1. Property Rights and Economic Development
The Law and Development Institute
Diploma / Certificate in Law and Development Program
Lecture 1
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I. Introduction
1. Property rights
- Rights to possess, control, and transfer property (including both personal and real property)
- Recognized by formal law or by custom and convention
- Ownership right: right to possess, control and transfer property (subject to other competing rights such as lien or lease)
- Possessory right: right to possession (lien, lease)
- Usage right: easement
- Conference of property rights: e.g. titling through land registration
- c.f. Contractual right
- Property rights: basis for private business transactions
- Formal property rights: essential for economic development?
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I. Introduction (cont.)
2. Classic view
- Formal private property rights (FPPR): legally-recognized rights in property held by private parties, including individuals and companies: essential for economic development
- Adam Smith: security of property rights against expropriation by state or other fellow citizens essential for economic growth
- The position reinforced by New Institutional Economics (Ronald Coase, Harold Demsetz, and Douglans North): property rights crucial to economic performance
- Douglas North and Robert Thomas: the rise of the western world owed to the creation and development of private property ownership
- Fall of communism in the 1990s: lack of private property ownership led to the economic inefficiency and welfare loss
- Earlier broad approaches of NIE (e.g. property rights protected by social norms, rather than law) converted into narrow focus on FPPRs in development projects: FPPRs – essential for economic growth and development
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I. Introduction (cont.)
3. Inconsistencies in reality
- Observations mixed: some observations indicating positive correlations between FPPR and economic development v. others without strong link between FPPR and economic development: Besley, Frank Upham
- Cause for the inconsistencies: institutional issues, divergent social and cultural norms, effectiveness of state
- misplaced FPPR may cause disruption to economic development: Guangdong Xu, Frank Upham
- Robust enforcement of legal norms, including the existing property rights, may inhibit socio-economic changes and the creation of net social benefit that may be necessary to achieve economic development (Frank Upham) (1)
1. Existing property rights need to be destroyed to promote economic growth: The villagers’ rights to enter the common were destroyed by the 16th century enclosure of English fields to allow monoculture and sheep pasturage. The right to clean water was one of many property rights destroyed to allow industrialization in 19th century America (e.g. mining); the economic and social status of Japanese landlords was eliminated by land reform in order to build postwar democracy; and the communal right to a village’s agricultural production was destroyed with the individualization of agriculture in late 20th century China.
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5. II. Economies of Private Property Right
- State of open access: reduction of the finite available resources with economic consequences to others, no incentive for an individual to use the resource optimally
- Private property right: right holder captures all the benefits and costs of holder’s decision on property – incentive to use resources efficiently – leads to economic development
- Transferability: moves resources from the less efficient to the more efficient (1) c.f. massive transaction cost (Coase), resistance against socially beneficial changes by elites
- FPPR enforceable by state – better enforcement
- FPPR are more efficient (by avoiding using resources to self- defense or invasion and lowers social cost of enforcement (by developing impersonal court system): increase social peace, predictability, consistency, economies of scale – more standardized enforcement extended within national border
- FPPR promotes business on an extended basis
- FPPR encourages asset-based investment through lowering risks of insecurity and/or expropriation
- FPPR facilitates the development of financial markets and transfer of properties essential for economic transactions
When property rights are clear and secure, the transaction costs involved in identifying the real owner of the property and making and enforcing a lease or sale contract are reduced to the extent that property markets can function effectively in transferring the property from less efficient uses to more efficient uses.
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III. Property Rights and Economic Performance: Evidence of Inconsistencies
- law and property rights have played a variety of roles: sometimes slowing the process of change, sometimes legitimating it, sometimes becoming the very agent of change, and sometimes playing no role at all (Frank Upham). - Cases of lower productivity observed in the use of common land: common ownership leading to resource degradation and resource depletion; widely perceived low productivity of firms under communist regimes of Eastern Europe and Russia (1) (2) - Challenges: Tobel, Switzerland – use of communal land for cattle grazing – maintaining productivity for centuries and overgrazing prevented by tight control; privatization of land leading to destruction of native vegitation in India, land reform in Japan granting FPPR to a single family farmer did not increase agricultural productivity - Security of property rights: reduce man hours to protect property and increase productivity - Property rights and investments: enhanced land tenure security improve investments in Asia and Latin America but mixed in Africa (3)
Arab tribesmen in the Libyan province of Tripolitania used communal land for low-valued uses, such as growing occasional crops of barley and grazing privately owned sheep and goats, rather than for more profitable activities, such as almond-tree planting.
In U.S. labor productivity was higher in privately leased oyster grounds than in government-regulated open-access grounds.
