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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.
 

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
 

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