Monday, June 20, 2005

PROPERTY AND POVERTY

For my dissertation, I have been researching the left libertarians. Left libertarians ought not to be confused with socialist anarchists. Unlike these anarchists, left libertarians believe in the legitimacy of some sort of state and they are fairly at ease with markets. It would be inaccurate, but much simpler to refer to them as Georgists. They agree with other libertarians on the issue of self-ownership, and viewing all rights as property rights; but they disagree with libertarians on the appropriation of land and hold that land or other initially unowned natural resources cannot justly be appropriated unless adequate compensation be paid to all those thereby rendered unable to use or appropriate that land themselves. This usually takes the form of some land value tax.

I shall discuss this issue some other time, but the thing that struck me as odd about their proposal was its practical implication. The left libertarians are uneasy with the idea of appropriation of natural resources, and yet the most pressing problem facing the world's poor is that they have not been able to establish private property in resources. For instance, the Peruvian economist Hernando de Soto, in an experiment to find out how hard life was for a migrant from the countryside to get started in the city of Lima decided to try, with his research team, to set up a fully legal garment workshop in Lima. His team then then started filling out the forms, standing in queues and making bus trips to get all the certification they needed to run, according to the full letter of the law, a small business in Peru. After spending six hours a day at it, they finally managed to register the business... 289 days later. Even though the business was arranged to only operate with one worker, it cost $1,231 to get legal registration, thirty-0ne times the monthly minimum wage. To get the legal authorisation required to build a house on state-owned land took six years and eleven months, and required 207 administrative steps in 52 government offices. Obtaining legal title for that piece of land took 728 steps. The research team also found that if a private bus, jitney or taxi driver wanted to obtain official recognition of his route he faced twenty-six months of red tape.

But this is not just limited to Peru. In the Philippines, if a person had built a dwelling on either state- or privately owned land, to purchase it legally he would have to form an association with his neighbours to qualify for a state housing finance program. The entire process could take 168 steps, involving 53 public and private agencies and take 13 to 15 years. And that is assuming that the state housing finance program has enough funds. If the dwelling is in an area still designated as "agricultural," then the homesteader will have to overcome the further obstacles of turning the land into urban use. This involves 45 more bureaucratic steps, with 13 new entities, and adds another 2 years to the process!

The pattern is echoed throughout Africa, and in much of the developing world. In Kenya, for instance, people do not own the land they farm, and so have no interest in ensuring its capital value, which they cannot own. They cannot use it as collateral to develop their businesses, and so are kept at a small, undercapitalized level.

The same applies in Russia. Russia, since the fall of communism, has become a target for anti-capitalists. They point to the growing poverty and disparities, corruption in its governments, the Mafia style business undertakings. What they don't point to are the absence of property rights in the Russian economy, and how few business operations are actually owned. Russia's economy did not develop during the nineteen-ninties precisely because the Russian government, despite the fall of communism, has still not developed a uniform system of private property rights in land ownership. Land is generally held to be owned by the government and is simply lent or leased to the farmers. This means that it is the government, and not, the farmers that owns the capital value of the land. Given this, there is simply no point in the farmer investing in the land, and its sale or its mortgage is utterly unthinkable. In short, a) he can't use the land to secure capital; b) he has no incentive to invest any other capital in the land, and b) he can't sell the land. As Johann Norberg notes, in In Defense of Global Capitalism, "Fewer than 300,000 out of some ten million Russian farmers have anything resembling title to their land. The government imposes severe restrictions on what people can do with land which really belongs to them." Hernando de Soto quotes the article by Leonard J. Rolfes, Jr, "The Strugle for Private Land Rights in Russia," from Economc Reform Today No. 1, 1996,

[In the former Soviet Union] rights of private possession, use, and alienation of land are inadequately defined and not clearly protected by law . . . Mechanisms used in market economies to protect land rights are still in their infancy . . . The State itself continues to restrict use rights on land that it does not own.


As Norberg says, "Land socialism, of course, inhibits any number of investment opportunities, but because land is often the basis of borrowing, it also impedes the development of a modern credit system." Strangely Russia is portrayed as an example of "hypercapitalism." However, given that capitalism is, in most definitions, a system based on private ownership of goods, services and resources, with titles exchanged on a free market, this could not be further from the truth. "Russian land socialism, coupled with a formidable welter of business regulations and trade controls, leads the Heritage Foundation to find it only the 127th freest economy out of 155 investigated, and in Economic Freedm of the World's corresponding table it comes 117th out of 123, after countries like Syria and Rwanda."

But what is the consequence of all these controls on acquiring land or opening business? The result as these operate as obstacles to building homes and businesses legally and an incentive to opeing them illegally. As PJ O'Rourke notes in his Eat the Rich, "Russia's businesses pay a 35 percent federal tax, plus a 20 percent VAT, plus local taxes that can be as high as 45 percent. That adds up to 100 percent. So a tremendous amount of Russia's business is contucted vie the "informal" economy. And it can be very informal. The way you hail a cab in Moscow is that you don't. You hail any car, and if the driver feels like it, he'll stop, negotiate a fee, and take you where you want to go." Later O'Rourke reports talking to one of the advisors of the Communist presidential-candidate. This advisor described herself as an expert on the black economy, and said that 45 percent of the Russia's trade and industry was now conducted off the books.

