Lesson 2: Property Rights and the Rule of Law

Download Lesson 2 .doc file – includes all figures, source citations, and appendices

Concepts:

institutions	property rights	rule of law
incentives	capital	asset
collateral

 

National Voluntary Content Standards in Economics

The background materials and student activities in lesson 2 address parts of the following national voluntary content standards and benchmarks in economics.  Students will learn that:

Standard 4:  People respond predictably to positive and negative incentives.

• Acting as consumers, producers, workers, savers, investors, and citizens, people respond to incentives in order to allocate their scarce resources in ways that provide the highest possible returns to them.

Standard 10:  Institutions evolve in market economies to help individuals and groups accomplish their goals.  Banks, labor unions, corporations, legal systems, and not-for-profit organizations are examples of important institutions.  A different kind of institution, clearly defined and well enforced property rights, is essential to a market economy.

• Property rights, contract enforcement, standards for weights and measures, and liability rules affect incentives for people to produce and exchange goods and services.

Standard 15:  Investment in factories, machinery, new technology, and the health, education, and training of people can raise future standards of living.

• Economic growth is a sustained rise in a nation’s production of goods and services.  It results from investments in human and physical capital, research and development, technological change, and improved institutional arrangements and incentives.
• Historically, economic growth has been the primary vehicle for alleviating poverty and raising standards of living.
• The rate of productivity increase in an economy is strongly affected by the incentives that reward successful innovation and investments (in research and development, and in physical and human capital).

Standard 16:  There is an economic role for government to play in a market economy whenever the benefits of a government policy outweigh its costs.  Governments often provide for national defense, address environmental concerns, define and protect property rights, and attempt to make markets more competitive. . . .

• Markets do not allocate resources effectively if (1) property rights are not clearly defined or enforced, (2) externalities (spillover effects) affecting large numbers of people are associated with the production or consumption of a product, or (3) markets are not competitive.
• An important role for government in the economy is to define, establish, and enforce property rights. A property right to a good or service includes the right to exclude others from using the good or service and the right to transfer the ownership or use of the resource to others.

Introduction and Lesson Theme

Throughout history, the road out of poverty has been built by economic growth, and the process continues today.  In evaluating whether capitalism is good for the poor, therefore, the question to be answered is whether the institutions that characterize capitalist economies are effective in promoting economic growth.  The evidence supplied by a survey of the world’s wealthy nations suggests that they do.  The developed economies of the world promote economic growth by incorporating incentives that encourage production, exchange, and creativity.  These economies operate through capitalist institutions:  They establish reliable political systems that ensure the rule of law; they secure property rights; and they open markets to competition.    

As the National Content Standards in Economics remind us (see standard 15, above), the economic growth that raises standards of living results from investment, the foregoing of current consumption in anticipation of future benefit.  Investment is risky, and the importance of clearly defined property rights, secured by the rule of law, in reducing risk and encouraging investment cannot be overstated.  Of the capitalist institutions that offer opportunities for the poor to ascend the economic ladder, secure property rights is one of the most fundamental. Indeed, Hernando de Soto, Peruvian writer and statesman, contends that in developing countries, the lack of secure property rights condemns the world’s poor to a nightmare existence in which hard work brings only more of the same.  He reminds us that commonplace features of ownership that we may even regard as trivial, are, in their absence, matters of overwhelming significance to the poor.    

Imagine a country where nobody can identify who owns what, addresses cannot be easily verified, people cannot be made to pay their debts, resources cannot conveniently be turned into money, ownership cannot be divided into shares, descriptions of assets are not standardized and cannot be easily compared, and the rules that govern property vary from neighborhood to neighborhood or even from street to street.  You have just put yourself into the life of a developing country. . . . (De Soto 15)

In such an atmosphere, investment shrivels, and the probability of increasing output dwindles.  In this lesson, we begin our examination of capitalist institutions by focusing on how property rights affect the ability of the poor to allocate their labor and how they shape incentives for investment in human and physical capital.  Case studies from India and Latin America illustrate how policies that target institutions may be more successful in reducing poverty than policies that target people.  

