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Socialist Cities without Land Markets1


*Infrastructure and Urban De¨ elopment Department and † Financial Sector

De¨ elopment Department, The World Bank, 1818 H Street N.W.,
Washington, DC 20433

Received March 31, 1995; revised December 1, 1995

How does the spatial dynamics of the socialist city compare with that of the
market city? What happens when all investment decisions are made administra-
tively in the absence of land markets? Russian development is the longest socialist
experiment on record. Its outcome is of paramount interest to urban economists.
This paper reports the first analysis of the structure of Russian cities after 70 years
of Soviet development. The main finding is a perversely positive population density
gradient. The Soviet city also has a disproportionate share of industrial land, often
in prime locations. Free property trading started in Russia in 1992. The emerging
negative price gradient contrasts totally with the positive population gradient that
is the legacy of administrative land allocation. These two conflicting gradients
highlight the land misallocation and inefficiency of the socialist city. Q 1997 Aca-
demic Press

The rejection of private ownership of capital and of the means of
production, including land, has been a central tenet of Marxist ideology.
This ideology led to the suppression of land markets in socialist countries.
The purpose of this paper is to describe the long term effects on location
and land use of administrative allocation systems in cities where land
markets have been eliminated. To what extent does the resulting socialist
city differ from the market city? How does its land use differ from the
predictions of our familiar models of residential and business location

This paper originates from a program of technical cooperation between the Russian
Federation and the World Bank Ž1991]1993.. We are grateful to Mikhail P. Berezin, Joseph
K. Eckert, Natalya V. Kalinina, Olga Kaganova, and Oleg Matiukhin for their assistance in
obtaining data in St. Petersburg and Moscow. As part of the program, J. Eckert performed
the price gradient analysis using a database assembled by Dr. Kalinina. We also acknowledge
the comments of two anonymous referees and we are very grateful to Jan Brueckner for his
detailed editorial advice. This paper is the sole responsibility of the authors whose views
should not be attributed to the World Bank.

0094-1190r97 $25.00
Copyright Q 1997 by Academic Press
All rights of reproduction in any form reserved.

based on competitive land markets developed by Alonso w1x, Muth w17x,

Mills w14, 15x, and Henderson w8x? What happens when public ownership
and public allocation of land is chosen to solve the long-standing concerns
with the ‘‘capture’’ of publicly generated land rents by private owners?
The evidence presented comes from Russia, where the urban centers
have the longest history of development without land markets. Apart from
the old historical city centers, almost all of Russian urban growth took
place during the Soviet era 1917]1991. The fact that urban development
took place in a period when land was nationalized and administratively
allocated, rather than sold on an open market, has had a very profound
and negative impact on the internal organization of Russian cities. The
combination of Marxist ideology, national institutions, and domestic eco-
nomic system has produced somewhat different results in each socialist
economy. However, it is appropriate to speak of a ‘‘socialist city’’ whenever
urban development is expected to proceed without land markets and land
use decisions are made administratively. The socialist city experiments
bring out multiple issues of property rights, institutional organization and
governance, agency problems, and urban planning regulations. This paper
focuses on the striking spatial outcomes caused by an administrative-com-
mand system’s inability to take into account even an approximation of the
value of a land site and its opportunity cost as the demand for land
changes over time.
In Soviet Russia, and other socialist cities, administrative decisions
based on ‘‘needs’’ and norms have governed the use and quantity of land
consumed. In contrast, in a market economy, land price differentials
constitute the most important factor determining quantity and location of
land consumed. These divergent principles governing land allocation and
land use could be expected to produce different spatial outcomes. A
quantitative land use analysis of Moscow and St. Petersburg reveals that
there are indeed major differences between Russian cities and market
cities in the distribution and consumption of land. Inspection of land use
maps or satellite photos of other Russian cities shows that these are
common features of the Soviet city, where land officially had no value.
Land use analyses elsewhere confirms that these differences are systemic
features of socialist cities.
A. Absence of Incenti¨ es to Recycle Land in So¨ iet and Other Socialist Cities
As their economy and their population grow, cities expand through the
progressive addition of concentric rings, similar to the growth of trees in
successive seasons. New rings are added to the periphery as the city grows.
Within each ring, land use reflects the combined effects of demography,

