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An Ordo-liberal Perspective on Land Problems in Korea

Department of Economics, Soongsil University, 1-1 Sangdo-1-dong, Seoul 156-031, Korea

Recurring land price inflation in Korea is one of the most worrisome policy issues. It frustrates people's aspirations of home-ownership, aggravates income/wealth disparities, raises business costs and requires higher costs for government of land acquisition for infrastructure. Any effort to combat this problem must consider whether this land price inflation reflects a change in fundamentals or is led by speculative bubbles. An econometric test concludes that land markets in Korea have partly been driven by speculative bubbles. Then this paper argues that bubbles are cyclically formed and are persistent due to structural differences in the rate of return between land and financial assets, which are enforced by the centrally administered economic order. Thus, to reduce the bubble element in Korean land prices, fundamental reform is necessary towards a genuine market economy. This includes financial liberalisation and land tax reform to decrease speculative demand, and reform of land-use control to increase the supply of urban land.

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