Key Points

1.  Overview:

• This background outline examines the first of the institutional components of capitalism: property rights.  Investment in physical and human capital is essential for growth, and property rights secured by rule of law form the institutional “rules of the game” that shape incentives for investment.
• In the accompanying classroom activity, “You’re the Economist,” students analyze actual data from a research project on the effect of establishing clear and enforceable titles to land holdings in the Amazon state of Pará, Brazil.

2. Key Terms and Concepts:

• Institutions are the codes of conduct and established behaviors upon which the life of a community is built.  They are the formal and informal “rules of the game” that shape incentives and outline expected and acceptable forms of behavior in social interactions.
• Incentives are the rewards or punishments that shape people’s choices about their behavior.
• Property rights are the formal and informal arrangements that govern the ownership, use, and transfer of assets.
  • Formal property rights are encoded into law, statute, ordinance, or contract.
    • In most developed nations, this function is performed by legislative bodies.  The executive branch may also participate in the definition of property rights when, for example, the legislature delegates regulatory functions.
    • Title is the legal evidence of the right of possession or control over property.
    • Informal property rights may be based on custom, tradition or precedent.
• Incentives are shaped by institutions.
• Property rights have 3 critical features in law:
  • i)        The conditions of use of an asset are specified. These may include
    • a) any restrictions or regulations, both formal and/or informal, imposed from outside the specification agreement.
      • For example, formal licensing requirements, hunting seasons, and hunting areas limit use by the owners of rifles.
      • Or, informal norms may tighten or loosen the constraints imposed by formal rules. For example, neighbors, who have the legal right to exclude others from their property, may allow children to “trespass” during play.
    • b) the conditions of receiving income from the asset;
    • c) the characteristics of the property-holding arrangement – private, collective, or common; and
    • d) the conditions under which an owner may exclude others from the use of the asset.
      • (This characteristic of property rights is commonly referred to as exclusivity.)
  • ii)      The conditions of transferability are specified, describing how property (assets) may be sold, given away, bequeathed or otherwise transferred by the property owner to someone else.
    • There may be both formal and informal limitations on the ability to transfer assets.  For example:
      • Formal:  The sale and resale of firearms, fireworks, cigarettes, alcohol and other goods and services may face legal restrictions of time, place, and licensing.
      • Informal:  In the U.S. it is customary, but not legally required, that parents leave their property to their children.
  • iii)    The security of possession is established, telling how the property rights will be enforced.
    • Property rights are meaningful only if they can be enforced.
    • Enforcement of property rights is both a private and a public function:
      • Governments typically provide title, or evidence of property rights to assets, and create and maintain the enforcement mechanisms for titles.
        • Judicial institutions adjudicate disputes over property rights and the executive branch exercises the police power of the state to carry out decisions of the judiciary
      • Private enforcement includes measures taken by owners – such as installing locks or occupying their property – to defend their rights.
        • Private enforcement may also include third-party mechanisms such as social ostracism, a method that tends to be effective only in societies with strong, widely-accepted beliefs and practices.
• Investment is the process of increasing the stock of capital, which increases productivity and future production.  Investment means foregoing current consumption in anticipation of future benefits.
  • Capital includes those man-made resources –  buildings, machines, tools, technology, etc. – used to produce goods and services.

