How a Jump in Home Ownership Boosted Entrepreneurship in China

real-estate-China

Entrepreneurship can do a lot to drive economic growth, but what spurs entrepreneurship? Shing-Yi Wang, a professor of business economics and public policy at Wharton, sheds light on that question in her study of Chinese property reform in the 1990s.

Among the many free market reforms launched by China in that decade, the privatization of state-owned housing in 1994 had a significant impact on fostering entrepreneurship, notes Wang in her paper, “Credit Constraints, Job Mobility and Entrepreneurship: Evidence from a Property Reform in China,” which was published in the journal The Review of Economics and Statistics. The study is one of the first on the economic effects of employer-provided housing, according to Wang, who adds that “the big question I’m looking at in this paper is how giving individuals private property rights over their homes affects decisions on entrepreneurship.”

The study finds that the reform, whereby state employees purchased their government-owned homes, increased the odds of those residents entering self-employment by two times. The reasons: Residents, no longer dependent on state jobs for their housing, could pursue other avenues. Moreover, home ownership provided residents with capital to start businesses. The findings, Wang says, can help inform policies in developing countries where a large percentage of housing is government-owned.

Wang’s research focuses on issues related to property rights in developing countries and migration. Much of her work is concentrated on China, though she also studies other regions of the world. Wang describes herself as an empirical micro-economist, using econometric techniques “to answer big questions” from data that usually comes from the household or individual level. “The majority of my work is to exploit natural experiments — to try to make use of things that happen that affect one group and not the other,” she says. “It’s best if the two groups are very similar. Then, you can back out the causal impact of the program or reform. It’s a very nice tool for trying to evaluate the impact of a reform or policy change. If we’re interested in applying this reform to other areas or countries, this technique helps us answer that question.”

A Sweeping Change

The “natural experiment” that Wang studies in the paper is China’s 1994 plan to sell state-owned housing in cities nationwide, which affected more than 40% of urban households. Current occupants of the housing had the choice to buy full or partial ownership of their dwellings at highly subsidized rates — most purchased at below 15% of market value, according to Chinese press reports. As a result, China now has one of the highest rates of home ownership in the world, notes Wang.

To identify the reform’s impact, Wang studied the employment choices pre- and post-reform of 4,400 households and 16,000 individuals in the China Health and Nutrition Survey of nine provinces, including Guangxi, Guizhou, Heilongjiang, Henan, Hubei, Jiangsu, Liaoning and Shandong — all with varying geography and economic development levels. She divided the households into three groups for examination. The “treatment group” comprised households living in state-owned housing with at least one spouse working for the government. Wang compared that group to two “comparison groups”: households living in private homes with at least one spouse working for the government and private-sector employees living in private homes. She found that the reform significantly increased self-employment by 1.9 to 2.1 times for the treatment group, compared to the other two.

Before the reform, self-employment for state housing residents didn’t differ much from the rates of those employed by the state or private sectors living in private homes. But in 1997, the first set of survey data available after the 1994 reform showed that individuals who bought homes from the government became entrepreneurs at a much higher rate than those who had been living in private housing previously.

According to Wang, there are two reasons for this effect: The delinking of housing from employment and the alleviation of credit constraints on households. “When housing was tied with employment, people didn’t want to change their job,” she notes. “By disentangling housing and employment, labor mobility increases” and more people began to start their own businesses.

Moreover, the ability to realize the value of home ownership gives residents capital with which to start entrepreneurial ventures — by taking out loans collateralized by their homes, or selling or renting their homes at market prices. “Before, they could use the home, but not tap into the value in any other way,” Wang says.

“In China, all the land is owned by the government. Farmers still can’t sell their land, but recently, they received the rights to rent out their land. The question is how property rights reform impacts the mobility of farmers.” –Shing-Yi Wang

Wang found that housing reform increased treatment group households’ ownership of productive assets by 340% compared to the privately employed, and by 200% versus state employees with private housing. Indeed, Wang found that the 1994 property reform freed 10 billion renminbi (RMB) from state housing to productive enterprises, or 14% of the estimated 67 billion RMB of capital invested in urban household enterprises in 1993, the year before the reform.

Questions for the Future

These findings are relevant to other parts of Asia and regions such as sub-Saharan Africa with high levels of state employment and state housing, says Wang. A 2001 U.N. study found that 18% of households in Africa, 16% in Asia and 8% in Latin America live in state- owned housing as a benefit of government employment.

While the paper focuses on a past reform unlikely to be repeated in China, it raises questions related to China’s current urbanization effort aimed at moving more rural residents to the cities, notes Wang. “In China, all the land is owned by the government,” she says. “Farmers still can’t sell their land, but recently, they received the rights to rent out their land. The question is how property rights reform impacts the mobility of farmers. If farmers can access the value of their land by leasing it, rather than losing it altogether, that could encourage them to move to better opportunities.”

Wang is currently studying other property rights and migration issues in China. In particular, she’s examining what happens to rural households when family members leave to work in the city and how their agricultural investment decisions are affected not only by the reduction of available farm labor, but also by the increase in remittances from the migrant worker. In a separate study, Wang is exploring how home ownership affects the way that husbands and wives make household decisions. Some of her findings so far: When men get the title to their homes, they do less housework. When women get the title, household consumption of cigarettes, associated as a male-favored product, declines.

The application of natural experiments to China so far has been less common, due to the relative lack of data availability and language barriers, than in other countries, such as India, says Wang. But there has been growing interest by development economists in doing research, similar to her own, on China, she notes.

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