Property Rights, a Way to Eradicate Poverty

Dorothée Enskog, Online Publications

27.04.2009 Legal reforms aimed at granting property rights to the world’s poorest can eradicate poverty and boost economic growth, says the Peruvian economist Hernando de Soto. As long as these people cannot prove what they own, they cannot secure credit and capital, and expand their businesses, he says in an interview.

Dorothee Enskog: Why are property rights crucial when it comes to eradicating poverty?
Hernando de Soto: They are important because they document where things are located and to whom they belong. We share our economic world with over six billion other people, which means we do business with billions of people we don’t know. Essentially, the only documents that allow you to identify your counterparties and to pool various resources are property titles. That is how we get to know each other. The system breaks down without clarity as to ownership.

How many people do you estimate are unable to claim their property as assets?
A little over two billion people participate in the legitimate globalized economy: the citizens of North America and Europe, and small elites in developing countries and former Soviet Socialist Republics. The remaining four billion live outside the system, in an extra-legal economy, if you will, in the sense that they cannot prove what they own, where they are employed, or what businesses they run.

When and why did you begin championing property rights for the poor?
When I returned to my native country of Peru as a young adult, I was surprised by the extent to which developing countries had turned inward. I noticed how difficult it was to obtain documents from the authorities: For instance, it took me three years just to get a street number for my house. I started wondering if this type of legal transaction was even more difficult for the poor, so I hired a professor and some students to set up a small company in the middle of a slum in Lima. Their objective was to create a legal shirt-manufacturing business with two sewing machines, open eight hours a day. It took them 279 days to obtain the permit to operate. In Egypt, where a similar trial was carried out, it took 549 days to set up a bakery. Although the relevant laws are clearly in place, they are not accessible to many people. And to be able to grow, you need to be able to identify yourself in the marketplace, and thus gain access to credit and capital.

Have you seen any improvement over the past decades?
Generally speaking things have gotten better during the last 20 years. Peru, which has adopted a good amount of reforms, has been growing at about 10 percent for a few years now. The country is doing much better, considering that a lot of its growth is due to construction, mining and exports of agro- industrial goods. These sectors would not have been able to grow without solid property rights to land and mines. But there is still an enormous amount of work to be done. You not only need property rights as such, they must also be recorded, written up as rules, and implemented in a very specific manner.

What else is crucial to building an inclusive and modern market economy?
Many elements can be improved if you define the word property to include businesses as well. If you create property rights to businesses, they must be able to attract investors by issuing shares. Giving investors control over equity is like giving them a right to the components of a business. Businesses must also be granted limited liability. If an owner can be sure that an investment in his business will not detract from his investments elsewhere, he will do much better. Asset shielding – earmarking capital exclusively for a business – is also necessary: If the business goes into debt, the owner should not be able to run away with the capital. Businesses must also be organized internally, with a clear hierarchy. By this I mean that a CEO, a CFO and employee rights as well as other elements are necessary. A survey in Latin America found that only 10 percent of all businesses meet all of the above-mentioned criteria. The situation is probably similar in most developing countries.

You are the president and founder of ILD (Instituto Libertad y Democracia) in Peru, which promotes the agenda you describe. Could you tell us more about ILD?
It was set up in 1984 as a foundation to do research. It has since evolved from think tank to action tank. Shortly after our first publications, we started getting calls from the Peruvian government, followed by other governments. We investigate the size of countries’ extra-legal economy and make plans for reforms. We have worked in 20 countries in Latin America, Africa, the Middle East, the former Soviet Union and Central Asia. We’ve even been called into developed countries, such as the US and Canada. In the US, for instance, more than 30 million people do not have fungible title to their land – mainly on the Mexican border, in the inner cities and among native populations. We didn’t take up these mandates, however, as they would have been too complex for us.

How does ILD operate?
We typically get a request for our expertise from the country’s head of state. ILD then sends in a small team, and recruits much larger teams locally. We first do a diagnosis, telling the head of state how big the country’s extra-legal economy is and what characteristics it has, before we design reforms. This is followed by an implementation phase. As we advance in the project, there is a tendency on the part of them to push us out, which is a healthy sign. The local teams then take over our work.

Are governments ready to listen and implement the advice ILD gives them?
The people who are keen to call us in are politicians with a mandate to change the situation in their country. They are sometimes shocked by our diagnosis, but in a pleasant way, because our diagnosis explains why things don’t work in their country. If we are able to demonstrate that their country cannot prosper and operate properly without the rule of law, although it’s a shock for them to hear, they also welcome the news, since it means there is a solution to their problems. Those who benefit from the red tape of the status quo – very small public and private bureaucracies – don’t always like us too much.

Which countries still need to build up an inclusive market economy?
All countries. It’s also a challenge in the developed world. Take the current subprime crisis as an example. The developed world has introduced an estimated 600 trillion dollars worth of derivatives into the financial markets, derivatives that are not recorded in a central property register. That is the reason why these toxic assets cannot be taken out of the financial system. We don’t know where these derivatives are and how many they are. If we had applied the same rules to derivatives as we do to the registration of equities and airplanes, for example, we would know where they are. This has led to a global recession, a lesson that should not be forgotten.