3.  Property rights are human rights.

• It is, of course, nonsense to suppose that “property” has rights.  The term “property right” is shorthand for the right of humans to freely use and transfer their possessions, including themselves.
• In suggesting that property rights and human rights are separable, the rhetorical bombast, “People, not property!” ignores the importance of recognizing individuals’ rights of ownership to themselves and to their labor – a right that was not recognized throughout most of human history.
  • Until the mid-18^th century and the incorporation of the Enlightenment ideals of individual liberty, natural rights, and the rule of law into the western societies undergoing the Industrial Revolution, ownership of property was the exception rather than the rule.  It was a right of the wealthy who could privately afford the coercive power necessary to assert and enforce ownership.
  • The granting of the property right to self is the fundamental right of human liberty from which all other property rights are derived.
  • When humans gained the right to claim the fruits of their labor, they gained the ability to change their own standard of living.  In that sense, property rights must be regarded as the essential human right.
• An equally important 18^th century development was that property rights were not only recognized, but were secured.  As western European governments gained a monopoly on coercion and institutionalized the rule of law, the competitive violence that undermined secure property rights was dramatically reduced.
  • Because the cost to individuals of enforcing their own property rights is high, this development conferred its greatest benefits on the poor.
    • Enforcement of property rights is characterized by huge economies of scale – which the rich can achieve and the poor cannot.
      • For example, some wealthy people choose to live in gated, security-patrolled communities, paying privately for enforcement of their property rights.  The poor, unable to afford private protection services, depend on public enforcement.
      • Where government cannot effectively maintain a monopoly on coercion, competitive violence makes property rights insecure. For example, the violence of the American drug trade, with its high murder and property crime rates, burdens the inner-city poor, not the wealthy.

 Case 1:  Without Enforcement, Property Rights for the Poor Are Meaningless

In Lesson 1, we identified India as one of the nations responsible for the significant decline in absolute poverty that began in the last decades of the 20^th century. However, even the World Bank, the source of the data on declining world poverty, notes that India still has a long way to go, and that anti-poverty programs there have not continued to demonstrate the stunning successes they had in the 1980s and early ‘90s.

The sad fact is that over one-quarter of the Indian population is still severely impoverished. Improvements in standard of living in many of India’s urban centers stand in stark contrast to persistent deprivation in some of the largest and most rural states. This uneven pattern of success in reducing poverty provides the opportunity to examine the larger context in which capitalist institutions operate, and helps us resist the temptation to oversimplify or to suggest that solutions are obvious or easy to implement.

India, for example, has long been a democracy with a firmly entrenched rule of law and boasts an extended history of formal recognition of property rights. However, it also has a 1500 year-old cultural institution – the caste system – that frequently undermines property rights institutions by subverting the rule of law that would enforce them.

160 million Indians, 15% of the population, are Untouchables, the lowly and intensely reviled outsiders of the Hindu caste system. There are middle class and educated Untouchables and from 1997-2002 an Untouchable, K.R. Narayanan, was India’s president, but these are noted exceptions. They call themselves “Dalits,” the oppressed, and they make up 90% of India’s impoverished and 95% of her illiterate population.

Formal property rights institutions exist in India – even for the Dalits. The Indian constitution (1950) officially banned untouchability and the 1989 Prevention of Atrocities Act made it illegal to “. . . parade people naked through the streets, force them to eat feces, take away their land, foul their water, interfere with their right to vote, and burn down their homes.” (Source:Hillary Mayell. “India’s ‘Untouchables’ Face Violence, Discrimination.” National Geographic News, June 2, 2003 http://news.nationalgeographic.com/news/2003/06/0602_030602_untouchables.html).

Informally, however, the Dalits – particularly those in rural areas – know that the lack of enforcement renders their property rights tenuous at best and frustratingly meaningless at worst. The all-too-common stories of people like Girdharilal Maurya are a poignant reminder that property rights are human rights.

“. . . [H]e is a leatherworker, and Hindu law says that working with animal skins makes him unclean. . . . And his unseemly prosperity is a sin. Who does this Untouchable think he is, buying a small plot of land outside the village . . . [and] demanding to use the new village well[?] … He got what Untouchables deserve.

“One night while Maurya was away in a nearby city, eight men from the higher Rajput caste . . . broke his fences, stole his tractor, beat his wife and daughter, and burned down his house. . . .

“Girdharilal Maurya took his family and fled . . . . It took two years for him to feel safe enough to return – and then only because human rights lawyers took up his case, affording him a thin shield of protection.

‘I see them almost every day,’ Maurya now says of his attackers. ‘They roam around freely.’ . . . The court case against his attackers drags on . . . [and] Maurya confesses that he is still scared . . . . ‘The government refuses to address problems like this . . . because they say the caste system legally does not exist. Well, look around you. People treat animals better than us. This is not natural. We’re only asking for human rights.’”

