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Thursday, 30 April 2009

Reforming property rights..

An insightful article on the the relationship between property rights and economic development and the institutional challenges involved :

Reforming property rights , Tim Besley and Maitreesh Ghatak, Vox EU, Commentary :

Whether they thought private property was a sine qua non of a free society or organised theft, classical economists, from Adam Smith (1776) to Karl Marx (1891), accorded a central position to the role of property rights or the “relations of production” in the process of economic development. However, it is only recently that mainstream modern economics has come around to this point of view. The cheerful view of economists about the efficiency of competitive markets assumes that property rights are well-defined and well-enforced. Given this presumption, it is no wonder that, for a long time, economists focused on savings and capital accumulation as the key to economic development.

But in a world where property titles are ill-defined, where legal disputes take decades to settle, where poor farmers or small business owners face eviction threats, it is difficult to imagine how they can take a long-run view – saving, investing, and climbing their way out of poverty. Security of property rights therefore is of utmost importance.

Property rights and economic exchange 

The term property right refers to an owner's right to use a good or asset for consumption and/or income generation (referred to as "use rights"). It can also include the right to transfer it to another party, in the form of a sale, gift or bequest ("transfer rights"). A property right also typically conveys the right to contract with other parties by renting, pledging, or mortgaging a good or asset, or by allowing other parties to use it, for example, in an employment relationship.

By property rights, economists typically refer to private property rights, a key feature of which is being able legally to exclude others from using a good or asset. This affects resource allocation by shaping the way that individuals choose to carry out productive activities involving the use of the good or asset, undertake investments that maintain or enhance its value, and also, to trade or lease the asset for other uses.

A recent influential advocate of the importance of the link between property rights and economic efficiency is the Peruvian economist Hernando de Soto. According to him, what the poor lack is easy access to the property mechanisms that could legally fix the economic potential of their assets so that they could be used to produce, secure, or guarantee greater value in the market. Therefore, even when they have some assets, they are “dead” capital.

Economists have emphasised four main aspects of how property rights affect economic activity.

  • The first is expropriation risk – insecure property rights imply that individuals may fail to realise the fruits of their investment and efforts.
  • Second, insecure property rights lead to costs that individuals have to incur to defend their property, which, from the economic point of view, is unproductive.
  • The third is failure to facilitate gains from trade – a productive economy requires that assets be used by those who can do so most productively, and improvements in property rights facilitate this. In other words, they enable an asset's mobility as a factor of production (e.g., via a rental market).
  • The fourth is the use of property in supporting other transactions. Modern market economies rely on collateral to support a variety of financial market transactions, and improving property rights may increase productivity by enhancing such possibilities.

Secure property rights and economic development

It is possible to take a bird's eye view of the quality of property rights using cross-country data. To illustrate, we take two measures of property rights regimes using standard sources.

The first is a measure of the security of property rights from the International Country Risk Guide. It is measured on a scale between 0 and 10. A higher score corresponds to better protection of property rights. Figure 1 shows that this score is positively correlated with income per capita. In other words, countries with a higher risk of expropriation have lower levels of income per capita.

The second measure comes from the World Bank’s Doing Business proect. We focus on a measure of the ease with which individuals can register their property, specifically the country's rank on this measure for 172 countries. This is a purely administrative dimension to property rights and follows the logic of the de Soto argument. Figure 2 shows that this too is strongly negatively correlated with income per capita in 2000. Thus, this more administrative dimension of property rights is weaker in low-income countries (these figures are from Besley and Ghatak 2009).

Together these figures illustrate the central proposition that improving property rights is associated with economic development. However, they say nothing about the direction of causation. It is possible that economic development induces a switch to improved property rights, as opposed to property rights facilitating economic development.

The economics literature now has a plethora of micro-economic studies that suggest that securing private property affects economic decisions in the way that the theory suggests. For example, improving squatters’ rights in Peru seems to have reduced the need to use guards according to Erica Field (2007). Her work on Peru with Maximo Torrero also suggests that property titles are associated with increase in approval rates on public sector loans by as much as 12% when titles are requested by lenders (Field and Torrero 2006).

In a related study, Sebastian Galiani and Ernesto Schargrodsky (2005) have looked at the collateral effect of property rights reform. They look at a group of squatters who occupied an area of wasteland in the outskirts of Buenos Aires more than 20 years ago from the time of the study. An expropriation law was subsequently passed, ordering the transfer of the land from the original owners to the state in exchange for a monetary compensation, with the purpose of entitling it to the squatters. They find that it improved housing investment, among other things.

Between anarchy and predation

But the creation of private property rights cannot be taken for granted. The emergence of effective private property rights has had to steer a course between the twin problems of anarchy and predation. In a state of anarchy, the main problem is dispersed coercive power, as now characterises warlord societies. The obvious answer is to create a monopoly protector as suggested, centuries ago, by Thomas Hobbes. But who is to protect the citizens against Leviathan? This is the problem of predation. All societies have had to grapple with this problem at one point in their history and many continue to do so.