technology, and the economy at the time when the ring was developed.
While this organic incremental growth is common to all cities, in a market
city changing land prices exert their pressure simultaneously in all areas of
the city, not just at the periphery. Land prices exert a powerful influence
to recycle already developed land in the inner rings when the type and
intensity of the existing use is too different from the land’s optimum
economic use. Thus, changing land values bring a built-in urban dynamism
as ceaseless variations in land prices put a constant pressure on the
current uses of land and trigger changes to new activities andror densities.
Under the administrative-command economy, the absence of land prices
eliminated the main incentive to redevelop built-up areas by removing site
value considerations from investment decisions since the nationalization of
land in 1917.2 Without price signals to reveal the opportunity cost of land
in alternative uses, it was administratively simpler to respond to current
land demand pressure by developing at the periphery than to redevelop
well-located areas with obsolete land uses. While the city expanded out-
ward, land use in already developed areas remained unchanged and there
was very little land recycling. This process explains the persistence and
uniformity of housing types in successive rings around Moscow, with each
type being usually named according to the period when it was built. Thus,
driving from the center of Moscow, one passes through rings of Stalin,
Khrushchev, and then Brezhnev flats.
The socialist land allocation process leads to land that differs from
market economies. This land use has three features that imply urban
inefficiency on a very large scale, which we will describe in turn. First, the
population density gradient has a perverse slope that rises as one moves
away from the city center. Second, very large industrial areas are occupied
by land-intensive, obsolescent industries in prime areas of the city.3 Third,
households are concentrated in the periphery. Residential densities are
increasing toward the periphery while ‘‘historically’’ low densities are
found in central areas. This pattern tends to increase commuting require-
ments, transport costs, and pollution because it requires higher energy
expenditures. At the same time the effects of this type of urban planning
are not compensated by the provision of better amenities such as larger
housing unit sizes or a better environment that is the normal trade-off for
increasing commuting distance in a market economy w14, 17x.

For a concise history of Soviet urban policies, see w1x, Chap. 1.
Derelict land parcels in good locations are familiar in market industrial cities which have
lost their economic base w7x. The industrial rings of Soviet cities are of a different scale and

B. The Socialist City Compared With the Market City: Moscow ¨ ersus Paris
The comparison of density profiles between Moscow and, for instance,
Paris reveals the structural difference between a socialist and a market city
ŽFig. 1a.. Both metropolitan regions have similar populations of about 9
million. They are strongly radio-concentric, and have similar peak densi-
ties. However, the way densities are distributed geographically is strikingly
different. Paris shows the typical density profile of a market economy city,
with a negati¨ ely sloped gradient. In sharp contrast, Moscow has a posi-
ti¨ ely sloped density gradient. The net density of Moscow at 15 kilometers
from the city center is twice as high as in the center. The density of
Moscow suburbs at 15 kilometers from the center is the same as in the
center of Paris. One should note the drop of density at 6 kilometers from
the center in Moscow. This drop of density is due to the unrecycled
industrial land use producing large inner rings of obsolescent state indus-
tries in the city fabric.
The degree of population dispersion can be quantified by comparing the
median distance to the center per person. Figure 1b shows the cumulative
population distribution curve of Moscow, St. Petersburg, and Paris. The
cumulative curves of Moscow and Paris intersect each other at Kilometer
14, corresponding to a population of about 6 million people. This means
that within a 14 kilometers radius, Moscow and Paris serve the same
population, and as a consequence have the same average density. How-
ever, because of the difference in the density profile between the two
cities, the median distance per person to the center is 7 km for Paris and
10 km for Moscow, meaning a 42% greater dispersion in the case of
The land use and the density profiles of socialist cities like Moscow or
St. Petersburg matters to the Russian urban economy, where three-fourths
of the population lives and over 85% of GDP is produced, for the
following reasons:

1. Average densities being equal, the population of a city with a

positively sloped density profile is more dispersed than in a city with a
negatively sloped profile. This greater dispersion implies higher transport
costs, larger primary infrastructure requirements, higher urban operating
costs, and a greater share of labor time wasted in commuting travel,
worsened by the high share of centrally located jobs. These distortions are
paid for in the form of lower productivity and slower rates of growth.
2. A large amount of floor space has been developed where there is
little demand for it, that is to say in the suburbs with the least accessibility.
As transport subsidies are removed and full wages restored, the demand

FIG. 1. The socialist city compared to the market city: Moscow compared to Paris.
Ža. Comparative population density gradient between Moscow and Paris built-up area.
Žb. Comparative population distribution: Moscow, St. Petersburg, and Paris.

for this type of high density housing far from the city center will drop even
further, and so will land prices. With present commuting constraints,
housing prices could well drop below replacement costs and trigger some
abandonment, unless and until employment is suburbanized.
3. The fully serviced yet underused land close to the city center has a
high opportunity cost.