Source: O’Neill, Tom. “Untouchable.” National Geographic June, 2003: 6-31.

• Defending and enforcing property rights is crucial.  If the rule of law is effective, property ownership acts as an incentive for investment and a catalyst for the creation of capital and wealth.
• Property rights can be established and secured in three ways:
  • i)        Rule of physical force (also called anarchy)
    • Anarchy, the condition of competitive violence, has, to a greater or lesser extent, been the norm through most of human history, rendering it virtually impossible for the poor to own property.
      • In anarchy, the source of property rights is coercion by physical force.  Access to property is restricted to those with the physical ability to take and defend it, or with the wealth to pay others to do so.
      • In conditions of anarchy, property rights are enforced only by vigilance or personal policing.  There is no effective enforcement by the state.
      • Peaceful transfer of property rights is difficult and uncommon.  It is limited by disorder, by lack of a consistent enforcement, and by the absence of formal and recognized proof of ownership.
  • ii)      Rule of men
    • Under the rule of men, formal law may exist, but the hierarchy of power determines if, when, and how it is applied.
      • The National Content Standards in Civics and Government identifies the rule of men – “the ability of government officials and others to govern by their personal whim or desire” – to be in direct opposition to the rule of law (156).
        • Those who rule may gain positions of power through a variety of means – inheritance, usurpation, conquest, or even election – but they maintain power through political connections and military might.
    • Property rights are tenuous, subject to the good will of those who govern.
      • Settlement of disputes over property is frequently arbitrary and is often tinged with political favoritism.
      • Enforcement is arbitrary and lacks consistency.
      • Transfer of assets and/or property rights is restricted by the need to obtain permission from those “in charge.”
    • The wealthy may be able to bear the costs of influencing the hierarchy of power, but the poor are not.
  • iii)    Rule of Law
    • The National Standards for Civics and Government define the rule of law as an essential component of limited government, whereby a society “. . . is governed according to widely known and accepted rules followed not only by the governed but also by those in authority” (47).
      • The standards identify the benefits of the rule of law:
        • It “establishes limits on both those who govern and the governed”
        • It “makes possible a system of ordered liberty that protects the basic rights of citizens”; an
        • It “promotes the common good” (116).
    • The rule of law means that even the poor have secure property rights and can therefore use their property to improve their well-being.

4.  Secure property rights in market economies create incentives that promote growth and the accompanying improvements in material well-being.  (Review Lesson 1 outline for the importance of economic growth as they key to reducing absolute poverty.)

• Property rights-holders face strong incentives to preserve the value of their assets.
  • Simply stated, people take better care of things they own because they bear the opportunity cost if they do not
  • Owners consider the future value of their assets as well as the present value because they know that the future value is theirs.  Ownership encourages them to protect the asset so they can secure the continuing return.
    • This phenomenon can be seen by comparing the care and maintenance of similar houses by an owner-occupant and by a renter.  Even if the renter is not deliberately abusive, he is much less likely to be as conscientious as the owner
    • In a similar vein, while automobile owners check the oil and rotate the tires on their cars, it hard to imagine rental customers doing so
• Owners with full property rights also face strong incentives to improve their assets through investment.
  • Secure property rights create incentives for owners to invest in capital and capital improvements, and this process results in the creation of more wealth.
    • Secure property rights encourage investment because owners are confident that any future value created will be theirs.  Unclear ownership rights – such as commonly exist under anarchy or the rule of men – reduce the benefits of making investments and improvements
    • This phenomenon can be seen in comparing the incentives facing an owner and a non-owner regarding improvements to an asset.
      • A renter has little incentive to bear the expense of adding a deck to the house he lives in.  He would enjoy having the deck, but knows that when his lease expires, he has no claim on the value he created.  A homeowner, on the other hand, considers the increased future resale value of the house as well as the present enjoyment of the deck, and therefore faces a greater incentive to bear the current costs of building it.

