas. The question remains: why does land continue to be illegally occupied, even though LURs have been openly granted through tender, auction and quotation? In Figure 8, I reveal the risks of corruption embedded in the procedures of market-led urban land supply system. 91 Figure 8. Risks of Corruption and Illegality in Tender, Auction and Quotation24 Manipulation of Information At the initial stage, land use information such as size, location, and above-land fixtures, is announced by land administration organs; however, such information may not be equally accessible to all potential land buyers, in another scenario, obtaining the information is a time-consuming process. On the supply side, information asymmetry increases transactions costs and motivates land buyers to bribe land administration officials to get sufficient land use information. On the demand side, land administration officials intend to extract bribes from land buyers by hiding and selling information. Communications in private between land buyers and individual land officials are commonly held on a ―mutual benefits‖ basis. One local developer said that they have to ―communicate‖ with local officials on a daily basis to get the latest information about local land use, failing which, other developers would obtain the information and exploit the opportunity to make profits. This communication is often accompanied by feasting and gift giving, which makes it difficult to detect and prove bribery and corruption.25 24 The stage of approving construction projects is excluded in Figure 8 because it mainly involves urban planning organs rather than land supply organs, although the two are closely related, they are in charge of different tasks. 25 Interview with a local real estate developer on November 23, 2010. 92 Problematic Selection of Land Supply Mode At the second stage, a land allocation method is chosen between various modes. The central government has mandated tender, auction and quotation modes to acquire LURs for the purposes of industrial, commercial, tourism, entertainment and commercial premises. However, many local officials choose private negotiation as a land supply method instead of complete market modes. The rules and regulations introduced by the central state were contested and manipulated by local governments in various ways (Lin & Ho, 2005), making local land regulations inconsistent with central policies. Xu, Yeh and Wu (2009) noted that the enforcement of central policies was difficult as many were overlooked by local states. The authors cited the example of land allocation in Beijing municipality, when the center required all land used for business purposes (commerce, tourism, entertainment and commodity housing) to be allocated through market modes after July 1, 2002, the Beijing Municipal Government issued Circular No. 33, which continued to allow negotiated conveyance in four areas: small towns, green belts, urban renewal schemes, and high-tech and major projects with urban significance. Negotiated land deals in Beijing enlarged rather than decreased after the new land policy came into effect (Xu, Yeh and Wu, 2009). The relationship between central and local states has been dramatically redefined in current land politics, and the central authority‘s efforts to reduce governmental role in land market have encountered resistance in local areas where party and government leaders stimulate 93 economic growth and enrich themselves by manipulating land sales. A sudden change in the land leasing system seems to shock localities and encourage local governments to be disobedient. Power is abused to protect local interests. Inconsistent and conflicting rules between the center and localities create confusion in detecting illegal land use activities. Distortion of Land Value At the stage of evaluating land prices, land value is supposed to be appraised by agencies or experts with professional qualifications in land evaluation, and the bottom or starting price should never be known to buyers prior to the start of the bidding process. The risks of corruption embedded at this stage involve devaluation or overvaluation of land price. Firstly, the land appraisal system is China was newly created in the 1990s; the qualifications of land appraisal agencies are questionable and the criteria to be adopted in land appraisal are vague, especially in underdeveloped areas. Moreover, many local government officials who are unqualified to evaluate land values also participate in the land assessment process. This administrative intervention may distort the market pricing mechanism and bias the result; worse yet, corrupt government officials are able to make use of the land assessment information to help their friends or family obtain land at the lowest possible price, as exampled by Dai Min‘s case. Even though professional land pricing is gradually institutionalized and improved across the country, officials prices 94 can be abandoned as many land leasing prices are determined by negotiation between local governments and land users with limited reference to the price guidelines (Qian, 2008:500). This type of violation is closely linked to the manipulation of land leasing modes discussed in the preceding section and illegal reduction of land leasing fees to be discussed in following part. Pre-Selection of Land Buyer At the stage of operating tender, auction and quotation activities, risks of corruption cannot be ruled out. Corruption occurring in tender and auction activities has been documented by existing literature (Laffont & Tirole, 1991; McAfee & McMillan, 1992; Compte et al., 2005; Menezes & Monteiro, 2006; Burguet & Perry, 2007; Koc & Neilson, 2008; Arozamena & Weinschelbaum, 2009). Corruption can happen in auctions when bidders collude with each other (McAfee & McMillan, 1992); bribery is likely to occur when land administration officials, who administer the auctions, favor specific bidders (Laffont & Tirole, 1991; Lengwiler & Wolfstetter, 2005); the level of competitiveness in auctions affect the corruption level as well, as Celentani and Ganuza (2002) found that corruption may increase as the number of competing bidders is increased. These scholarly works commonly use mathematical models to analyze the equilibrium of corruption in auctions. Following similar auction rules, corruption is likely to take place in China‘s land market as well. Differing from earlier studies, I