C. Dynamics of Housing and Residential De¨ elopment in the Socialist City

The administrations producing housing under the command-system re-
spond to different incentives than real estate developers in market cities
and the outcomes differ from those predicted by familiar market models of
location and land use. In a market, housing developers are ¨ alue maximiz-
ers. In a supply-driven command economy, bureaucratic housing builders
are cost minimizers, and serious agency problems arise. Construction
organizations have little interest in final user satisfaction because future
residents are not their direct clients. These construction administrations
are working for other administrations.
In a market economy, private developers compete for the same location.
The winning bid will go to the activity estimated to be most profitable at
that site w1x. Land prices exert their pressure on the whole supply of land,
including the already built land. This process is the key to economically
efficient cities and lies at the core of urban market models. As the city
expands, land prices tend to rise throughout the city. Land prices stay the
highest in the most accessible areas around the city center and along
transport corridors. Such pricing triggers density increases in those areas.
This was Von Thunen’s¨ fundamental insight that was formalized and
developed by Mills w14x and Muth w17x.
The rise in density triggered by relative price changes is due to the
compounded effects of two phenomena. First, floor-to-land area ratios
ŽFAR. increase in central locations because of land recycling through
demolition and reconstruction. Second, the consumption of land space per
job or per resident decreases because the more efficient land users out-bid
less efficient land users who then move to more peripheral locations where
land is cheaper, a process modeled by Alonso w1x. Over time, the interac-
tion of these effects produces a population density profile that is negatively
sloped from the high-population center to the sparsely populated
The administrative-command decision process is unable to duplicate the
efficient structure of the market city because the driving force behind this
market density gradient is not master planning by city planners. The urban
structure reflects primarily the individual decisions of real estate develop-
ers who want to maximize the difference between development costs and

the market value of the final product. As a city grows larger and richer,
recycling land in already built-up areas offers the opportunity to maximize
this difference. This is an incremental and decentralized process but it is
not slow. In advanced industrial economies, about 2 to 5% of all urban
jobs within an urban area relocate every year, depending on economic
growth conditions w11x. In a market economy like the United States,
families also relocate about every 5 years, but 80% of the moves are within
the same urban area.
Under the administrative-command economy, housing construction or-
ganizations are typically integrated into large kombinats. They respond to
non-price incentives and are not efficient at contracting w25, Chap. 8x. A
kombinat’s performance is measured bureaucratically by its ability to
reduce input costs while meeting its quantitative production targets. The
costs have to be minimized while the ¨ alue of the final product is
irrelevant. Land may be free, but it must be allocated by city planners from
what is available. Due to the lack of incentive for land recycling, the supply
of land is thus limited to the new land areas developed at the outer fringe.
As a consequence, kombinats have to meet their assigned production
targets using land that is almost exclusively at the periphery. The density of
the newly built area Ždefined as the unit of floor space divided by unit of
land. will then reflect the ratio between the developed land available and
the amount of floor space to be built to meet the production quota.
As the socialist city expands, the land at the periphery becomes less and
less desirable and more expensive to develop because primary infrastruc-
ture}and metro lines in the case of Moscow and St. Petersburg}has to
be expanded. But in a command economy, housing it entirely supply driven
and, if the supply of serviced land is lagging behind the floor space
production target, the building density in the outer rings will tend to rise.
Over time, Soviet housing kombinats have stacked up more floor space on
the more distant land. The failure to price land is compounded here by
artificially low energy prices, the failure to charge interest on capital costs,
and the absence of life-cycle costing of high rise residential buildings when
building capital cost and operating costs are the separate responsibility of
totally different bureaucracies. The dynamics of such a system does not
tend to produce the resource-preserving, more efficient negative density
gradient of market cities.4

The low socialist cash wage facilitates residential land use distortions w20x. In market
cities, residents value their travel time to work at between one-third and one half of their
hourly wage equivalent w13, Chap. 8x. In socialist cities, the longer commuting time that
results from the distorted land use allocation is masked by the artificially low value that urban
residents place on their time based on their low cash wage. The socialist low wage removes
another incentive toward efficient land use and high urban productivity.

