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Sunday, 20 September 2009

When property rights don't help..

An interesting conclusion from a new paper that examines inequality in developing countries :

We find that property rights significantly increase the level of income inequality in the vast majority of developing countries, especially in low-democracy political environments. Suggesting that institutions in these economies tend to serve the interests of a minority. The inequality-increasing effect may be counterbalanced only in systems which are able to develop sufficiently inclusive political institutions. As the democratisation process unfolds, this effect should be reduced, albeit to a limited extent, implying that more political equality modifies the functioning of institutions so to ease economic inequality. The role of democracy seems to be an ‘indirect’ one and is channelled only through the property rights system. In fact, we find no evidence that democracy affects inequality by moderating the effect of financial development, education and asset inequality. Our results seem to support the view that, in the last decades, institutional arrangements in most developing countries have worked according to the interests of dominant groups, thereby not granting opportunities to lower classes.
This is essentially the story of Zambia since 1991 thanks to the IMF / World Bank led reforms and their preoccupation with "private property". Economic liberalisation in the absence genuine transfer of power to the people through fundamental democratic reforms has proved Zambia's undoing. Successive governments have continued to concentrate power in the hands of the few and provided key state resources to domestic and foreign friends. The latter are particularly crucial as key financiers of elections.

Instead of a true level playing field that Zambians prayed for in 1991, what they got was a new system founded on a false liberalism that, to borrow from Van de Walle, "allowed corrupt elites to mobilize political support via clientelism and introduced patrimonial logic in the state bureaucracy, leading to the destruction of the capacity of the state and creating an environment of unpredictability…".

The point is not that life was rosy prior to 1991, but that Zambia moved from one extreme of poor governance founded on socialism to another founded on false liberalism. What the country need was economic and political reforms going hand in hand. It is not that economic liberalism was wrong, but that political liberalisation was missing. In the absence of such liberalisation, Zambia should have opted for a much slower pace of economic liberalism. The two must go hand in hand.


  1. Economic development depends heavily on property rights. So to discourage property rights is to discourage development.

    One cannot enable entrepreneurship without endangering equality.
    Equality and poverty go together.

    Moreover, as Talleyrand pointed out, limiting inequality involves limiting freedom.

  2. It is not that economic liberalism was wrong, but that political liberalisation was missing.

    Economic liberalism is wrong, because any economy and markets need firm rules against concentration of wealth and elite formation. Or lose it's democracy.

    You need government regulation to create and maintain competition, or you just move from state monopolies to private sector monopolies.

    The problem in Zambia is that the main economic game is now in the hands of foreign nationals, and transnational corporations, which owe no loyalty to the country or people of Zambia.

    There needs to be a constitutional separation of not only the powers of state (legislative, judiciary and exexutive), but of the state (civil service, parastatals), the government (cabinet, ministers) and the party in government (UNIP, MMD - so far).

    In other words, not only is economic development needed, so is institutional development.

  3. Anonymous,

    Economic development depends heavily on property rights. So to discourage property rights is to discourage development.

    The point is not that "property rights" are evil. The point is that a policy that promotes "property rights" before governance and institutional reform would lead to perverse outcomes. This is a point about correct ordering of policy reforms.

    "Equality and poverty go together."

    I assume you are stuck in the Kaznet's mode.

    Several papers point to a stable and sometimes positive relationship between equality and growth...

    E.g :

    Also you seem ignore well established argument about the negative long term economic effects of inequality..

    I comment on these here:

    The other complex dimension relates to the definition of equality. Would be curious to know what definition you are using to be so definitive.

    Moreover, as Talleyrand pointed out, limiting inequality involves limiting freedom.

    Whose freedom?

  4. MrK,

    I think this is where definitions confuse pictures!

    I use the phrase "economic liberalism" to denote where markets play a greater role in allocating resources.

    In short effective regulation is critical to making markets work.

  5. Cho,

    I presumed that with economic liberalism you meant laissez faire economics - which is what we have seen over the last decades of neoliberalism and the pursuit of FDI.

    Congratulations on your interview with The Post:

    Windfall tax is easier to implement – Mukanga
    Written by Chiwoyu Sinyangwe and Fridah Zinyama

    Also, Malawi is getting more independent and telling the IMF and it's prescriptions to take a hike. Maybe this is the benefit of having an economist for president, instead of the usual lawyers. They first told them to sell off the national food reserve to balance the government's debt, with disastrous results. Now they want them to devalue the currency, to 'promote exports'.

    Bingu lashes at IMF, declares Kwacha will not devalue

  6. Neoliberal economics is a contradiction in terms because it is not economics.

    Economics as properly taught recognition the limitation of markets due to many failures in the system.

    Also new theory is teaching us a lot about the fallacy of "rationalism". People don't always act as we think they do.

    On Bingu...

    Great piece. I read it and I have now blogged it...

    On the Post:

    Thanks. We need to start bringing Zambians along the debate. We are working on establishing an organisation on the ground.


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