approach this issue 95 through examining the institutional design of land auction system in China. Current land legislations do not include specification on who are qualified to participate in competition activities, which gives local land administration organs too much discretionary power in choosing competitors. Each locality appears to be making its own rules on the qualifications of land bidders, as there are no clear and universal guidelines for selecting participants. This institutional uncertainty creates and enhances opportunities for bribery, cheating, fraud and corruption. For instance, as real estate tycoons usually prefer monopoly, they may use different strategies to circumvent the expensive market channels of buying land; instead, they tend to persuade land administration officials to design bidding requirements that artificially function as entry barriers, such as the amount of capital deposit, the developer‘s rank and reputation in the real estate industry, etc. These bidding requirements usually benefit favor-seekers and shut out other competitors. As a result, arbitrary selection or direct appointment of winners is common in land deals. The winners are those that pay the largest bribes or that claim guanxi with land administration officials. Yu Feili‘s case exemplifies favor seeking on behalf of officials‘ relatives. The information learned from the author‘s fieldwork suggests that guanxi networks between investors and state officials are usually a dominant factor in land deals.26 26 Interview with local real estate developers on December 3, 2010. 96 Theft of Public Funding The final stage of land allocation system is the payment and management of huge amounts of land leasing fees. Corruption happens most frequently in this stage because of direct governmental exposure to money. Bribery, embezzlement and misappropriation of public funds are major manifestations of corruption at this stage. Firstly, land buyers who have strong incentives to pay fewer fees tend to persuade land officials by offering bribes. Of the 20 land corruption scandals studied, it was observed that unlawful wavier or reduction of land leasing fees coupled with bribery occurred in at least 10 cases: Hu Changqing, Cheng Kejie, Mu Suixin, Ma Xiangdong, Tian Fengqi, He Minxu, Wang Wulong, etc. In an alternative scenario, illegal reduction of land leasing fees is initiated by local governments as a strategy to attract investors who contribute economic benefits and tax revenues to localities; for instance, in ―industrial parks (gongyeyuan)‖ or ―development zone (kaifaqu), land is leased for free or at a price far below market standard to subsidize investors (Zhang, 1997), leading to a loss in the central government‘s land revenues. Besides bribery, embezzlement and misappropriation of public funds happen as well. Categorized as extra-budgetary funds, land leasing fees can be easily stolen due to a lack of effective internal accounting mechanism and external scrutiny on extra-budgetary revenues, as reflected by Luo Yaping and Chen Liangyu‘s cases. The National Audit Office‘s annual report revealed 97 many instances of mismanagement of land conveyance funds.27 Lin and Ho‘s (2005) fieldwork in a county-level city on the Yangtze River Delta revealed that over 98% of the land leasing fees collected between 1989 and 1997 were retained by the municipal government and no monies were handed over to the central state, which obviously led to losses in national land capital. 28 This explains the regression result that fiscalization on land encourages land-law violations. Obtaining Land Use Rights—the Source of All Land Disputes Every case of dispute, corruption and illegality in the land sector is centered on the assignment of LURs. LURs, or property rights in land, are the ultimate goal of land buyers and a prerequisite for all investment projects; therefore, the assignment of LURs becomes the source of all land disputes, power abuses and corruption. At this stage, major types of illegal land-use behaviors involve encroachment of land without approval and unlawful approval of land, which accounts for a dominant fraction of illegally-used land areas. There were several scenarios where illegal occupancies and approval of land are induced by the restriction of LURs. Firstly, encroachment of land without approval, in which land is taken 27 For a recent report on illegal land use by National Audit Office, see China Daily (2010, April 21), ―Audit catches illegal land use.‖ source: http://www.chinadaily.com.cn/china/2010-04/21/content_9755534.htm. 28 The Land Administration Law has permitted local states to keep 70% of land leasing fees to finance urban infrastructure and agricultural industry, with the remaining 30% to the central government. 98 for construction of buildings or projects without official titling of LURs, may occur due to the complex and time-consuming procedures of assigning LURs. Profit-making opportunities do not go on forever in the real estate market, and good locations face fierce competition from multiple developers. Tender, auction and quotation modes make the land titling process even more lengthy and complicated. Hence, dishonest developers may illegally grab the location by building houses on the land where LURs are not yet granted. The authorization to seize land is often issued by individual government officials who have close guanxi networks with the developers. 29 Alternatively, unlawful approval of LURs occurs because of local authorities‘ incentives to attract investors. Even though an investment project does not meet general legal requirements such as pollution control, energy saving or relocation of residents, local authorities still give the go-ahead for the projects because of the potential contribution to local taxation and GDP growth. Under the protection of local authorities, these projects are often run for years without official possession of LURs. In the third scenario, expensive tender, auction and quotation channels of obtaining urban state-owned land encourage land buyers to directly approach rural collectives to obtain discounted rural land parcels. The ambiguous concept of property rights is a popular explanation to illegal land transference by rural collectives (Ho, 2001; Lin & Ho, 2005; Zhang, 2006). I 29 Interview with one real estate developer on November 23, 2010. 