The Land Market Deregulation Debate in Chile

Few places in Latin America, or in the rest of the world, have dared to implement such radical urban land policy reforms as Chile has over the last 20 years. In 1979, the government began initiating deregulation policies by releasing a document that stated that the scarcity of land was artificially produced by excessive regulation, which resulted in the virtual elimination of urban growth boundaries.

Since then much has changed in the morphology and internal structure of Chilean cities, but the assessment of these changes varies greatly according to one’s ideological position. Explicit socially oriented urban policies have allowed for significant improvements in access to housing by the poor, but some argue that the spatial segregation impacts of such policies have imposed a high toll on society by indirectly lowering quality of life, impeding access to jobs and aggravating social alienation.

Even before the 1973-1990 period of military government, Chile was recognized as a unitarian and centralist political system, characterized by the strong presence of the state in economics and politics. It is a society with a relatively homogenous culture and is unique among Latin American countries in its strong legalist tradition. Chilean cities also present a sharp contrast to their counterparts in Latin America. There are virtually no informal land markets; land tenure has been almost completely regularized by strong public programs; and the majority of the urban poor live in areas where the main streets are paved and sanitary services are provided. Urban violence, in spite of growing trends, is still minimal compared to the rest of the continent.

Deregulation Policies and Problems

Among the most innovative aspects of Chilean urban policy are the following:

• Elimination of urban growth boundaries while maintaining the planning designation of sensitive areas for environmental protection. This measure had two goals: to delegate a leadership role in urban development and land use to market forces and to reduce land prices.
• Establishment of a subsidy system aimed at reducing the housing deficit. Considered by many to be the pillar of Chile’s housing policy, the subsidy system is widely perceived as the original and most innovative synthesis of liberalization policies with Chile’s state-dominated tradition. The program channels substantial subsidies to families-based on income, family structure, demonstrated saving capacity, and current housing condition-in order to finance housing provided by the private sector according to certain pre-established standards. As a result, Chile has emerged as the only country in Latin America where, since 1992, new housing has been provided at a faster rate than the formation of new households, gradually eliminating the housing deficit.
• Eviction of poor settlements from well-to-do areas and other overt segregationist policies. Few other countries would dare to implement such policies today, as they would surely meet strong resistance in less autocratic societies where the rights of poor occupants are recognized as legitimate.

Although some of the achievements of these deregulation policies are widely recognized as positive-particularly in regard to legal and physical or urbanistic regularization and the quantity of social housing provided-many Chileans believe that the policies of the past 20 years have only caused new problems. Some of them are:

• Urban sprawl and its relation to increasing traffic congestion and dangerous levels of air pollution. For example, Santiago’s air pollution levels are matched only by cities three times its size, such as Mexico City and São Paulo, even though car use is relatively low.
• The formation of ill-equipped and socially segregated low-income neighborhoods. In a context of increasing economic and employment insecurity, these areas become a breeding ground for social problems such as drug addiction, juvenile delinquency, youth apathy and alienation.1 Even a casual visitor to the capital city, Santiago, is struck by the contrast between the flamboyance of wealthy, master-planned comunas2 such as Las Condes and the monotony of neighborhoods produced by private developers in fringe comunas such as Maipú and La Florida.
• Continued increases in land prices. Contrary to the predictions of those responsible for the deregulation policies, land prices in Chile have increased, absorbing an ever-larger share of the housing subsidy program.3 Some analysts have claimed that land prices already correspond to between 60 and 100 percent of the subsidy. This is seriously jeopardizing the sustainability of the voucher system, and is pushing the poorest sectors out of the program. These increases in land prices should come as no surprise, however; similar escalation has occurred in other countries where deregulation policies have influenced future demand expectations of ‘cheaper’ urban fringe development as an alternative to the congested centers.

It is unclear whether these urban changes can be attributed directly to the effectiveness of market-oriented land policies or to the strong overall performance of the Chilean economy. The steady growth in gross domestic product (GDP), averaging about seven percent a year since 1985, was interrupted only recently due to the Asian economic crisis.

Expanding the Debate

The liberalization of urban land markets in Chile represents an intriguing and innovative experience from an international perspective, yet internal public debate has been limited. Recently, the achievements and problems of liberalization have reached a point of such undeniable importance that they have stimulated broad concerns. Furthermore, the government has proposed modifying the current “Ley General de Urbanismo y Construcciones” (Law of Urban Planning and Construction), which would result in a number of significant changes. Among the most important are:

• broader responsibilities for urban planning, which would have to account for all local space (not only the urbanized areas within each municipality, as at present), and
• the application of a series of economic or market regulations, such as the issuance of special “construction certificates” designed to conserve the country’s architectural heritage, and the creation of “conditional urban development zones” to favor mixed-use schemes. Despite the importance of these potential modifications to future planning, they have not been debated widely, and the legislative proposal has not included theoretical considerations or an explanation that justifies the proposed changes.