In a sample of 39 Indian reservations to estimate the effect of land tenure on agricultural productivity. Per-acre value of agricultural output is 85–90% lower on tribal-trust land than on fee-simple land and 30–40% lower on individual-trust land than on fee-simple land.
Test for changes in efficiency in the British Columbia halibut fishery following privatization of property rights, and privatization leads not only to efficient input usage but also to a substantial producer surplus
Cases of improvements: in Thailand, farmland security leading to greater capital formation, higher capital/land ratios, and higher levels of land improvement; in China, land tenure security significantly affects land-specific investment, specifically investment in soil quality (organic fertilizer). In India, soil and water conservation investment is significantly lower on leased land in two of the study villages and lower on plots that are subject to sales restrictions in one village; In Vietnam, the land law of 1993, which gave households the power to exchange, transfer, lease, inherit, and mortgage their land-use rights, is found to lead to a significant increase in the share of total area devoted to multi-year crops and to some increase in irrigation investment; In Brazil, ownership security playing an important role in promoting investment in land improvements. Land titling and registration are also found to be associated with increased investments in Guatemala and Nicaragua. Tenure security is demonstrated to influence residential investment in urban squatter neighborhoods in Peru and Argentina.
Cases of mixed results: empirical evidence from Kenya, Uganda, and Zimbabwe provide little support that registration, through improved tenure security, has increased investment in agriculture. Cross-sectional evidence from Ghana, Kenya, and Rwanda in 1987–1988 shows rather unclear relationship between land rights (the level of individualization of land rights, especially the extent of transfer or alienation
rights) and land improvements. The relative insignificance of the effects of land ownership on investments is further supported by findings
from Uganda and Madagascar. By contrast, in a very influential paper, Besley uses data from two regions of Ghana (Wassa and Anloga) and finds that land improvements in Wassa (in the form of tree planting) are significantly related to land rights, whereas land improvements in Anloga (including drainage and continuous fertilizing) have no such relationship. Similarly, tenure insecurity incites farmers to divert scarce manure resources to more secure fields (owned fields rather than borrowed
fields). Furthermore, in Malawi, tenure security promotes long-term investments and boost agricultural production.
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III. Property Rights and Economic Performance: Evidence of Inconsistencies
- Credit effects of FPPR: mixed – positive impact in terms of increasing approval rates in Thailand, Peru (9-10% increase in approval rates), and Argentina but no significant relationship found in some African case studies (rural areas).
- Land titling increased property value in Philippines, Jakarta, Thailand (Increased transactions), Brazil, Nicaragua, and Ecuador v. land transactions not significantly affected by land registrations in Africa (only 16% market transactions) and in Ho Chi Minh City (half the property unregistered)
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8. IV. Possible Causes for the Failure of FPPR
1. Absence of key factors
- Necessity of key markets: credit market, labor market, insurance market
- Increased access to credit market important: success in Thailand; c.f. Africa: problems associated with government-dominant financial market (1)
- Where informal lending dominant – formal land title has negligible value on credit access
- Ineffective judicial system and administrative system to enforce FPPR and maintain valid registration: FPPR has limited value in enhancing economic transactions.
2. Costs of FPPR
- Cost of property registration system (2)
- Problems of discrepancy between actual rights and registrations
- Problems of multiple registration authorities (Nicaragua and Bolivia) and over-centralization (Guatemala)
- Alienation of customary rights and resulting injustice
1. more than 90% of households in several European countries have a bank account, less than half of households in many developing
countries have one, and in many African countries fewer than one in five households has an account. In addition, small firms report lack of financing to be one of the most important business constraints they face: for example, in Africa fewer than 20% of small firms use external financing. In that case, the impact of land title or registration on credit-related increases in capital investment will be reduced substantially.
2. In the World Bank’s 2008 “Doing Business” report, the mean cost associated with property registration in 173 countries amounted to 6.6% of the property’s value, and the mean waiting time was 81 days. The cost of registering property is highly bimodal; whereas it is 2% or less of property values in 32 cases, it amounts to 5 or 10% and over 10% of property values in 92 and 41 cases, respectively.79 In some extreme cases, such as Syria, the cost of registering property is about 28.05% of property value, while in Kiribati it takes 523 days to register property
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9. IV. Possible Causes for the Failure of FPPR (continued)
3. Inconsistency between property law and customary land system
- Customary land ownership dominant: in Africa formal land system only covers 2 – 10% of the total land area
- Customary land tenure flexible and secure enough to draw land- based investment: no increased secure under formal title
- Imposition of FPPR at the expense of informal, communal land arrangement: results in the loss of important social welfare
- Difficulty associated with the multiplicity of claims and rights (“group rights”) onto land where primary land use is agricultural (“web of interests”): failure to register all these rights may harm legitimate claimants such as women, youth, and seasonal users: FPPR becoming a source of social conflict rather than a facilitator of economic development
- Land registration can be manipulated by social elites to deprive vulnerable land users of customary land rights: cause for social unrest and waste of resources
- Reality: presence of plural land systems (FPPR and customary tenure system, e.g. Kenya): “combining the worst of all worlds” (Frank Upham)
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10. IV. Possible Causes for the Failure of FPPR (continued)
4. Failed state
- State function essential to recognize and protect FPPR properly
- Prevalence of “failed states”: 2010 Failed States Index compiled by Foreign Policy magazine and the Fund of Peace, nearly 21% of the world’s countries (37 countries) are “failing states.” Another 51% of the world’s countries (91 countries) are states in imminent danger of failing.