99 would add to the literature by identifying the inefficient and unfair land titling institutions in the following. According to current Land Administration Law, rural land has to be transformed from peasants‘ collective ownership to urban state ownership before it can be utilized for construction, rural collectives on behalf of peasants are not authorized to grant LURs to developers. However, this institutional design has complicated land supply procedures, distorted demand and supply mechanism, and created inequalities between rural and urban areas. Rural land is forbidden to enter the market; instead, it is forcibly taken by the state with low compensation, and rural collectives are denied to share the profits of burgeoning real estate industry. The incentives to capture profits make behind-the-scenes interactions frequently take place between rural collectives and commercial users. As a result, rural land is often converted without going through state expropriation process, thus creating black markets (Zhu, 1999; Ho & Lin, 2003). This often constitutes two types of land law violations: developers‘ illegal occupancy of land without approval and rural collectives‘ unlawful approval of LURs. Legal Loopholes of Market-Led Land Supply System Effective land administration requires a sound legal system to ensure rules and regulations are enforced and violations are prohibited. What is missing is the supervision and monitoring function within the land management regime. The Land Administration Law has delegated power to 100 the local land administration bureaus to supervise and penalize illegal behaviors within the land sector. However, the bureau is constantly trapped in a dilemma in daily supervision. Firstly, many of the legal violations are committed from within, and it is unlikely that the officers would be able to effectively monitor, investigate or penalize for their infractions. Secondly, the enforcement of anti-corruption laws by local land administration bureau is limited due to its subordinate status to local governments. According to Article 70 of Land Administration Law, land administration organs shall impose administrative punishments upon individuals, organizations, and government bodies that have violated land laws. However, the author‘s interviews with local land monitoring officials suggest that only individual land users and social organizations are penalized for misuse of land resources, while state organs that permit or initiate illegal land deals are kept from supervision and penalty.30 Even if local governments‘ misbehaviors surface, political and administrative interference can come to their rescue. Local government officers can often elude prosecution and let the land administration officials be punished. Worse yet, the land inspectors who adopt a hard line in cracking down on local governments‘ illegal behaviors will be penalized or privately dismissed from their jobs.31 Above situation is deeply rooted in the institutional arrangement of the land management apparatus. Wu, Xu and Yeh (2007) described the land 30 31 Interview with a local official on November 22, 2010. Interview with a local official on November 22, 2010. 101 management structure in the reform era: local land administration organs are territorially under the control of local governments and vertically subordinated to land administration organs at a higher level. Yet, the dual leadership is asymmetrical, as local governments have a stronger voice than the administration officers in charge of local land affairs, even though they are higher on the hierarchy. Vertical leadership is weaker than horizontal control because land inspection agencies are subordinate to the local governments, who decide on fiscal allocation and cadre appointment in land departments. On the other hand, higher-level land agencies have no financial or political connections with their subordinates except technical guidance (yewu zhidao). This structural weakness of local land administration organs has resulted in their inability to implement anti-corruption policies effectively; the fear of retaliation might stop them from initiating any investigation or exposing any penalty upon local executive leaders. The failure of horizontal inspection organizations to deter land corruption has stimulated the recentralization of the land management system. In 2004, State Land Supervision System (guojia tudi ducha xitong or SLS) was created and nine regional SLS offices (Beijing, Shenyang, Shanghai, Nanjing, Jinan, Guangzhou, Wuhan, Chengdu and Xian) were set up, independent of local land administration bureaus at the various levels. 32 Each 32 See ―Guowuyuanbangongting Guanyu Jianli Guojiatudiduchazhidu Youguanwenti De Tongzhi‖ [―Notice of the General Office of the State Council on Creating State Land Supervision‖], http://www.gov.cn/xxgk/pub/govpublic/mrlm/200803/t20080328_32520.html. 102 SLS office supervises land use activities in several provinces. SLS offices are administratively led by the Ministry of Land and Resources under the auspices of the State Council, and are superior to provincial governments. For instance, the jurisdiction of the Shanghai office includes three provinces (Shanghai, Zhejiang, Fujian) and two cities (Ningbo and Xiamen). SLS inspectors are placed in charge of two main tasks: to enforce farmland protection quotas signed between the central government and various local governments, and to supervise land market transactions and punish local officials who violate existing rules (Su, 2008). SLS is distinguished from existing land administration system in that it exerts supervision and sanctions independently, and no local authority (including governments at the provincial, municipal, county and township levels) can intervene in the investigation process. The central ministry appoints and pays the SLS inspectors, requiring them to be accountable to the centre instead of the localities in ensuring that central land policies are strictly implemented. SLS represents a vertically controlled land administration system with enhanced top-down monitoring. Despite this, the SLS is not free from problems. Local scholar Zhu (2007) argued that the newly created SLS is unable to solve the fundamental problems of China‘s land management system. Firstly, the responsibilities of SLS offices are not clearly distinguished from that of the existing land inspection departments. The overlapping authorities and responsibilities may 103 lead to ineffective land management. Secondly, similar to China‘s audit office, and despite its high status in the administrative hierarchy, the SLS is an internal supervision system within the land sector, and is unable to function independently or to effectively deter land corruption. In addition, SLS only interacts with the provincial level government and is unable to coordinate supervision activities at the municipal, county and township levels, as vertical leadership is still weak. Yu and Yu (2008) further pointed out that SLS-initiated investigations have to rely on local land administration organs which are directly controlled by local government; hence, it is doubtful that statistics submitted to SLS by land administration organs truly reflect illegal land use activities in localities. The author‘s fieldwork experience supports the view the SLS authority is unable to reach the grassroots level where land lawbreaking happens most frequently. 