5.  Secure property rights can also increase the likelihood of investment by providing collateral for debt.

• Debt need not be, as is often assumed, a drag on the economy and a trap for the poor.  Instead, it can be an instrument of economic growth.
  • Debt allows people to use both their past income (savings) and their future income to acquire human and physical capital.  When people take on debt to make current expenditures, they contract to repay the debt with future income.  Debt allows them to acquire more capital than they could purchase using only their past income.
    • As people acquire more capital, their productivity and their income increase.
  • Collateral, commonly in the form of assets (property) to which the borrower has secure property rights, is offered as a surety that reduces the risk taken by banks and other lenders. Because collateral is necessary for the assumption of debt, securing rights to property can boost economic growth.
    • By depriving people of collateral, insecure property rights reduce investment in capital, businesses, or other wealth-creating assets.
    • The poor are, arguably, the least able to bear the costs of securing their property rights in order to gain access to capital. Unable to invest, their standard of living is therefore constrained by their current income and their ability to save
  • People with low incomes are often the biggest beneficiaries of collateral-secured debt.  The rich are much more able than the poor to pay cash for assets, while the poor depend on the ability to borrow.
    • Consider how home mortgages extend the opportunity for home ownership to those with low incomes.  Mortgages are debts allowing a current expenditure to be repaid with future income.  Because property rights are secured by rule of law, a lender is willing to accept the home itself as collateral. Without this arrangement, home ownership would be much reduced, restricted to the wealthy
    • Consider how small business loans extend opportunities for mom-and-pop businesses.  Without borrowing, those with low incomes are unlikely to accumulate the savings necessary to lease or purchase start-up capital goods and supplies.
  • The results of economic field research in the Brazilian Amazon have been supported by similar findings in Ghana:  that the level of investment activity is linked to the security of property rights among poor landholders.
    • (The results of the Brazilian study are the basis for the student activity for this lesson, entitled “You’re the Economist.”  Results of the field investigation are presented in detail in the case study which begins on p. 19 of Appendix 1 to this lesson in the attached .doc.  For additional information on the Amazon study, see the sources listed under “Alston,” on p. 28.
    • Similar investigations in Ghana in the 1990s by London School of Economics professor Tim Besley and more recently by Christopher Udry and Marcus Goldstein for the Yale University Economic Growth Center also found a relationship between investment and property rights:
      • “We examine the impact of ambiguous and contested land rights on investment and productivity in agricultural (sic) in Akwapim, Ghana. We show that individuals who hold powerful positions in a local political hierarchy have more secure tenure rights, and that as a consequence they invest more in land fertility and have substantially higher output. The intensity of investments on different plots cultivated by a given individual correspond to that individual’s security of tenure over those specific plots . . .” (Udry and Goldstein).
  • In both Ghana and Brazil, landholders told researchers that the reason they wanted title was to gain access to credit markets. However, it is important to note that while these studies confirm the link between title and increased investment, they do not establish that title, in and of itself, always improves access to debt.
    • For example, some studies of a Peruvian titling experiment found that property titling projects was not associated with an increase in business credit and that mortgage lending did not increase until encouraged by government subsidies for low-income mortgages. (Cockburn, 2000, Field and Torero 2002, cited in Mitchell, 2005) However, the role of title in increasing investment can still be asserted, as even the subsidized loans depended on the existence of title-secured collateral
  • The role of collateral in fostering investment and productivity growth underscores the importance of the rule of law.
    • Under the rule of physical force (anarchy), uncertainty and instability surrounding ownership of assets renders property largely useless as collateral, severely constraining the growth of capital
    • Under the rule of men, the capricious nature of property rights undermines the value of assets as collateral.

 Case 2:  What If You Couldn’t Go into Debt ?

Wander into Mtandire, a shanty town near Lilongwe, the capital of Malawi. The roads are unpaved, bumpy and wet. Maize sprouts in every backyard. Cars are so rare that children wave excitedly as you drive by, and chickens fearlessly block your path. A slum in one of the poorest countries in the world’s poorest continent: you would expect the people who live there to be very poor indeed. You certainly would not expect to find a large store of potential [emphasis added] wealth in Mtandire. Look harder.   Grace and John Tarera slaughter goats for a living. Demand is brisk: Malawians adore goat stew. The Tareras want to expand their business to meet this demand, but they lack capital. Mrs. Tarera thinks they need about 20,000 kwacha ($250). This may not sound much, but in Malawi, where the average annual income is only about $200, it can take years to raise such a sum.