D. Why Rusting Factories in Prime Urban Locations?

The failure to recycle land occupied by old activities of little value today
also affects non-residential land use, with four negative consequences. The
first outcome and the most visible is the presence of old industrial belts
that ring the center of Moscow and St. Petersburg. Developed during the
1930s and 1950s, these belts are still spread between 4 and 8 kilometers
from the city centers. These industrial land use bottlenecks have never
been recycled when their site value would have had a high opportunity cost
in a service oriented market city. Under private ownership, competitive
land pricing, and related property taxation, land values would have been
prohibitively expensive for these state enterprises. The absence of market
signals has resulted in the land use freeze that pushed residential areas
further toward the city periphery than in market cities. Meanwhile, obso-
lete and low density activities have remained as large enclaves on accessi-
ble and well serviced land.5
The absence of land prices and the dominance of heavy industry in
government planning and policies explains the second phenomenon: an
excessive share of industrial land. Moscow and St. Petersburg are charac-
terized by centrally located industrial belts. In addition, the share of
industrial land within these cities is extraordinarily large by market stan-
dards. In Moscow, 31% of the total built-up area is used by industries,
compared with 5% in Paris, 6% in Seoul, and 5% for Hong Kong. In the
belt from 7 to 8 kilometers from the center of Moscow, 67% of land is
used by industries Žsee Fig. 2a.. The extensive use of prime, centrally
located urban land for industries is particularly inefficient in Russia
because of the nature of socialist industrial organization. The ‘‘shortage
economy’’ characteristic of central planning requires most industries to
hold large inventories of materials in order to survive the state input
allocation process w10x. Industrial activities therefore require large areas of
land for warehousing and a heavy transport infrastructure. This supplies-
storage constraint on industrial land use in turn results in a low ratio of
jobs per unit of land. In market cities, such a low job-to-land ratio would
be incompatible with a central location w16x.
Third, the percentage of industrial land as a function of distance from
the city center shows the high concentration of industrial land in the city
center ŽFig. 2a.. The histograms of the geographical distribution of jobs for
Moscow ŽFig. 2b. and Saint Petersburg Žnot shown. also confirm that the
industrial zones do not significantly increase the number of jobs to justify
their prime location so close to the city center. No data were available to
conduct a more detailed analysis of present land use and floor space. But
The land intensive, obsolescent ring of state factories also reflects the very low rate of
technological change in socialist economies w19x.

FIG. 2. Industrial land use and job density patterns. Ža. Moscow}land use. Percentage of
industrial land within built-up area. Žb. Moscow}land use analysis. Job density in built-up

the very high spot prices reached by new office space in Moscow and Saint
Petersburg today are indicative of an acute supply constraint for land and
floor space dedicated to services in the city center, a typical shortage in
socialist economies in transition.
The structure of cities reflects the overall structure of the planned
Soviet economy that was still dominated in the early 1990s by basic
materials and heavy industry rather than manufacturing goods and ser-
vices, a monopolistic transport system that is rail based, and economic
activity that is heavily centralized within metropolitan areas due to a very
low level of freight motorization. A fourth urban land use inefficiency
therefore results from the large share of centrally located industrial land
that is serviced by a dense network of railway lines. These lines have the
effect of further fragmenting access to land and of making land on the
exterior side of the industrial belt expensive to service. Only a small part of
the volume of traffic on the rail network within Moscow Municipal
boundary is used for passenger and commuter traffic; most of it is used for
freight and is surface rail.6 The fragmentation caused by the rail infra-
structure reduces the usability of land adjacent to centrally located indus-
trial areas and increases significantly the cost of the new infrastructure
network needed to service commercial and office uses.