33 Established amidst a weak institutional environment and equipped with limited political resources, the special vertical inspection agency SLS is inadequate to curb land corruption and to ensure the land policies are implemented in a transparent and effective fashion. 33 Interview with local land administration official on November 22, 2010. 104 Figure 9. Relations between Land Inspection System and Local Authorities Above figure shows complex relations between land inspection agencies and local authorities. It is observed that the inferior status of local land administration organs has jeopardized its effectiveness in supervising and punishing illegal land use activities undertaken by local governments. The inspection of SLS, although directly exposed on provincial governments, is unable to reach municipal, county and grassroots levels. To sum up, neither of the two inspection organs has the authority to challenge local governments and coordinate their efforts to combat land corruption effectively. In addition, the inspection loopholes in current land sector have led to insufficient sanctions on corrupt officials. The following table presents the number of illegal land use cases and disposal of violations in accord with party 105 disciplines and criminal law between 1999 and 2008. Table 11. Penalties on Land Corruption Year Illegal Illegally- Land Land leasing Fines Disciplinary Criminal land-use used land withdrawn fees (10,000 or Penalty case (hectare) (hectare) (10,000 RMB) administrative RMB) penalty 5143295 773 39 1999 153526 28100 2000 172623 30483 3112 5955848 71471 622 49 2001 116010 24052 3134 12958896 65036 815 107 2002 112515 28036 3396 24167925 95354 1223 168 2003 128125 55897 5883 54213112 120456 925 132 2004 85176 70171 6346 64121759 191191 977 65 2005 80427 42989 6993 58838170 217574 1044 199 2006 96133 84082 11596 80776447 345021 3094 501 2007 95937 89847 8608 122167208 336803 2925 474 2008 60399 46672 6192 102597987 216525 3094 501 Source: China Land and Resources Almanac 2000-2009 Note: the numbers of ―Land Withdrawn‖ and ―Fines‖ in 1999 are missing; the data of 1998 is not obtainable. The number of officials receiving disciplinary or criminal punishment for charges of land corruption is extremely small, as shown in Table 11. For instance, only seven officials were criminalized for land corruption in each province in 2008. Each year, about 10% of illegally-used land is withdrawn. Compared with the land leasing fees, the amounts of fines charged on illegal land-use activities are extremely small, accounting for less than 1% of total land leasing fees in most years. As many illegal land-use behaviors escape detection, the risk of receiving monetary or non-monetary sanctions on land-law violations is extremely small, while potential benefits are huge. As 106 such, the current legal system fails to prevent local officials from engaging in abusive and corrupt land-use activities. A prerequisite for the market-oriented land reforms is a well-designed supervision function that is free from political and executive interference, which is not observed in China‘s land sector. Summary This chapter discusses and explains the regression results using an institutional approach. The failure in current market-led land supply system to reduce corruption is explained by the legal and institutional loopholes in land administration regime, as well as structural factors rooted in China‘s economic and political landscape. The occurrence of corruption in the land sector is shaped by the dynamical interactions between land market and local political economy. Firstly, the rapid development of land market is coupled with poorly designed institutions, which generates risks of corruption. Secondly, a lack of parallel supervisory and sanction mechanisms in land management system make land-law violations difficult to control. Thirdly, central-local contentions in the reform-era have encouraged policy distortion in localities. In conclusion, a clearly defined institution is a precondition for the successful operation of land market. Marketization and reduction of state intervention should be carried out in a good institutional environment that ensures transparency, accountability, and rule of law; institutional malfunctions make land sector vulnerable to land abuses and corruption. 107 Chapter 6 Conclusion and Limitations of this Research This chapter summarizes the findings of empirical studies in previous chapters. The contributions and limitations of this research will be addressed, and suggestions for future study are provided as well. In the policy arena, recommendations are made to enhance the integrity and accountability in China‘s land management system. Summary of this Study This thesis has sought to illuminate how institutional changes in urban land allocation regime affect corruption. With the rapid process of urbanization and industrialization, land becomes an important vehicle for local governments to regulate economy and to accumulate capital; however, opportunities for land disputes and land corruption abound. This thesis began by noting the importance of land management and seriousness of land corruption in China. Then it traced the history of China‘s urban land reforms in recent decades to identify the research questions and hypotheses of this study. With an objective to curb corruption, the central government introduced a market-led urban land supply system—urban land used for profit-making purposes