But wait: the house where the Tareras live is worth at least 25,000 kwacha. They bought the land five years ago and threw up a brick bungalow, fussily furnished and painted a satisfying shade of light blue. Surely they could borrow using the house as security? No, because they cannot prove they own it.

The Tareras’ house, like all the others in Mtandire, is built on ‘customary’ land. That is, the plot’s previous owners had no formal title to it. The land was simply part of a field that their family had cultivated for generations.”

“Now, Think Small.” The Economist. 13 Sept. 2001.

6.  Secure property rights contribute to economic growth by releasing resources from protective activities to productive activities.

• If government does not define and protect private property, property owners must do so themselves.
  • Using time and resources for protection imposes a heavy opportunity cost, a cost more easily borne by the wealthy than by the poor.
    • Comparisons of murder, theft, and burglary rates per capita in poor neighborhoods and wealthier ones, even in developed countries, provides empirical evidence that property rights are much less secure and less well-enforced for the poor.
    • In developing countries the disproportionate burden of protection means that the poor give up time and energy they would otherwise dedicate to providing basic necessities.
• Where governments define and secure formal property rights, the poor can spend less of their time enforcing their claims.  The result is that they spend more time in activities that contribute to rising standards of living.
  • Erica Field’s 2002 analysis of the results of a titling project on the well-being of 2,750 Peruvian households in 8 cities found that with title, hours of work for poor households increased and the probability of child labor fell significantly.
    • Field explained the effect by positing that without title, householders were more likely to secure ownership with the presence of an adult and, therefore, to send children to work to replace the income of that adult
    • She posited that having title gave families the assurance that they could both prove their ownership and expect the police to uphold their property rights and evict squatters, so that the adult who had stayed home could enter the work force, and children might be sent to school instead of to work. (Field, 2002)
  • This area of economic inquiry is relatively new, and the research continues – into such questions as what other conditions must be present before titling improves access to credit for the poor, and what other conditions contribute to household decisions about whether to send children to school or to work.  There is, however, a growing body of support for the contention that securing property rights does foster increased investment activity, of many types, among poor property rights holders.   

7.  The recent economic history of India offers an example of the importance of institutional changes in property rights and the rule of law in encouraging economic growth.  The following description of the Indian economy serves as a background to Case Study 3, a description of how the Bhoomi project has successfully targeted archaic, corrupt, and costly titling practices.

• As noted in Lesson 1, India has achieved remarkable economic progress since 1980, with growth in GDP per capita running as high as 9.8% during the first decade of the 21^st century.  The World Bank notes in its “Fiscal Year ‘04 India Country Brief”:
  • •  “In recent decades, India has significantly improved the well-being of its people. Since the 1970s, India’s economic growth rate has risen, poverty has declined, and social indicators have improved. The average life expectancy at birth has increased from 49 years to the current 63 years. The total fertility rate for India’s population – which exceeds 1 billion people – has been lowered from six children per woman to three since the 1960s. Similarly, since 1950, there was a dramatic reduction in infant mortality from 146 to the current average of 68 per 1,000 live births.
    • In the early 1950s, nearly half of India’s population was living in poverty. Poverty incidence began to decline steadily in the mid-1970s. The 1990s witnessed high levels of poverty reduction and important achievements in literacy. . . .
    • Structural reforms and stabilization programs during the 1990s have contributed to India’s sustainable economic growth. . . . Services, the least regulated sector in the economy, continues to be the strongest performer, while manufacturing, the most regulated sector, is the weakest
    • Poverty reduction remains India’s most compelling challenge despite good progress in the 1990s. With a per capita gross national income (GNI) of $460 in 2001, there is a broad consensus that poverty in India has fallen in the past decade.” (World Bank, 2003
  • India’s growth is most clearly evident in its burgeoning information technology sector – labeled one of the world’s “most dynamic” by the World Bank.  IT generated revenues of approximately $8 billion in 2000, providing thousands of jobs to India’s urban population.
• Equally important in terms of our current topic is that India, the world’s largest democracy, has a well-established rule of law. However, one of the challenges in India’s continuing struggle to reduce poverty is that of expanding the rule of law to secure and enforce the property rights of the poorest classes.
  • Despite its recent successes, poverty is still a haunting reality in India.  Down from 50% in 1950, to just over 24% today (2012), the percentage of people in India who live in extreme poverty still translates into a large number: over 200 million people.  Most – 75% – live in rural areas
  • Currently, the World Bank has initiated in India several rural poverty relief programs based on recognition of the importance of property rights.  Case Study 3, below, describes one such program, designed to reform the inefficiency and corruption that poor Indian landholders encounter when trying to gain or verify title to their land or when transferring land (and title) from one owner to another.