As de Soto notes, In every country he and his team investigated it is almost as difficult to stay legal as it is to become legal in the first place. So people don't bother, "and they opt out of the system." In 1976 two-thirds of people working in Venezuela were worked in a legally established enterprise. Today, though, that proportion is down to a half. In Brazil thirty years ago more than two-thirds of new housing erected was for the purpose of rent. Today it is only three-percent. The market went to the extra-legal districts of the favelas where there is no rent control, and rents are paid in US dollars.

Once these newcomers to the city quit the system, they become "extralegal". Their only alternative is to live and work outside the official la, using their own informally binding arrangements to protect and mobilise their assets. These arrangements result from a combination of rules selectively borrowed from the official legal system, ad hoc improvisations and customs brought from their places of origin or locally devised. They are held together by a social contract that is upheld by the community as a whole and enforced by authorities the community has selected. These extralegal social contracts have created a vibrant but undercapitalised sector, the centre of the world of the poor.


Throughout former communist and Third World countires the pattern is the same. People are not idle poor out of work. They are working. The streets are buzzing with activity. Side-street cottage industries grow up manufacturing everything from clothes to pirated designer watches and bags. As de Soto says, "There are workshops that build and rebuild machinery, cars, even buses. The new urban poor have created entire industries and neighbourhoods that have to operate clandstine connections to electricity and water. There are even dentists who fill cavities without a licence."

Most public transport in developing countries is made up of unauthorised buses, jitneys and taxis. In other parts of the Thrid World, most food is supplied by vendours from shanty towns selling produce from carts on the streets or stalls in makeshift buildings they construct. Ded Soto reports,

In 1993 the Mexican Chamber of Commerce estimated the number of street-vendor stands in the Federal District of Mexico City at 150,000, with an additional 293,000 in 43 other Mexican centres. These tiny booths average just 1.5 metres wide. If Mexico city vendors lined up their stands on a single street with no gaps at intersections, they would form a continuous row more than 210 kilometres long. Thousands upon thousands of people work in the extralegal sector - on the streets, from their homes and in the city's unregistered shops, offices and factories. An attempt by the Mexican National Statistics Institute in 1994 to measure the number of informal 'microbusiness' in the entire country came up with a total of 2.65 billion


In Russia the informal sector is even more sophisticated, manufacturing computer hardware and even jet fighters for sale abroad! In Egypt, for instance, if a person wants to acquire and legally register a lot on state-owned desert land, he has to make his way through at least 77 bureaucratic procedures in 31 different public and private agencies. This can take from 5 to 14 years. To build a swelling on former agricultural land can take up to 6 to 11 years of bureaucratic wrangling, and possibly longer. The consequence is that people don’t bother to try to acquire land or establish dwellings legally. 4.7 million Egyptians have built their homes illegally. And even after having built the home, the Egyptian cannot own it formally. If, after finishing his home, he wanted to become a law-abiding citizen and purchase rights in it, he risks having the home demolished, paying a steep fine, and serving a ten year prison sentence. So there is no incentive to formally acquire the property and it remains, officially, unowned.

The most obvious attempts to get around obstacles to the legal aquisition of land are the shanty towns we see throughout the developing world, which are built illegally on government land. However, de Soto's researchers found far more sophisticated ways of getting around the real estate laws. In peru, for example, people formed agricultural co-operatives to buy estates from old owners and turn them into housing and industrial settlements. Because there aren't any easy legal ways to change land tenure, the co-ops subdivide the land illegally into smaller, privately held parcels. Because of this, de Soto says, "few if any have valid title to their ground." In Prot-au-Prince expensive pieces of real estate change hands with nobody bothering to inform the registry office, which is unmanagebly backlogged anyhow. In Manila, housing has sprung up on land the government has designated for industrial use.

In Cairo people try to get around real estate laws in various ways. Residents of older four-story public housing projects build three illegal stories on top of their buildings and sell the apartments to relatives or other clients. In an effort to stamp out high rent, the government froze rent on various apartments at values now worth less than a dollar. As a result legal tenants subdivide these properties into smaller apartments and lease them out illegally at the market price. So the poor hold numerous assets, but they do so extra-legally, having acquired them illegally, or built on them illegally. So the world’s poor actually have access to an enormous amount of wealth, but they don’t formally own it. As Hernando de Soto writes,

When you step out of the door of the Nile Hilton, what you leave behind is not the high-technology world of fax machines and icemakers, television and antibiotics. The people of Cairo have access to all those things. What you are really 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 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 – that allow you to secure the interests of third parties with your work and assets – do not exist here.


And how much is this dead capital worth? By the tally de Soto and his researchers made with some Egyptian colleagues, the total value of Egypt’s dead capital in real estate, is some US$240 billion. This is thirty times the value of all the shares on the Cairo stock exchange, and fifty-five times the value of all foreign investment in Egypt.