shall be leased via tender, auction or quotation methods, while administrative and negotiation methods of land allocation in the earlier periods 108 were significantly reduced. Tender, auction and quotation methods are believed to be more transparent and fair than administrative and negotiated allocations which are subject to heavy state control; therefore, they are expected to prevent corruption from its source. Regardless of the expansion of market forces, one important question remains: to what extent has the objective of tackling corruption been achieved through the use of tender, auction and quotation? To answer this research question, this paper used random-effects panel model to analyze a set of provincial level data between 1998 and 2008. It found that tender, auction and quotation modes have made no contributions to corruption-control in China‘s land sector. Based on the regression results, this paper thoroughly investigated the institutional and legal loopholes in current urban land supply system to explain the failure of tender, auction and quotation in tackling corruption. The theoretical and practical contributions of this research are as follows: 1. The first theoretical implication is the limited role of the market mechanisms in deterring corruption. Introduction of market mechanisms in urban land allocation does not necessarily reduce corruption. As shown in the descriptive analysis, land abuses have intensified in recent decades with regard to the amount of illegally-used land areas. Particularly, land abuses have progressed after the tender, auction and quotation modes were adopted in 2002. The market-led land supply modes have failed to effectively address land abuses and corruption. China‘s farmland 109 continues to shrink, and misuse of land is still alarming. This finding is further confirmed by the regression analysis that tender, auction and quotation modes have no statistically significant impact on either occurrence or severity of illegal land-use activities. This finding seems to challenge the central government‘s policy rationale that market-led land supply modes are able to reduce state intervention thus to curb corruption. It also appears to contradict the conventional wisdom of public choice school that market is more efficient and corruption-free than state. However, we can find that local states remain an active role in leading and influencing land market via procedural manipulation by probing into the designing and implementation of market mechanisms. The retreat of local governments from marketplace is not genuine and there is no clear boundary between the public and private sphere. Under this ambiguity, market mechanisms are distorted and manipulated by local corrupt officials for self-enrichment. 2. The second implication of this research is that without well-designed institutions, the market-led paradigm fails to create a clean and effective urban land market. The paradoxical nature of new land supply policy is deeply rooted in the legal and institutional loopholes of the new land supply regime. Current institutional design has produced numerous risk factors of corruption in urban land assignment, such as manipulation of land use information and land leasing modes, distortion of land prices, 110 collusion between bureaucrats and land buyers, mismanagement of land-related revenues and so forth. These risk factors have made the implementation of tender, auction and quotation subject to bribery, favoritism, nepotism, cheating and fraud. Furthermore, China‘s land management is also plagued by insufficient legislations and weak law enforcement. Detections and penalties on illegal land-use behaviors are insufficient due to executive and political interference. In this circumstance, land corruption becomes increasingly difficult to control. 3. Finally, this research confirms the general perception that local governments‘ financial dependence on land deals breeds corruption within state agencies. As a result of market-oriented land reform, capitalization on land has encouraged irrational and illegal land grabbing in localities. In the battle of grasping fiscal resources, local governments often choose to manipulate even distort central land policies to reap the considerable amount of land revenues. The deviant and disobedient behaviors of local governments are often connected with violations of law, abuse of power and corruption. Limitations of this Research and Suggestions for Future Study The issue of corruption in China is still alarming and yet to be addressed effectively. The land sector remains to be one of the most corrupt 111 economic areas in China, and public dissatisfaction on the soaring prices of land and houses is escalating throughout the country. A thorough investigation of the urban land supply mechanism and local government behaviors in land market is necessary to understand the overall economic reform and social contentions in China. Given the unavailability of land corruption data, we can only measure land corruption indirectly in this study. Measuring the level of corruption in land sector is inherently difficult because of conceptual and methodological reasons. So far, there are no systematic data on land corruption available in either official documents or scholarly works. The illegal land-use behaviors disclosed by the Ministry of Land and Resources are closely related to corruption, because many illegalities appear to have governmental involvement or support; however, some behaviors may not constitute abuses or corruption, for peasants and urban residents are equally responsible for land abuses as well. Therefore, the measurement of land corruption in this study may result in some biases. A second limitation of this research concerns the incorporation of independent variables. Omitted variable bias is difficult to control and remedy, particularly as the selection of explanatory variables is not free of risks; thus, the accuracy of regression estimation has to be improved. Thirdly, the causal inference of this research is drawn from a narrow examination of the institutional and legal loopholes in new land supply regime; however, analysis of institutions should go beyond the land sector to incorporate broader state apparatus. The roles played by the 112 party‘s anticorruption agencies, procuratorates and courts should be analyzed as well. Finally, since there is a distinction between