Since 1990, urban laws and constitutional reforms promoting individual
ownership and decisions have been enacted in Russia, as well as other
socialist countries including China w9x. Consistent with Kornai’s insights
w10x, the early urban reforms were initially attempted for narrow bureau-
cratic reasons rather than as part of deliberate market reforms. With the
start of market housing reforms, actual apartment sales transactions be-
tween private parties began to take place in Moscow in 1991. Privatization
and opportunities to trade units have risen dramatically over the period
A preliminary empirical analysis of 2000 transactions carried out in the
first trimester of 1992 and of another group of transactions in the fourth
trimester of the same year provided an important first look at emerging

In 1990, the Soviet economy was 5.6 times more transport intensive than the United
States per dollar of GDP output. It made a distinctly higher use of rail for freight, with 85%
for long-haul versus 38% in the United States. Rail also held a disproportionate share of
passenger movement with 1410 annual passenger-kilometers per capita versus 40 in the
United States w4x. There was a distinct anti-motorization bias in the central planning system.
Between late 1992 and the end of 1993, 35.5% of the state housing stock was privatized in
Moscow and 26% in Russia overall. By the end of 1994, the share of privately owned Moscow
units was expected to reach 55%, in dramatic contrast to a ratio of less than 1% in 1990 w23x.

FIG. 3. Emerging market land price gradients in Moscow and Krakow, Poland.

real estate and land prices. The study analyzed the residuals from an
apartment sales model that uses only building-specific variables based on
resales of privatized apartments. It is possible to construct a land price
gradient by plotting the residual as a function of distance from the center
of the city w5x, as shown in Figure 3. These initial gradient results already
provide critical information. First, the emerging price gradient is down-
ward sloping from the center, as market models predict. Clearly, state
housing organizations had not been providing the housing that households
value the most. Figure 3a shows a land price index decrease from 100 in
the center to 70 at 25 km, with the greatest decreases coming in the first
8 km. Free trade has generated a negative price gradient. The analysis
suggests that, initially, imputed land prices were only about 1.5 times
higher at the center than at 25 km. This is too weak a price differential to
trigger the urban restructuring that Russian cities need. Various short-term
factors can explain this flat price gradient, including the collapsing econ-
omy, ambiguities about land values, and the disequilibrium state of an
emerging market.
The new land price gradient appears to be rotating very rapidly.8 The
analysis of data from the second period of late 1992 in Moscow shows that
The real estate markets of Moscow and St. Petersburg are still too small and volatile for
robust inferences. However, a rapid rotation of the emerging land price gradient would be
consistent with capital theory which predicts that the rate of change of the price of a plot
should be equal to the supply price of capital in the economy less the current rate of return
from rent w24x. Under the high and volatile inflation during the transition in Russia, real
interest rates are also very high while real rent levels remain quite low.

the price gradient had steepened from 100% in the center to 58% at 15 km
from the center. This rotation implies an adjustment of 20% in less than a
year. A similar land price analysis carried out for Krakow, Poland shows
that the central peripheral land price differential has already reached
about 10 to 1 within about 5 years. This ratio is more comparable to
market cities. However, Polish urban reforms, in particular the restoration
of private land ownership rights, have been much more complete than in
Russia. The shape of the price gradient in Russian cities should eventually
stabilize when investors gain certainty about land tenure, the production of
real estate information becomes effective, and economic and political
conditions stabilize.


Urban land markets will raise the efficiency of the socialist city, but
what happens during the transition, especially in Russia? For seven decades,
Soviet planners have made urban investment decisions under four greatly
distorted prices: land had no site value, interest on capital was not
recognized, energy prices were only a small fraction of world prices, and
cash wages bore no relation to the marginal productivity of labor, thereby
distorting the value of time in commuting decisions. The emergence of
markets and the opening to the world economy is leading to major
absolute and relative shifts in prices. In cities, the process could become
disruptive given the interactions between the new negative price gradient
and the positive population density gradient that is the socialist legacy.
What could happen to the land occupied by existing enterprises and to the
pricing of dwelling units?