Case 3:  Land Title Reforms Part of India’s Successful Attack on Poverty

Fostering the conditions for growth in the rural economy . . . must be considered central to an effective strategy for poverty reduction in India.”World Bank, India Poverty Data Paper, 2004 

Project:  Bhoomi:  Online Delivery of Land Titles in Karnataka, India

India’s impressive progress in reducing absolute poverty has been sporadic with respect to location.  Increasingly, poverty is concentrated in rural areas in some of India’s largest states.

In many of these states, a corrupt and inefficient infrastructure undermines the security of property rights.  This, in turn, reduces incentives for investment and slows wealth-producing voluntary exchange in markets.

The Bhoomi project in the state of Karnataka was designed to computerize 20 million records of land ownership by 6.7 million farmers.

Problem:  To get a bank loan, a farmer had to obtain a copy of his RTC (Record of Rights, Tenancy, and Crops).  Before the Bhoomi project, RTCs were available only from the Village Accountant:

“In the manual system, land records were maintained by 9,000 Village Accountants, each serving a cluster of 3-4 villages. . . . Requests to alter land records (upon sale or inheritance of a land parcel) had to be filed with the Village Accountant. However, for various reasons the Village Accountant could afford to ignore these “mutation” requests. Upon receiving a request, the Village Accountant is required to issue notices to the interested parties and also paste the notice at the village office. Often neither of these actions was carried out, and no record of the notices was maintained. Notices were rarely sent through post.

An update to the land records was to be carried out by a Revenue Inspector, if no objections were received within a 30-day period. In practice, however, it could take 1-2 years for the records to be updated.

Land owners find it difficult to access the Village Accountant, as his duties entail traveling. The time taken by Village Accountants to provide RTCs has ranged from 3 to 30 days depending upon the importance of the record for the farmer and the size of the bribe. A typical bribe for a certificate could range from Rs.100 to Rs.2000.* If some details were to be written in an ambiguous fashion, out of selfish motives, the bribe could go up to Rs.10,000. Land records in the custody of Village Accountant were not open for public scrutiny.”   (Source: http://www1.worldbank.org/publicsector/egov/bhoomi_cs.htm  accessed 2-05)

• *100 Rs (Rupees) = about $2.20 and 2000 Rs = about $45.00.  While this amount seems small, it is important to remember that $45 is about 1/10 of India’s 2001 per capita GDP of $460, meaning that for most poor farmers, it is a significant expense.

Project:  Set up computerized “Bhoomi Centers” to reduce costs by increasing the efficiency of titling and title transfer and by eliminating opportunities for corruption.  Using a computerized kiosk, farmers can update information and get printed copies of their RTCs for about Rs.15.