urban and rural land policies, this research focuses on corruption in urban land market; while abuse of power in rural land management is equally severe, integration of the two systems would be a massive yet meaningful undertaking to comprehend the full picture of land issue in China. Future studies could perhaps look at comparative land abuses in rural and urban areas. Policy Implications Addressing corruption in the land sector is extremely important in contemporary China. Firstly, corruption in land management has resulted in substantial capital loss to the central government, as local authorities often undervalue land so as to attract investors. Secondly, the misuse of land, particularly the loss of scarce arable land resources, is threatening national food security and citizens‘ wellbeing. Thirdly, corruption related to land is encroaching on citizens‘ trust in governments and offering a source of social conflicts and political instability. Because of these reasons, continuous and sincere efforts should be made to address the land corruption issue. The findings in this research provide valuable policy implications to the government on how to enhance accountability and integrity in land management. 113 Firstly, institutional qualities in current land management regime need to be improved to accommodate the rapid development of land and property market. Current transitional LURs appropriation mechanisms and institutions may not provide sufficient guidelines for the effective operation of land market. The examination of the land supply procedures in Chapter 5 has highlighted the institutional loopholes in land allocation process. Municipal leaders need better land management tools to enhance professionalism in the land allocation process, such as the evaluation of land prices, selection of land allocation mode, compensation and relocation of residents, and assessment of bidders‘ documents. Perhaps the most important and urgent policy implication of this research is the protection of property rights. Because of the ambiguous definitions of urban land use rights and rural collective land ownership, we observe the prevalence of the forced demolition of urban residents‘ private properties and abuse of rural land expropriation rights. To solve this problem, policy makers should be aware that urban residents and rural peasants are de facto land owners, rather than local government officials and village committee cadres. De facto land owners should be invited to participate in land use decision-making process to oversee government activities on land use. Local governments are obligated to publicize information on urban planning and land allocation in a quick and comprehensive manner so that incentives to obtain information through bribery can be reduced. 114 Corruption occurs when there is a monopoly of power and a lack of accountability. The central government has made constant efforts to break local government‘ monopoly of land use, as evident in the promotion of tender, auction and quotation modes. However, this initiative requires substantial implementation costs with unsatisfactory gains in the absence of institutions enforcing accountability. The accountability enforcement does not simply mean more control and monitoring. In contrast, the transition from authoritarian nature of the Party-state to progress towards democracy can be a long term and necessary solution. The final implication concerns the reconstruction of central-local relations in the domain of land administration. The central government has centralized inspection and sanction functions to deter illegal land use activities more effectively. However, it seems that the centralized land inspection system—SLS—does not gain many achievements in supervising local governments. SLS is subject to local party and governmental intervention, it also has to rely on existing local land inspection organs to fulfill its targets. One important question arises from this analysis: how to reconcile the conflicts between the center and localities to make local governments accountable in land management? Perhaps the answer lies in the financial and tax reforms. As existing literature illustrates, the tax reform in 1994 has resulted in fiscal recentralization (Ko and Zhi, 2011) and a lack of sufficient financial resources in localities. The fact that financial motives encourage 115 illegal and abusive land use activities has been verified by regression analysis in chapter 4 of this research. The center needs to reconstruct current tax system to expand the sources of local fiscal revenues. In the mean time, local governments should diversify their revenue sources by shifting from land market to more productive industrial sectors. The transformation of revenue collection pattern in local China would be an essentially important yet challenging task to the Chinese government. In conclusion, this study has made active endeavors to enhance public awareness of land corruption in China. Empirical analysis allows for a better understanding of the dynamics behind market-oriented land reforms and corruption. This research reports that market forces are not necessarily coupled with transparency, fairness, and low level of corruption. Comprehensive reforms focusing on preventing institutional loopholes should be undertaken to improve the quality of land management institutions so as to protect scarce land resources. 116 References Arozamena, L., & Weinschelbaum, F. (2009). The effect of corruption on bidding behavior in first-price auctions. European Economic Review, 53(6), 645-657. Borras, S. M. (2003a). Questioning market-led agrarian reform: experiences from Brazil, Colombia and South Africa. 