A. Market Prices and Land Currently Occupied by Enterprises

Urban land reformers are presented with a difficult dilemma. Industrial
enterprises could be asked to pay the market price for the land they
occupy either in the form of higher rents or land use taxes, but most of
them would not be able to afford it and some would have to be declared
bankrupt. Alternatively, if the financially weaker enterprises are given a
reprieve or a waiver on the cost of land they occupy, such relief will
perpetuate the status quo. To improve land use efficiency as rapidly as
possible, it appears best to grant to existing enterprises clear property
rights to the land they now occupy. Then these enterprises will have the
incentive to use these now tradable land assets as equity when planning to
relocate to an appropriate location. The size and value of the land
resources involved in industrial land recycling are very large, and adequate
financial systems to trade these assets are not in place. To reduce the

percentage of industrial land in Moscow from the present 32 to 10%}still

a high ratio by international standards}about 100 square km of already
developed land would be recovered.

B. Impact of the Transition to Markets on Housing

The suburban housing crisis which is looming in the cities of Russia
cannot be attributed to the transition to markets. It is another legacy of
the past. This crisis is the result of the administrative-command which
ignores the actual structure of individual housing demand and lacked the
incentives to self-correct. The emerging price gradient shows that the
economic value of the housing units that were produced did not match the
true economic cost of the resources used. Housing privatization has been
taking place particularly rapidly in Moscow and St. Petersburg, but housing
markets are emerging across Russia and households are gaining ownership
interest in the units they currently occupy. However, units of the housing
stock at different locations within each city have very different implicit
values.9 In these inefficient emerging markets property valuation is unsta-
ble and risky.
Under emerging market prices, a significant share of the housing stock
in the periphery may have a very small discounted present market value,
possibly less than zero. In Moscow the units at risk would likely be those
located in residential areas with densities above the density line for Paris
between kilometer 9 and kilometer 22 ŽFig. 1.. Transition policies of
preferential treatment in terms of transportation subsidies and higher
quality maintenance may ease the burdens on residents. The high travel
accessibility of some parts of the suburban stock around metro stations
together with motorization provides the opportunity for the emergence of
secondary employment centers. Such employment decentralization would
contribute to restoring the economic value of the suburban residential
stock. For this to happen, major and rapid changes in land use regulations
and urban planning practices are necessary. In the absence of such
changes, the transition to markets could result in the abandonment of a
substantial part of the suburban housing stock with high operating and
commuting costs. Market equilibrium might then be reached at lower

The largest share of the housing stock consists of prefabricated, reinforced-concrete,
large-panel, high-rise apartments of 5, 9, 12, 15, and 22 floors. The economic value of such
units}in contrast with their resource cost}based on household preferences is being
revealed by free trades during the transition. The state produced housing stock at the
periphery has four competitive disadvantages compared with units in central locations:
Ž1. high operating and maintenance costs; Ž2. floor areas that do not vary according to
location; Ž3. a quality of amenities including distance to shops and a variety of services that is
lower at the periphery; Ž4. transport costs that were formerly undervalued and are rising with
energy costs and transport subsidies cutbacks.

standards of housing than prior to the transition to market. It could take

an increased crowding of the remaining units and much higher rent-to-in-
come ratios to achieve a balance between the economic value of housing
units and their full capital and operating costs, including the journey to
For 70 years, Russia has used its vast resources to build an urban system
of low efficiency and doubtful sustainability in a market economy open to
world prices. The absence of land markets has impaired the ability to
allocate and recycle urban land. It has had a negative impact on the
internal efficiency, productivity, environmental quality, and livability of the
socialist city. The extent of land use misallocation and the degree of
rigidity encountered in the Russian urban economy suggest that the
socialist city has inordinately high capitalroutput ratios and requires more
resources per unit of output that market cities. Urban land markets are
therefore a very important part of overall economic reforms. In order to
move to markets, the main components of the needed urban reforms are:
clear and tradable property rights; effective and market-oriented informa-
tion systems; a stable taxation system consistent with efficient land use;
and, last but not least, the timely publicity and contestability of urban
planning decisions w3x.
Perhaps the most important lesson of the failed socialist experiment is
that the well-meaning attempt to socialize the collection of the land rent
through public ownership and administrative allocation of land has not
achieved the intended results. The allocation of land by administrative
means in the name of equity and efficiency has demonstrably failed on an
inordinate scale. A broad variety of social goals can be accommodated
under market conditions. Soviet cities remind us that what is most valuable
in urban land market institutions is their ability to signal through prices
how the current and future use of land is valued by individuals and society
}and to reveal how site valuation shifts up or down over time.


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