To facilitate a focused discussion of these issues, Carlos Montes, President of the Chilean House of Representatives, invited the Lincoln Institute to participate in a seminar coordinated with the Institute of Urban Studies of the Catholic University of Chile. Titled “20 Years of Liberalization of Land Markets in Chile: Impacts on Social Housing Policy, Urban Growth and Land Prices,” the seminar was held in October 1999 in Santiago. It brought together members of the Chilean Congress, the business community (developers, financial leaders, etc.), officials of public agencies (ministries, municipalities, etc.), academics and representatives of NGOs to engage in a lively public debate. The discussion highlighted a clear ideological polarization between “liberal” and “progressive” approaches to understanding and solving deregulation issues (i.e., “more market” versus “more state”).

From a liberal point of view, these problems emerge and persist because land markets have never been sufficiently deregulated. Some liberals, in fact, insist that public intervention never disappeared; they believe that regulation actually increased after Chile’s return to democracy in 1990. For example, liberals cite various means, often indirect, by which the state restricts the free growth of cities, such as when it attempts to expand environmentally protected areas that are closed to urban uses or to impose an official and almost homogenous criterion of densification to all urban space. They also assert that citizens should be free to choose different lifestyles and that the authorities should limit themselves to informing citizens of the private and social costs of their options, with the implicit understanding that such costs are reflected in market prices when urban land markets are functioning efficiently (i.e., when they are fully liberalized).

The principal explanation offered by the liberals for the problems of equity and efficiency facing Chilean urban development today are insufficient advances in the application of criteria to “internalize the externalities,” particularly negative externalities, by those responsible for them. As passionately argued by some representatives of this group, private agents should be allowed to act freely, as long as they are willing to compensate society for the implied social costs incurred.

On the other hand, the progressives believe that liberalization has gone too far in its market approach and has left many problems unsolved: the increase in land prices; problems in the quality and durability of housing; the conditions under which land is serviced; social problems associated with urban poverty; and problems of efficiency and equity derived from the growth patterns of cities, such as the mismatch between areas where services are provided and the locations chosen for private developments.

These criticisms recognize the imperfect nature of urban markets and the need for greater levels of control and intervention. Among the forms of intervention recommended by many progressives are value capture instruments, which have rarely been used or even contemplated in financing programs for the public provision of new urban infrastructure and services. The creation of such mechanisms would be consistent with the idea of internalizing the externalities, a point of relative consensus between the progressives and the liberals. The main difference is that the liberals would restrict value capture to the public recovery of specific costs, whereas the progressives would consider the right to capture the full land value increment resulting from any public action, whether resulting from investment or regulation.

In more general terms, the progressives argue that not everything can be considered in strictly monetary terms. There are urban values and objectives related to public policy that cannot be achieved through the market, or for that matter by law, such as the sense of community. Although largely disregarded in the new housing options provided by private developers to low-income families, such as the voucher system, community solidarity is of tremendous importance to counteract the social problems that spatial segregation tends to exacerbate. Environmental conservation is another example of an urban policy objective for which “price tags” are seen to be of questionable effectiveness.

With regard to the free growth of cities and the idea of respecting the options of their citizens, the progressives react by noting that steep social and environmental costs tend to go hand-in-hand with sprawl. They also point out that the only group that can truly choose its way of life through the marketplace is the wealthy minority. While seeing benefits in concentration, progressives also voice concerns about extreme density. Some Chileans have expressed an interest in a metropolitan authority to deal with regional issues, and in the use of public infrastructure investment as a means of guiding growth.

Adequate responses to these issues and perspectives involve more than technical or fiscal solutions, such as the extent to which developers actually pay for the full cost of the changes they impose on society (let alone the problem of accurately assessing the costs) or the sustainability of the demand-driven voucher system which constitutes the core of Chile’s housing policy. The solutions also involve broader and more value-related concerns, such as the environmental costs of sprawl and the importance of maintaining local community identities and initiatives. Discussion in the Congress and other settings is still expanding, but is expected to take some time before the opposing perspectives reach consensus.

Martim O. Smolka is a senior fellow and the director of the Lincoln Institute’s Latin America and Caribbean Program. Francisco Sabatini is assistant professor of the Institute of Urban Studies at the Catholic University of Chile in Santiago. Laura Mullahy, research assistant, and Armando Carbonell, senior fellow, both of the Lincoln Institute, also contributed to this article.

Notes:

In contrast to the rest of the continent, drugs were not a major problem in Chile until recently.

2 Metropolitan Santiago is comprised of 35 independent political-administrative jurisdictions called comunas.

3 See Gareth A. Jones, “Comparative Policy Perspectives on Urban Land Market Reform,” Land Lines, November 1998.

4 Our use of the term “liberal” corresponds to its connotation in Chile, which refers to the strong influence of the economic principle of freeing market forces to their limits, as espoused by the “Chicago School.”

Sources: Francisco Sabatini, et.al., “Social Segregation in Santiago, Chile: Concepts, Methods and Urban Effects” (monograph, 1999) and Executive Secretariat of the Planning Commission for Investments in Transportation Infrastructure (SECTRA), “Survey of Origin and Destination of Trips in Santiago”(1991).