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Of Property and Poverty
Land Titling is a good thing, but it does not in itself create capitalism
The Economist, August 26th to September 1st 2006
Almost exactly 20 years ago, in November 1986, a Peruvian economist
published an influential book. In The Other Path, Hernando de Soto
issued a clarion call for popular capitalism. He saw in his country's
informal economy of backstreet workshops and squatter settlements an "insurrection"
against the unfair legal system of a corporate state. Its failings were of
commission - absurd and costly regulations that discouraged businesses
from seeking legal registration; and of omission - the poor lacked legal
title to their homes or land, and therefore could not use them as
collateral to obtain credit. Millions of Peruvians were condemned to
unproductive lives of insecurity and poverty. In a later work, The
Mystery of Capital, de Soto used this approach to explain the broader
failure of capitalism to bring about development across many parts of the
world.
Nobody had ever disputed that property rights matter for investment: you
are more likely to put money in something if you are sure you own it. De
Soto's insight - that title frees up credit, turning dead capital into
live capital - was widely hailed (by The Economist and others). It focused
welcome attention on the need to cut the red tape that often strangles
business in developing countries as diverse as Egypt and the Philippines
to undertake large-scale property-titling campaigns. De Soto argues that
it is above all the lack of title that explains why poor people have been
unable to turn their assets into capital.
It turns out however, that securing title doesn't necessarily lead to this
piece of alchemy. Recent studies in Argentina and Peru have found that
title indeed encourages the poor to invest in improving their houses. They
also spend longer working outside the house because they need to devote
less time to seeing off intruders; and they are less likely to put their
children to work. For all these reasons, property titles matter. But, the
studies found, poor people with title are no more likely to obtain a loan
from a commercial bank.
There are two sets of reasons for this. Informal entrepreneurs will tell
you that their property is too valuable to put at risk as collateral. By
renting a room or putting up relatives, the home may provide income or
services, as well as shelter. Quite apart from the risk of a failing
business, the poor face the threat of natural disaster or abrupt political
change, for example, which makes them reluctant to take on debt. On the
other hand, commercial banks in many developing countries are slow to lend
to the poor. They worry that judges will fail to seize the homes of poor
defaulters. It has often been left to non-profit institutions to provide
micro-credit.
Some of this can be fixed through, for example, more competition among
banks or the broader reform of legal systems (which de Soto has also
campaigned for and is now helping the UN promote through a new
commission). The wider point is that, although land titling is certainly a
good thing, it does not provide a single theory of development, as many
Sotistas have in the past implied. Poverty, alas, is itself a barrier
to risk-taking and enterprise.
Capitalism is the only system that can lift billions out of poverty. But
no recipe can achieve this overnight. History suggests that as well as
property rights and a decent legal system, it requires sound economic
policies, an educated workforce and political arrangements capable of
regulating conflicts and minimising the risk to investment. Then again, if
development were easy, everyone would have already developed.
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The Mystery of capital deepens
Giving land titles to the poor is no silver bullet
The Economist, August 26th to September 1st 2006
In 1981 about 1,800 families occupied a stretch of wasteland in the
municipality of Quilmes on the outskirts of Buenos Aires. The squatters
lacked legal title to their new place in the sun, but they did not lack
for tenacity. They outlasted Argentina' military junta, which tried
several times to evict them, and in 1984, after the return of democracy,
the provincial government passed a law expropriating the land from its
rightful owners so that the squatters could enjoy formal ownership of it.
This is a tale that would warm the heart of Hernando de Soto, a Peruvian
economist, celebrated by The Economist and others for his book The
Mystery of Capital (2000), and for his vigorous efforts to extend
secure property rights to the poor. In his book, de Soto argues that the
poor have more assets - shacks, stalls, plots - than you might think. But
because they lack title to these assets, they cannot pass them on, divide
them up, or offer them as collateral for a loan to expand their makeshift
businesses and fully express their entrepreneurial energies. Their assets
remain embalmed as "dead capital".