There are a number of ways of dealing with these issues, most notably by building political institutions that create effective checks and balances and establish the rule of law in a way that is binding on policy makers. But these require more than the stroke of a pen. A lot rests on the reputation of government that needs to recognise its long-run interest ahead of short-term gains from expropriating property. History is replete with examples where governments have expropriated their citizens. A case in point is modern day Zimbabwe, where Robert Mugabe seized the property of farmers to distribute to his political supporters.

Policymakers who are aware of the problem of predation can seek innovative ways of creating secure property. One possibility is to tolerate some amount of secrecy and anonymity in private economic decisions vis-à-vis the government, which allow individuals to protect themselves against expropriation. Another is to use more decentralised policymaking and competition between governments, what is known as market preserving federalism. Both means have arguably been used to secure property rights in China to some degree.

Laws and law enforcement

But not all state failure stems from the breakdown in law and order or from predatory states. Many governments have simply failed to invest sufficient in basic legal institutions and property registration institutions. The main priority is then to spend more in such areas to promote more secure property rights. But political economy issues are likely to be important here. To the extent that the economically powerful can benefit from insecure property rights, there may be limited political will for property rights reform. This is likely to prevail when the absence of formal property rights encourages the poor to seek refuge in networks where there is market power. The classic case is of a moneylender to whom the poor are beholden when property rights prevent their assets being used as collateral elsewhere.

In all cases, it is clear that the solutions have to be, to some degree, country-specific. The mantra of property rights reform too easily degenerates into an empty slogan. Also, property rights improvement is not a panacea especially when other aspects of an economy perform badly. But identifying the appropriate institutionalised solution is only a first step. How the political process is able to prevent the potential losers from blocking the reform is likely to be the crucial element.


Field, Eirca (2007) “Entitled to Work: Urban Property Rights and the Labor Supply in Peru”, Quarterly Journal of Economics, November 2007
Field, Erica and Maximo Torrero (2006) “
Do Property Titles Increase Credit Access Among the Urban Poor? Evidence from a Nationwide Titling Program”, Working Paper, Harvard University, 2006
Galiani, Sebastian and Ernesto Schargrodsky (2005) “
Property Rights for the Poor: Effects of Land Titling”, Working Paper, University of Washington, St. Louis, 200Marx, Karl (1867) Das Kapital, Verlag von Otto Meissner, Hamburg
Ghatak, Maitreesh and Tim Besley (2009)
Property Rights and Economic Development, CEPR Discussion Paper 7243
Hobbes, Thomas (1660)
The Leviathan.
Smith, Adam (1776)
An Inquiry into the Nature and Causes of the Wealth of Nations, W. Strahan and T. Cadell, London.


  1. Hi Cho!
    Interesting article.
    Both Besley and Ghatak were my teachers at LSE.
    I would also suggest as reference Douglass North's vast body of work on the subject.

  2. Cho,

    I was just musing on the concept of property rights, and ensuring that they both create security of tenure for the farmer/investor, while also guarding against land speculation, which would keep land out of productive use for extended periods of time.

    What if the state created security of usufruct - land use, instead of ownership?

    For instance, ownership of the land would rest with the traditional authority, cannot be passed on to anyone. The farmer/entrepreneur would get a 2 year probation period, during which he would have to finish specific improvements or preparations to the land. Unless there are violations, the farmer/entrepreneur then gets an automatic 3 year extension to create a profitable business or farm, which is then automatically extended to 25 years, etc.

    This would both protect the entrepreneur against political risk and the whims of the chief, as well as corruption. On the other hand, it would guard against land speculation, and ensure the actual use of the land as intended.

    This right of land use is already in place in communal areas, and legislation would only enshrine an existing practice into law, by giving the recipient much greater legal protection.

  3. Koluki,

    Good to hear from you!

    de Soto's mystery of capital referenced in the article is dl import read!

  4. MrK,

    Isn't the issue about how we see land?

    If the issue is access to finance, then such communal arrangements would not guarantee tenure security and access to credit finance.

    If all we want is people to use land instead of it being idle...then certainly it would work..

    But Zambia has PLENTY of land....I saw a recent statistic about how much land RUSSIANS own in was significant..can't locate the present..

  5. Cho,

    Isn't the issue about how we see land?

    If the issue is access to finance, then such communal arrangements would not guarantee tenure security and access to credit finance.

    If all we want is people to use land instead of it being idle...then certainly it would work..

    I think the issue of credit should be separate from land ownership. The use of land as collateral is a very dubious practice in my opinion, because it links the ownership of that land to the success of the entrepreneur in a way that leaves the bank owning the land.