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Du Deputy party secretary In 2003, Du was engaged in illegal land leasehold, Expelled Shicheng of Shangdong province his son was involved in many construction projects party and illegal land selling. Chen Aimin Deputy 35 Yu Feili 36 Director of from and position From 2002 to 2003, Chen helped one real estate 15 years Department of Land and company to obtain LURs through manipulating imprisonment Resources of Jiangxi quotation leasing mode. Vice From 1992 to 1993,Yu helped his daughter‘s Expelled Chairman, Standing Committee of company get a piece of land at a low price, then his party People's daughter gained over 20,000,000 RMB profits from membership Congress, Guangdong province Hu Deputy governor Changqing Jiangxi province from transferring the LURs. of Hu helped real estate companies to obtain LURs at Death penalty much lower prices. In return, he accepted bribes that were worth millions of RMB. Cheng Vice Chairman of the From 1994 to 1997，Cheng allowed a piece of land to Death penalty Kejie NPC be sold at a low price to a company, that company Mu Suixin Standing Committee also got construction projects under Cheng‘s help. Mayor of Shenyang city, Mu authorized land use licenses and reduced land tax Death penalty Liaoning and fees illegally. Ma Deputy Mayor Xiangdong Shenyang city, Liaoning developer free of charge. Tian President In 1998，Tian worked together with Mu Suixin to life Fengqi people‘s court, Liaoning allocate a piece of land to a developer for free. imprisonment Wang Deputy From 1995 to 1997, Wang helped real estate Huaizhong Anhui province of of superior governor of Ma accepted bribes and allocated a piece of land to a Death penalty companies to obtain land and reduced land conveyance fees. 34 Source: Zunyi Intermediate People‘s Court, ―Liu Changgui Fan Shouhui Zui He Ju E Caichan Laiyuan Buming Zui Yian‖ [―Liu Changgui trialed for the crime of bribery and unidentified huge property‖], http://data.jxwmw.cn/index.php?doc-view-91271 35 Source: the Xinhua News, ―Toushi Jiangxi Tudi Xitong Fubai Woan: Tudi Guanyuan Quanli Shikong‖[― Probe into the organized corruption in land administration system in jiangxi: land officials‘ power out of control‖], http://fanfu.people.com.cn/GB/11915422.html 36 The cases of Yu Feili, Hu Changqing, Cheng KeJie, Mu Suixin, Ma Xiangdong, Tian Fengqi, Wang Ju, and Wang Huaizhong were recorded by Jian Li (2004), ―Guidelines of Land Corruption Cases,‖ China Land, 4, 21-33. 125 Death penalty Wang Youjie 37 Vice director, Standing From 1994 to 2005, Wang helped real estate Committee of People's developers obtain LURs and reduced relevant fees. Death penalty Congress, Henan Wang Yingfu 38 Jing Fusheng 39 Liu Zhihua 40 He Minxu Deputy General Director From 1999 to 2003,Wang helped a real estate Life of Department of Land company to obtain a piece of commercial land imprisonment and through administrative means, he also approved land Resources of Ningxia Province requisition and construction projects illegally. Minister of Propaganda From 1989 to 1995, Jing took 7660,000 RMB Life of Fujian province bribes in land and projects approval. imprisonment Deputy Party secretary Liu accepted over 8,000,000RMB bribes in land Death penalty of Beijing leasing, projects approval, and cadre promotion. From 2000 to 2004, He accepted bribes to illegally Expelled Anhui province grant LURs and reduced relevant fees. position Wang Vice director, Standing From 1995 to 2006, Wang helped real estate and Expelled Wulong Committee of People's construction companies to obtained LURs and party Congress, Jiangsu reduced land conveyance fees. position Director of Land and From 2001 to 2007, Luo embezzled a large amount Death penalty Resources Bureau, of land conveyance fees. Shuncheng district, Luo Yaping 41 Deputy governor of from from and Liaoning Wang 42 Bin Dai Min 43 Deputy director, Bureau Wang accepted money and presents from real estate 12 of Land and Resources, developers that were worth more than 1.7 million imprisonment Chongqing RMB Manager of Agricultural In 2006, Dai took bribes and leaked the upset price of 10 Bank of China Dongfang land auction to a company. Under Dai‘s instructions, imprisonment 37 Source: Legal Daily, ―Yuan Zhengzhoushiwei Shuji Wang Youjie Woan: Tanguan Yilin Jiushi Yichuan‖[― Organized corruption of former secretary of zhengzhou municipal party committee Wang Youjie: officials participate in organized corruption‖], http://qingyuan.people.com.cn/GB/14748/5433429.html 38 Source: Procuratorial Daily, ―Ningxia Tudiju Yuanjuzhang Wang Yingfu Chanhui Shouhui Jingli‖[―Former head of Ningxia land administration bureau Wang Yingfu repented accepting bribes‖], http://qingyuan.people.com.cn/GB/14748/5490458.html 39 Source: Procuratorial Daily, ―Fujiansheng Yuan Xuanchuanbuzhang Jing Fusheng 766 wan Yishen Beipan Wuqi‖[―Former director of Jiangxi Publicity Department of provincial party committees Jing Fusheng was sentenced to life imprisonment for accepting 7,660,000 RMB as bribes‖], http://society.people.com.cn/GB/6272084.html 40 The source for cases of Liu Zhihua, Wang Wulong, Li Jinbao, Du Shicheng and He Minxu is ―Yin Fangdichan Fubai Er Luoma De Shiwei Gaoguan‖ [―Ten high-level officials punished on real estate corruption‖], http://news.nj.allfang.com/newshtml/2007-02/9844_1.html 41 Source: ―Luo Yaping: Tudi Nainai Ye Fengkuang‖[―Luo Yaping: greedy land official‖], http://www.jcrb.com/zhuanti/fzzt/lps/renwu/tiaomu/201101/t20110107_487012.html 42 Source: Procuratorial Daily, ―Chongqing Yi Jituan Dongshizhang Zishe Xianjinshouhui Menkan:Chao 10wan Bushou‖[―One board director in Chongqing municipality sets standard for bribery: bribes over 100,000 RMB will be rejected‖], http://qingyuan.people.com.cn/GB/14748/8817390.html 43 Source: ―Hainan Yuan Nonghang Dongfangshi Zhihang Hangzhang Shouhui Huoxing‖ [―Manager of Agricultural Bank of China Dongfang city branch trialed on accepting bribes‖], http://finance.sina.com.cn/g/20101116/20348962720.shtml 126 years years city branch Chen Liangyu Party 44 that company obtained LURs successfully. secretary of Shanghai Chen misappropriated Social Security Fund for 18 years investment in real estate market, he also helped his imprisonment younger brother to obtain land at low price. Wu Zhenhan President 45 Wang Zhaoyao 46 of superior From 1998 to 2003, Wu accepted bribes in granting people's court, Hunan construction projects. Vice chairman, Standing Around 2003, Wang helped real estate companies to Committee of Jiangsu get LURs and accepted bribes in return. People's Congress 44 Source: Jinwang Huang, ―Chumu Jingxin De Tudi Fubai‖[―Land corruption shocks the eye‖], http://www.chineseworkers.com.cn/_d271368875.htm 45 Source: Oriental Daily, ―Ruya Faguan Luoma: Hunangaoyuan Yuan Yuanzhang Wu Zhenhan Beipan Sixing‖[―Former president of High People‘s Court of Hunan province was sentenced to death‖], http://news.sina.com.cn/c/2006-11-15/014410498677s.shtml 46 Source: Democracy and Law, ―Wang Zhaoyao: Xiangzuo Tanbaicongkuan De Dianxing‖[―Wang zhaoyao: confess and repent‖], http://cpc.people.com.cn/GB/64093/64371/5149120.html 127 