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The single most important aspect of a market economy is absolute respect for property rights. Photo: HT
The single most important aspect of a market economy is absolute respect for property rights. Photo: HT

Land acquisition or land grab?

Eminent domain laws remain a huge threat to the security of private property rights

India’s debate on land acquisition is a case of misnomer. When a business purchases another business, it is said to have acquired it through a market transaction. Acquisition is thus a word used to connote a consensual market exchange. But the same word is also often used to describe the forced appropriation of land. A better term for such appropriation, however, is: land grab.

Land grab using eminent domain laws is justified citing the need for private interests to be sacrificed to serve the larger public interest. In the absence of coercive state action, it is said holdouts would stall projects that could create much-needed jobs and growth for the economy. Thus, state action is called for to rein in anti-national forces impeding India’s march to industrialization.

The problem with this argument is two-fold. First, the problem of holdouts is often exaggerated although it is one that has historically been solved through private means. Unlike the naïve view often held by many about holdouts stalling mega business projects, businesses have found ingenious ways to deal with it—if only governments allowed them the freedom.

For one, businessmen aiming to buy large tracts of land have used dummy buyers to prevent sellers from knowing their ultimate intent. Famously, it was this way that American business tycoon Walt Disney bought 40 sq. miles of land in Florida to establish the Disney World theme park. Another way the holdout situation is avoided is through combinatorial auctions that are used to simultaneously purchase complementary land tracts. By this means, buyers agree to a purchase only when sellers offer land tracts as a whole. This is already prevalent in the business of logistics, real estate etc.

Gabriel Roth, a transportation economist, has documented the history of private entrepreneurs in the US building even highways—considered the ultimate public good—overcoming the holdout problem.

Second, leaving the power to decide land allotment in the hands of government officials makes it prone to a much bigger risk of government failure. When the option to bypass the market is available to businesses, they, in fact, favour employing state coercion to grab land over using private ingenuity to strike deals with consenting sellers. Supposedly though, it is impossible to buy land in the open market through voluntary exchange that coercion becomes imperative to uphold the greater good.

Yet, a vast number of businessmen do buy or rent land in the open market. It is the creamy layer of the Indian business class—part of influential lobbies—that somehow finds itself unable to perform this. Moreover, unlike the common belief that eminent domain laws can improve economic efficiency, land grabbing, in fact, has adverse consequences on efficiency. For when political power, rather than market demand, is used to decide land allotment, it is certain that land will be allotted to uses that are politically determined rather than economically efficient.

The single most important aspect of a market economy is absolute respect for property rights. Much has been said about preventing the abuse of eminent domain laws, but any authority provided with discretionary powers will misuse it to serve political ends.

Natural Order runs every Monday, with a libertarian take on the world of economics and finance.

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