De Soto writes,

In fact it is legality that is marginal; extralegality has become the norm. The poor have already taken control of vast quantities of real estate and production...This picture of the undercapitalised sector is strikingly different from the conventional wisdom of the developing world. But this is where most people live. It is a world where ownership of assets is difficult to trace and validate and is governed by no legally recognisable set of rules; where the assets potentially useful economic attributes have not been described oir organised; where they cannot be used to obtain surplus value through multiple transactions because their unfixed nature and uncertainty leave too much room for misunderstanding, faulty recollection and reversal of agreement. Where most assets, in short, are dead capital


This capital is dead because it is not formally owned, because it is not formally property.In the Philippines, 57 per cent of city-dwellers and 67 per cent of countryside dwellers live in housing that is dead capital. In Peru 53 per cent of urbanites, and 81 per cent of country people live in extralegal dwellings. In Haiti 68 per cent of city livers have housing that is extra legal, and 97 per cent of people in the countryside live in housing to which nobody has a clear title. In Egypt it is 92 per cent of urban dwellers, and 83 per cent of rural dwellers. Of course, these assets are not worth much by Western standards. A shanty in Port-au-Prince might fetch $500, a cabin in Manilla as little as $2,700. Even a fairly substantial house in Egypt, in a village outside Cairo might only bring $5,000, and a respectable bungalow in the hills around Lima only $20,000. But there are an enormous number of such homes, and collectively their value outweighs that of the rich.

In Haiti the untitled rural and urban real estate holdings are collectively worth some $5.2 billion. That is four times the total assets of all the legally operating companies in Haiti. It is nine times the value of all assets owned by the government. It is 158 times the value of all foreign investment in Haiti's recorded history up until 1995.

In Peru the total value of all extralegally held real estate adds up to some $74 billion. This is five times the total valuation of the Lima Stock Exchange before the slump in 1998. It is eleven time the value of potentially privatisable government enterprises and facilities. It is fourteen times the value of all foreign investment in the country's documented history.

In the Philippines the total value of untitled real estate is $133 billion. That's four times the capitalisation of the 216 domestic companies on the Phillipines Stock Exchange. It is seven times the total deposits in the country's commercial banks. It is nine times the total capital of state-owned enterprises. It is fourteen times the value of all foreign direct investment.

But all this money, all this wealth is absolutely useless to those who hold it precisely because they do not have legal title to it. Because they do not formally own these assets, they cannot access their capital value. As Johann Norberg writes,

And so poor people are forced to live and run micro-businesses in the informal sector, outside the law. Consequently they have no legal protection and do not dare to invest for the long term, even if they can. Their property is not included in a uniform system of ownership which follows transactions and indicates one owner. Without clarity as to who owns what, how transactions are to proceed, who is responsible for payments and services to the address, the property remains “dead capital”. Properties cannot be mortgaged, which would otherwise provide capital for financing the children’s education or investments and expansion of the business. Thus the commonest way for small entrepreneurs in affluent countries to obtain capital is cut off in developing countries. Without a registered address and the possibility of having one’s creditworthiness investigated, it is often impossible to get a phone or water and electricity supply, and the property cannot even be sold.


Entrepreneurs can’t expand their businesses by selling shares, because they can’t prove formal ownership of their businesses. In order to avoid bureaucrats and police they are obliged to keep their businesses small, and so are prevented from utilizing economies of scale. They are also prevented from advertising to expand their market and so income. But whilst a leftist may suggest that, “this obsession on property as the solution for the poverty in the developing world is mere bourgeois ideology to protect the rich,” the opposite is true. It is the rich that benefit the most from the absence of secure property rights. As Norberg writes, on the obstacles that the poor face to working within the law, legally acquiring and developing land, or registering businesses, “To people without big resources or powerful contacts, these are insuperable barriers.” In other words, if you are rich enough, you can afford the time it takes to legally purchase land, to register its ownership, to get permission to build on it, to register a business and acquire licenses or permits. Or if you are well connected enough, you can cut through the bureaucracy easily. Or even if you don’t do this, you can afford to bribe public officials. This means that the rich and well connected can secure land and resources and permission to operate businesses easily, whilst the poor are shut out. Failure to grant formal property rights provides the rich and powerful with monopolistic privileges.

8 Comments:

Anonymous Julius Blumfeld said...

Of course De Soto is rather coy in the (from a libertarian perspective) central question of whether modern capitalism require centralised State regulation of land title at all.

It is perhaps interesting to note that land title in England and Wales was largely a matter of common law and there was no centralised land registry, until 1925. And England does not seem to have had any problems generating capital prior to 1925!

8:12 PM  
Blogger Richard said...

Julius,

True. Minarchists have often taken The Mystery of Capital as proof against anarcho-capitalism, and even some ancaps have agreed (there is a critique on mises.org, I think). I know de Soto covers something of the development of the UK, but also looks at the informal legal systems in the pretty much ancap Old West in the US. I don't have his book at hand to refer to, though!

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