“Today [2001], a computerized land record kiosk (Bhoomi centre) is operational in 140 of the 177 taluks in Karnataka. . . . A second computer screen faces the clients to enable them to see the transaction being performed. Copies can be obtained for any land parcel in the taluk by providing the name of the owner or the plot number. A Village Accountant is available full-time at these kiosks.”    (Source: http://www1.worldbank.org/publicsector/egov/bhoomi_cs.htm accessed 2-05)

Outcomes:

• One way that markets increase output is by facilitating the transfer of resources, like land, to their most productive uses. 
  • The computerized land record system generates reports on land ownership according to a variety of variables including size, type of soil, and crop record.  Such reports are valuable not only for government and policy personnel, but also in the land markets that are a key component in reducing rural poverty.
• One of the major costs of securing loans (getting copies of RTCs) has been reduced, and plans to provide banks and other financial lending institutions electronic access to the land record database should provide additional incentive for farmers to invest in increased production.
  • Besides a drastic reduction in bribery, the Bhoomi centers experienced an immediate 50% increase in the number of requests for change of title.  In the past, only the most persistent, or those able to pay the bribes completed the documentation of sales, trades, or inheritance of land.  The opening of the Bhoomi centers precipitated a flood of requests as the population updated changes that they had previously not documented.  Newly titled owners were thus able to transfer land and/or use the land for collateral.
• A similar project to computerize land registration offices in the state of Andhra Pradesh also has reduced the cost to farmers of securing title and honest valuations of their property.

“Land registration offices throughout Andhra Pradesh now operate computerized counters to help citizens to complete registration requirements within an hour instead of several days, as was necessary under the earlier system. The lack of transparency in property valuation under the old system resulted in a flourishing business of brokers and middlemen, leading to corruption.” (http://www1.worldbank.org/publicsector/egov/cardcs.htm  accessed 2-05)

(2012 update:  See website for Bhoomi project:  http://www.bhoomi.karnataka.gov.in/)

8.  Summary:

• Successful anti-poverty efforts in developing countries like Peru and India validate predictions based on observing the history of western development since the Industrial Revolution:  human rights to property foster economic growth.
  • To be effective stimulants of economic growth, property rights must exist within a rule of law that offers reasonable expectations of stability and enforcement
  • Secure property rights to self and possessions release resources from protective to productive endeavors
  • Rights to private property promote economic growth by providing incentives to invest in future production, and facilitate such investment by acting as collateral for the assumption of debt.
  • The poor are burdened more heavily than the rich by the costs associated with ill-defined or insecure property rights, and stand to gain greatly from property rights reforms.

Conclusion

Property rights and the rule of law are the essential foundation for economic progress and reductions in poverty.  From the natural right of individuals to the fruits of their own labor to the mundane expectation that the security of people’s homes, businesses, and possessions will be enforced, the capitalist institution of private property creates conditions conducive to economic growth and generates incentives that make growth likely to occur.

Throughout developing countries, lack of secure property rights founded on the rule of law denies the poor access to wealth-generating capital, robbing them of initiative and hope.  The life-giving importance of this institution is summed up in Hernando de Soto’s description of Cairo, a description that researchers are finding applies to much of the impoverished world:

When you step out the door of the Nile Hilton, what you are leaving behind . . . is the world of legally enforceable transactions on property rights.  Mortgages and accountable addresses to generate additional wealth are unavailable even to those people in Cairo who would probably strike you as quite rich.  Outside Cairo, some of the poorest of the poor live in a district of old tombs called “the city of the dead.”  But almost all of Cairo is a city of the dead – of dead capital, of assets that cannot be used to their fullest.  The institutions that give life to capital . . . do not exist here. (De Soto 16)

(See .doc download linked at top of screen for full lesson outline, including figures, source list, Appendix 1:  “Investigating the Relationship Between Property Rights and Economic Growth – Economists Study the the Amazonian Frontier of Brazil,” and Appendix 2:  “Selected Readings on Property Rights and Poverty”.)

Classroom Activities You’re the Economist (click for demo video and download) The Rule of Law Download (.doc) Australia and Argentina – A Study in Contrast Download (.doc)

Lectures  (streaming flash video, ppt with voice-over, from Is Capitalism Good for the Poor? Online for Teachers) Property Rights and the Rule of Law (13 min.) Property Rights, Debt, and Capital Formation (11 min.)