Death penalty Death penalty Appendix B Table A2 Descriptive Statistics of All Variables Variable Landcase Landarea Dep Mkt Law GDPpc Wage Govspend Govemploy Rei Edu overall between within overall between within overall between within overall between within overall between within overall between within overall between within overall between within overall between within overall between within overall between within Mean 104.0846 1862.66 0.349633 0.195743 108.2586 13817.63 1.141619 0.197727 0.169167 0.068352 7.752545 Std. Dev. 87.03091 65.33989 58.45929 2600.415 1625.623 2050.351 0.293009 0.143274 0.25677 0.168861 0.081189 0.148471 93.2094 77.30262 53.7053 11532.24 9458.969 6793.531 0.131896 0.113384 0.070133 0.114153 0.101684 0.05473 0.110212 0.087646 0.068489 0.048037 0.041318 0.025507 1.177689 1.120915 0.409213 Min 4 33.81818 -83.3699 0.46 80.665 -2916.5 0.008 0.111364 -0.20018 0.001 0.047182 -0.17508 22.3506 46.34738 -83.1556 2342 4356.593 -5412.82 0.854 0.954273 0.860346 0.094 0.111455 -0.13045 0.03 0.053455 -0.08847 0.007 0.019091 -0.0341 2.948 3.967273 6.202727 Max 719 317.6 505.4846 21346.52 7894.271 19665.23 1.784 0.661818 1.536088 0.798 0.390818 0.687016 642.3915 366.3195 384.3305 73124 47483.45 40390.06 1.715 1.448273 1.408346 0.972 0.654182 0.892818 0.81 0.494636 0.603258 0.344 0.243909 0.168443 11.085 10.43936 8.552727 Observations N= 319 n= 31 T-bar = 10.2903 N= 306 n= 31 T = 9.87097 N= 341 n= 31 T= 11 N= 331 n= 31 T-bar = 10.6774 N= 279 n= 31 T= 9 N= 341 n= 31 T= 11 N= 341 n= 31 T= 11 N= 341 n= 31 T= 11 N= 341 n= 31 T= 11 N= 341 n= 31 T= 11 N= 341 n= 31 T= 11 128 Appendix C Map A1 Map of China Source: http://english.peopledaily.com.cn/china/images/map11.jpg. Accessed on June 15, 2011. 129 [...]... to 2010; these are presented in Appendix A While these land corruption cases represent only the tip of the iceberg, they shed light on the forms and characteristics of corruption in the urban land sector; hence, a basic understanding of land corruption can be drawn from these cases As shown in Appendix A, the magnitude and severity of land- related corruption seem substantial Many land corruption cases... and redesigning the tender, auction and quotation system 16 Organization of This study The structure of this thesis is as follows: Chapter 2 presents the basis for understanding the manifestations and causes of corruption in China s land sector An operational definition of land corruption is provided, followed by a narrative report describing the forms and characteristics of land corruption based on. .. argue that official statistics only reflect the intensity of enforcement rather than the actual level of corruption Consequently, official land corruption statistics can provide a proper indicator of trends in the actual land corruption level The second limitation of the quantitative data is that these land- law violations do not equal to land corruption because some violations are committed by urban residents... 20 corruption scandals Existing literature on land corruption in global and domestic contexts is then reviewed The focal point of literature review is on the controversial relationship between market- led land supply system and corruption Chapter 3 identifies the research questions by tracing the transformation of China s urban land supply regime After analyzing the major characteristics of current land. .. improving land use efficiency and protecting land resources Additionally, this research goes beyond the land sector and situates the issue of land corruption within the broader context of the central-local relationship and the national legal environment and, hence, sheds light on the bigger picture of institutional reforms in contemporary China Furthermore, it would provoke future studies in the area of land. .. studies on land corruption in developing and transition economies One important implication is that land corruption occurs due to both sectoral and environmental factors Sectoral factors such as monopoly of land resources, discretion of land administration officials, qualities of land administration institutions, government accountability and transparency exert direct influence on the incidence of corruption. .. of Chinese Corruption , China Report 2004, 40, p.107 10 Interview with local land administration officials on November 18, 2010 23 forms of corruption in China s urban land sector The next section reviews current literature to understand why land corruption prevails in both global and national contexts Studies of Land Corruption in a Global Context Corruption is a phenomenon that exists in many economic... information on land corruption and anti -corruption policies First, public officials‘ knowledge and experience drawn from government positions are useful for understanding the implementation of land policies and anticorruption polices The selected public officials consists of two groups: one group come from land administration organizations representing experienced influential decision makers who demonstrate... reveals the various forms of corrupt practices in urban land supply, such as extracting bribes, stealing land- related revenues and violating land protection rules and so forth, adding to the body of knowledge on how corruption 15 actually operates in urban land management Secondly, this research project presents empirical evidence for the effects of market- led land supply regime on corruption in land management... time These fluctuations may affect the validity of regression results To address this problem, I integrate the variable of law enforcement in the regression analysis to ensure the fluctuations in official land corruption statistics are under control By controlling the variations of law enforcement, we can also control the gap between actual land corruption level and revealed land corruption level as many ... paid land leasing system and abandonment of free administrative allocation of land under the socialist land management system (Zhu, 1999b) The transformation from the state -led to market- led land. .. open land rental and sale market, decentralization of land administration institutions, conversion of land from rural to urban uses, and reduction of government control in land resources, and... 13 The laws and regulations on the transference of LURs include the Interim Regulations of the PRC Concerning the Assignment and Transfer of the Right to the Use of the State-owned Land in the