Who would want to be a landowner in South Africa right now?

From news.com.au last week:

South Africa’s ruling party says it will push ahead with plans to amend the country’s constitution to allow for the expropriation of land without compensation.

President Cyril Ramaphosa announced the decision on Tuesday following a two-day meeting of the African National Congress, which had earlier signalled its intention to redistribute land under the current laws.

The South African parliament in February voted in favour of a motion, brought by the radical Marxist Economic Freedom Fighters and supported by the ANC, to send the matter to parliament’s Constitutional Review Committee.

“It has become patently clear that our people want the constitution to be more explicit about expropriation of land without compensation, as demonstrated in public hearings,” Mr Ramaphosa said in a video message addressing “fellow South Africans, comrades, friends”.

“The ANC [has] reaffirmed its position that a comprehensive land reform program that enables equitable access to land will unlock economic growth by bringing more land in South Africa to full use and enable the productive participation of millions more South Africans in the economy.”

From the perspective of my ECONS102 class, this is great timing given that we are about to do a topic that includes property rights this coming week. Efficient (welfare-maximising) property rights have four features:

1. Universality – all resources are privately, publicly, or communally owned and all entitlements are completely specified;
2. Exclusivity – all benefits and costs accrued as a result of owning and using the resources should accrue to the owner whether directly or indirectly;
3. Transferability – all property rights should be transferable from one owner to another in a voluntary exchange; and
4. Enforceability – property rights should be secure from involuntary seizure or encroachment by others.

Obviously, if the government is about to legislate for expropriation of land without compensation, then the 'enforceability' feature is going to be absent. What does this do to the value of land? The article tells us:

Speaking to the ABC’s Foreign Correspondent on Tuesday night, cattle farmer Jo-an Engelbrecht — whose elderly parents were tortured and killed in their home on Mother’s Day — said even if he wanted to sell his farm and leave, it was now “worth zero”.

“We had several auctions in the last two or three weeks cancelled because there was no people interested in buying the land,” he said. “Why would you buy a farm to know the government’s going to take it?”

To see why land values might fall to zero, consider the land market in the diagram below (note that it is a rental market for land, as I discussed last week). Before land expropriation was likely, demand is D0 and the land rent is R0. When land expropriation becomes likely, fewer people want to have land, either because they worry that they land they have paid for will be expropriated, or because they think "why pay for land, when I can just wait and some might be redistributed to me?" Either way, the demand for land falls to D1. Notice that there is no equilibrium in this land market now, because demand and supply never meet (or if there was an equilibrium, the equilibrium price would be negative!).

To see why the lack of enforceability reduces economic welfare in the land market (i.e. why this market is inefficient), consider the areas of consumer and producer surplus. Before land expropriation was likely, the consumer (tenant) surplus is the area ABR0, producer (landlord) surplus is the area R0BCO, and total welfare is ABCO. When land expropriation becomes likely, all of these areas (consumer and producer surplus, and total welfare) fall to zero, because there is no land trading at all! Of course, if demand didn't fall so far that there was no trading, there would still be reductions in consumer surplus, producer surplus, and total welfare.

That's not the end of the story though. The South African government has its reasons for land expropriation and redistribution. South Africa has one of the highest levels of inequality in the world (it's so bad, it even has a dedicated Wikipedia page). Reducing inequality is a worthy goal, and with a bit of luck, this might go some way towards addressing that. So long as they don't follow the example of Zimbabwe, where according to this New York Times story from 2002:

...the government's chaotic and violent seizure of white-owned farms has come at a price. The economy is collapsing. The land program, coupled with severe drought, has left half the population in need of emergency food. And so far, Mr. Mugabe has failed to transform the agricultural sector into a viable system that can feed the nation and drive the economy.

Vast stretches of previously productive farmland are no longer in use because about half of the aspiring black commercial farmers have failed to take up their allotted farms since August, when most white farmers were told to leave.

The government, which seized the farms without compensation, still lacks title to most of the land. Many prospective black farmers are reluctant to occupy farms without title deeds because it is nearly impossible to get loans without them.

Meanwhile, thousands of impoverished, resettled farmers are struggling to survive without seed, fertilizer, irrigation and plowing assistance, basic services that the government has promised.

If South Africa wants to address its inequality problem, land expropriation by itself will not be enough.