But the victory of the Buenos Aires squatters was only partial. Eight of
the former landowners accepted the government's compensation in 1986, one
did not relent until 1998, and the remaining four are still contesting it
in Argentina' Dickensian courts. As a result, several hundred families now
own their land, but their neighbours still squat uneasily on theirs.
This is unfortunate for the squatters, but a rare opportunity for
economists to test the power of property rights. Sebastian Galiani of San
Andres University and Ernesto Schargrodsky of Torcuato di Tella University
believe the case provides a natural experiment (1).
The families lucky enough to win title can be compared with a ready-made
control group: the otherwise identical families that did not. This makes
it possible for the study to distinguish cause and effects; to isolate the
impact of title from all the other confounding factors.
The results of the experiment are mixed. Secure land rights do encourage
the poor to build their homes. But even in a relatively advanced country
such as Argentina, title is not enough in itself to animate the dead
capital interred in land and property.
The landowning families invested more in their homes, which had noticeably
better walls and roofs. They were also more likely to lay concrete
pavements. But the titled households enjoyed no better access to bank
loans, credit cards or bank accounts, and only 40 percent of them managed
to acquire a mortgage.
Disappointing, but not surprising, Galiani and Schargrodsky argue.
Argentine banks tend to lend only to workers with wages and a stable job.
Titled or not, the former squatters still fell well below the official
poverty line. The cost of making and enforcing a loan contract might
exceed the modest sums they were able to borrow. Others say the experiment
might be too recent to deliver a conclusive verdict. The government did
not allow the newly entitled families to transfer their land for a decade,
thus by the time they answered the economist's survey in 2003, they had
enjoyed full rights to their property for seven years not 17.
The credit market has also been slow to respond to a much bigger
urban-titling movement in Peru, carried out by the government with the
help of de Soto's think-tank, the Institute of Liberty and Democracy (ILD).
The campaign had awarded over 1.5 million titles by July 2006. But it did
not do them all at once. Erica Field of Harvard University and Maximo
Torero, of the International Food Policy Research Institute, have compared
536 households served before March 2000 with another 1,180 households that
had yet to be reached by that date, on the assumption that little else
distinguished the two groups (2)
.
The authors show that households with title were more likely to secure a
loan from the government-backed Materials Bank, which buys bricks, mortar
and other materials for building and improving homes. They also paid lower
interest rates on loans from private sources, including commercial banks
and micro-lenders like Mibanco. But their odds of getting a private loan
in the first place did not improve. More than a third could not get a loan
or would not take one, for fear of losing their property.
Paradoxically, this fear may not be sharp enough, the authors argue. There
are, they point out, two sides to collateral: enforcing the bank's right
to repossess an asset is as important as recognising the owner's right to
possess it. But titling programmes, they write, "unavoidably signal to
lenders that a government prioritises housing for the poor, and hence is
more likely to side with borrowers in enforcing credit contracts".
The ILD has always pushed for broader changes in the legal system so that
it can handle the kind of collateral the poor provide, at a cost that
makes it worthwhile to do so. Credit also appears to have grown quite
quickly in Peru after 2000, the year of the survey used by Field and
Torero. The World Bank's own studies show that mortgages worth $136m were
approved in 2003, compared with $66m three years earlier. Likewise, formal
credit increased from $249m to $367m in the same period, although the Bank
notes the difficulty in showing why this happened.
The two cases, however neat, cannot settle the big questions de Soto
raises. Nonetheless, experiments of this kind, which aspire to the rigour
of a clinical trail, are the height of fashion in scholarly circles. These
papers subject one of the most appealing ideas in development to one of
the most eye-catching investigative techniques in the field. It is only a
shame that the second may dampen enthusiasm for the first.
© The Economist
www.economist.com
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Footnotes:
(1) Property Rights for
the Poor. Available at:
www.tinyurl.com/ndw69
(2) Do Property Titles
Increase Credit Access Among the Urban Poor? Available at
www.tinyurl.com/mp3yx
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