Policies for developing countries – are property rights the answer?

Just finishing off Development Economics with my CIE A2 class and below is an interesting clip from the Commanding Heights DVD series. Peruvian economist Hernando de Soto sees a main obstacle to the development of markets and capitalism within developing countries being linked with the lack of property rights. The result of this is that most people’s resources are commercially and financially invisible. Nobody knows who owns what or where, who is accountable for the performance of obligations, who is responsible for losses and fraud, or what mechanisms are available to enforce payment for services and goods delivered. Consequently, most potential assets in these countries have not been identified or realized; there is little accessible capital, and the exchange economy is constrained and sluggish. However in the West, where property rights and other legal documentation exist, assets take on a role of securing loans and credit for a variety of purposes – building capital with capital.

De Soto estimates that about 85% of urban parcels in Third World and former communist nations, and between 40 and 53 % of rural parcels, are held in such a way that they cannot be used to create capital. The total value of the real estate held but not legally owned by the poor of these countries is at least $9.3 trillion. This is approximately twice as much as the total circulating U.S. money supply and nearly as much as the total value of all the companies listed on the main stock exchanges of the world’s twenty most developed countries. The lack of such an integrated system of property rights in today’s developing nations makes it impossible for the poor to leverage their now informal ownerships into capital (as collateral for credit), which de Soto claims would form the basis for entrepreneurship. However, in reality, it cannot be seen as the panacea. Titling must be followed by a series of politically challenging steps. Improving the efficiency of judicial systems, rewriting bankruptcy codes, restructuring financial market regulations, and similar reforms will involve much more difficult choices by policymakers.

4 thoughts on “Policies for developing countries – are property rights the answer?

  1. John August 17, 2010 / 12:27 am

    Thanks Mark. I agree lack of clear (and enforceable) property rights is a major constraint in many LDC’s. This is often compounded by missing markets such as credit and insurance which also limits investment/expansion and entreprenurship. Furthermore there are the often present problems of sectoral imbalances, population issues, lack of finance, burden of debt servcing and corruption to contend with,.


  2. Mark August 17, 2010 / 10:40 am

    Some good points John. Even in a relatively advanced country such as Argentina, title is not enough in itself to arouse the dead capital present in land and property. Furthermore, Argentine banks tend to lend only to workers with high wages and a stable job. Also there were those that, even if a loan were available, would not take it for fear of losing their own property.


  3. Ben Cahill August 18, 2010 / 2:45 am

    Cheers Mark – I don’t have time to show the whole of CH3 but this clip is probably the biggest thing that I want students to take out of it!


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