    90% of startups fail (mainly through lack of capitalisation) and the user and the traditional authority would lose the land to the bank - and those are not good odds. It would be a recipe for turning banks into landowners. It would become a source of insecurity and manipulation, with banks calling in loans and selling the land to other business people, or even the state (or both, considering how many politicians are also in business).

    But Zambia has PLENTY of land....I saw a recent statistic about how much land RUSSIANS own in was significant..can't locate the present..

    Which should be a case in point. It should not be up to politicians to give away state assets for personal gain.

    The land is there, but who has access to it? Apparently Russians, Libyans and the Chinese.

    I would much rather see an independent state set up a banking system for low interest loans to productive businesses, than have commercial banks lend with land as collateral.

  6. There is an interesting little book by Ambreena Manji, "The Politics Of Land Reform In Africa", in which she sets out two different interpretations of land reform.

    The one, which tries to get land into the hands of as many people, is a about land redistribution.

    The other, favored by the IMF and World Bank, puts foreign investors as the main beneficiaries of land reform, is about land tenure reform or land law reform.

    She also points out that as land reform often has to go through NGOs and donors, the attitude is 'does your problem conform to my solution'? In other words, this land reform does not happen from the bottom up, but from the donors down.

    She also goes deeply into the case of land law reform in Tanzania, and the lack of impact of the women's movement on the drafting of land law in Uganda.

    I am pretty dismayed at the neoliberal orientation of the so-called Labour Party (Neo-Labourals), and their emphasis on the rights of investors over the interests of ordinary people and farmers. Manji quotes from The Blair Commission Report (page 64):

    small entrepreneurs suffer most from a poor investment climate. Access to credit and other financial services is important to growth and investment, yet few small businesses and individuals are able to get the access they need. This partly reflects the access to property rights for the majority of poor people: formal legal title to homes and land are often required as collateral to obtain commercial credit. More generally, effectively enforced property rights are important for reducing investment costs and risks.44Two observations can be made concerning this passage. The first is that it confirms that the small family farm should be viewed as a small business, while suggesting that collateral secured on land might also be employed for non-farm enterprises, an approach adopted and strongly advocated by the World Bank. Second, the passage displays an overriding concern with improved investment climates, enforceable rights and controlled investment costs and risks.

    These demands are a far cry from the calls for security of tenure and access to land of Africa's rural constituents. They are directed instead at the commercial lenders who have been entrusted with the development of formal rural credit markets. Economic growth, not poverty reduction, is the true objective of the Blair Commission
    And we have all seen how it is possible to stimulate the economy, without reducing poverty, let alone do so on a long term basis.

    Although it asserts that poverty reduction is to be achieved through economic growth, it wilfully ignores the risks for the poor in credit markets. It is silent on repossession, on exposure to risk in the face of uncertain and fluctuating agricultural markets or of the increased family labour that may have to be commandeered to pay back commercial loans. The role of law is also clearly stated: alongside 'strengthening the assets of the poor' to enable them 'to participate more effectively in markets', the report confirms that the 'economic, legal and governance environments shape the opportunities open to them'.45

  7. From:

    The Politics Of Land Reform in Africa
    Ambreena Manji

    The role of lawyers

    In his writing on the mystery of capital, Hernando de Soto has observed:
    although entrepreneurs and ordinary people are the builders of capital and of capitalism, it is the lawyers who fix property concepts in tangible representative form and define those concepts into statutes. The security of ownership, the accountability of owners and the enforceability of contracts must ultimately be concretised in procedures and rules drafted by lawyers. It is the legal profession that perfects all the artifacts of formal property.2

    McAuslin has pointed out that an additional explanation of the law's prominence is to be found in the embrace by donors of the language of good governance. Thus:

    the twin emphasis on donors, led by the world bank, on 'good governance' and the market economy as the keys to social and economic regeneration in Africa are increasingly seen as necessitating a greater reliance on legal reforms and a legal culture similar to those operating in Western, market oriented economies; conscious moves to adapt legal and judicial systems to that end are thus increasingly part of aid programmes.6

    Manji continues:

    However, what remains by this analysis, with its emphasis on the motivations of those who seek legal solutions to development problems, is the story of those who promote legal solutions. If law has come to be seen as central to the resolution of Africa's land problems, this is in no small part due to the interventions and activities of lawyers, and more specifically legal consultants, themselves.

    This is an issue that has tended to be overlooked in discussions of land reform to date with the result that neither scholars of land reform nor those concerned with the field of law and development have adequately explained the curious translation of the issue of land reform into one of law reform.

    The important role of agency in the land reform project has received little attention with the consequence that the strenuous efforts of key individuals in the land reform process to ensure that legal solutions are sought to the problems of land relations have gone unnoticed, as if there was an enevitability about the law's intervention in the field. In contrast to this approach, I would argue that it is precisely through the entrepreneurial activities of legal professionals that the law has come to have a central place in land reform.


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