- Lack of effective state institutions such as a reliable and inexpensive land titling system, a competent and uncorrupt judiciary, and a functional police force
- State becoming a vehicle to misuse FPPR in favor of social elites at the expense of the vulnerable or not enforce FPPR to the benefit of the socially powerful
- State agents offering privatized service for the state service: protection of property rights creating high transaction costs
- Problems of neo-patrimonial system (i.e. rulers in alliance with local strongman in Africa) (1)
- Preconditions for the function of FPPR: a consistent legal and institutional framework, broad access to information, and competent and impartial agencies
1. For example, in Northwest Cameroon, land conflicts have increased because local elites seek to acquire large tracts of land under individual title, a process facilitated by the 1974 land ordinance and by the links between local elites and national politics. In Kenya, a critical contributing factor to the growing social inequality in access to land is the capacity of the patron–client chains that link the national elite to the local level to gain control over resources that offer opportunities for accumulation. In Nigeria, political and civil elites benefit disproportionately from the 1978 Land Use Decree by manipulating the allocation authorities. Finally, in Somalia, the tragic civil strife is rooted in an earlier process of land occupation and expropriation by the state and its governing elites; the Land Law of 1975 enables those with privileged access to the mechanisms of registration to obtain titles to land that local farmers had used for generations.
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11. IV. Alternative to FPPR for Economic Development?
- Land reforms in Japan and Korea after World War II: grant of FPPR to single family farmers – promoted social change and democracy (and rural support for the government) but no increase in agricultural productivity - Case of China: rapid economic development of Chine in absence of full protection of property rights until the Property Law of 2007, weak judicial enforcement of property rights against powerful parties – vibrant, market-based economic growth without FPPR - Chinese markets relying on a range of informal as well as formal norms and institutions, rather than law - Cambodia: another success story of economic development: annually over 7% GDP growth on average since the mid-90s - Privatization of land in 1989 (1), failed land registration law of 1992 (2) - Cambodian Land Law of 2001: formalizing pre-existing de facto possession and prohibiting subsequent informal possession: computerized registry developed with satellite technology accessible by anyone: slow progress - from 2002 to April 2010 systematic land registration projects so far achieved only 1.3 million systematic registration certificates out of an estimated set of 10 million land parcels – high economic growth without FPPR backed by land registration
1. Instruction on the Implementation of Land Use and Management Policy dated on June 3, 1989 required the state to grant ownership rights over residential land of no more than 2,000 square meters, and possession rights over agricultural land of no more than 5 hectares.
The instruction required all landholders to apply for land possession and landownership within a period of 6 months and another extended period of 6 months - until June 1990, approximately 3.7 million land applications accounting for 70 percent of the total land parcels were applied.
Land Law: penalty provisions such as the confiscation of property which was not registered after 5 years from the date when the 1992 Land Law came into effect never enforced. Sporadic registration certificates – only 12 percent of land applications as of 2000.
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12. V. Protection of Property Rights and Public Use
1. Expropriation
- Internationally-recognized sovereign state right
- Requirements: a public objective (e.g. economic development); non-discriminatory; fair compensation
- Increased need for expropriation in the earlier stages of economic development for the need to build infrastructure (roads, dams, etc.)
- Human rights issues, environmental issues, compensation issues.
2. Foreign Investment and Expropriation
- Nationalization of foreign investments
- Requirements apply
- Fair compensation: effective compensation based on the market value? v. out-of-pocket cost approach?
- Currency issue
- Stipulation in bilateral investment treaties
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VI. Final Points
1. There are positive economies of FPPR, but FPPR alone does not facilitate economic development
2. Existence of well-functioning credit & insurance markets, institutional strengths, and good governance essential for FPPR contributing to economic development
3. Most developing countries adopting FPPR, but reality of plural land systems
4. Cost of establishing and maintaining the existing formal land system must be carefully assessed: cost may outweigh the benefits of FPPR
5. There has to be judicial and administrative flexibility to recognize customary land system and protect populations against attempts by social elites to misuse the formal system
6. Gradual consolidation, case-by-case approach necessary
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