You just mentioned the subprime crisis. What are the main consequences of this crisis for the world’s poorest inhabitants?
We’ll find out, as the crisis isn’t over yet. It’s not a matter of a bubble bursting. Only about 13 trillion dollars, euros, francs and other currencies are available in cash. The remainder is to be found in the form of property documents such as mortgages, mortgage-backed securities, or credit default swaps, whose volumes are much larger than the cash available. But the credibility of such titles has been deeply affected by the ongoing subprime crisis and the attendant credit crunch. The availability of credit has thus tremendously contracted, affecting anyone who needs a loan – all the way down to the poorest of the poor.

What is the solution?
The toxic assets need to be taken out of the financial system as soon as possible, in order to restore trust. That would be the best way to fight the recession.

Is it realistic to track all of these toxic assets?
Why not? We register everything, from births and cars to bank accounts. There is no need for a global register of toxic assets, but some uniformity in their reporting is key. An economy that doesn’t register its components properly is called a shadow economy, the extra-legal economy. Such economies don’t work because there is no reliable information available.

How do you view microfinance initiatives?
A lot of people have benefited from microcredit, and that is good. It reaches peoples that traditional banking could not get to. Is it the final solution? No, but it is an extremely good beginning. Microcredits won’t defeat the recession, build a nuclear plant or boost development. That’s where macrocredits become necessary.

About Hernando De Soto
Having spent most of his youth in Switzerland, Hernando de Soto returned to his home in Peru as an adult. His encounter with Peru’s complicated legal system and inefficient bureaucracy came as a total surprise, and spurred him to set up the Instituto Libertad y Democracia (ILD). The Lima-based think tank is committed to moving the assets of the poor from the extra-legal economy into the globalized market economy by ensuring that the property rights already in place in most of the world actually function as a means to economic and social empowerment. According to de Soto, the problem is the manner in which these existing property rights are actually implemented in developing countries. In addition to being the president of ILD, de Soto is currently writing a book about the causes of the current recession. “This recession isn’t a bubble bursting,” he notes, “but a legal failure.”Instituto Libertad y Democracia (ILD) In einem neuen Fenster öffnen.

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That being said, I agree with you completely that for us to making a lasting change to the way of life in Haiti, we must restore a sense of free enterprise and property rights in conjunction to addressing the spiritual shortcomings. While land ownership is an admirable goal, I think that it is probably more of a long term achievement rather than a short term endeavor.

South Africa experimented with this after the fall of apartheid and found that simply restoring the ownership of the property to the indigenous people group was catastrophic in many cases because those people did not possess the knowledge of how to care for the land nor did they have any idea why they would even want to.

I believe those perspectives are largely taught and in the case of working with adults, you have to unlearn the undesired paradigms first. That is probably best done in smaller increments, like owning shovels, scythes, trees, etc. If all goes well, you would hope that one day you would be able to witness them having earned enough money that they are indeed able to purchase their own land.

I think the Ministry Plan we laid out for the trees and stoves goes a long ways toward creating an environment where the prospect of land ownership in the local community is truly viable.
Thanks,
Bob

The land where we live cannot produce coffee, but we do have a church way up in the mountains that can, and I have often thought of trying to purchase land for the very purpose of coffee production. I think that it is definitely a feasible idea.

Thanks for the insights.

This is really helping so keep the comments coming, it is nice to have people help me think through some of this stuff.

I think you have brought the best point forward towards the idea of buying the land and keeping it in the mission’s name. Then it could be rented at a low rate, or even at no charge in exchange that produce from the garden be sent to the large markets to help provide food for other people.

Can you tell me what book you were reading, I would not mind getting my hands on it.

Thanks for the info and encouraging words.

The part of Hawai’i that I used to live in suffered under similar conditions (to a MUCH lesser extent!) Land in Waianae was owned by a few rich people, other people struggled to scrape a little food out of little plots that they rented or basically serf-farmed. One small scale project that I did see that was helpful was community plots of land. More disclaimers – these were small garden plots, enough for participants to supplement their groceries, not farm plots that they could subsist on. Still, though, it seems to me that maybe if the mission owned plots of land and leased farming rights to farming families, at least they would be free from the threat of the landowner taking their rights and crops with no notice.

Another field of my ignorance – how does the Haitian culture respond to cooperative works? If I let my imagination run away with me, I start to wonder what it might be like if several Haitian farmers were empowered to work together and profit-share on a plot of land large enough to possibly become a small but profitable coffee or sugar plantation? Okay, that is *really* long-term, but I’m still curious if it’s feasible. Fair-trade coffee is becoming very fashionable and popular here in the states.

From what I understand by your response, it sounds like you are thinking of a low scale reform. I am not as concerned about purchasing few acres of land to pursuit a balance in the agricultural system as of buying considerable amount of land. I think you are right, there are much less risks in the purchase part.

Now on long time effect. I was reading from a socio-political book on Haiti, in which the author talks about how president Broyer’s land reform has had lasting negative results on agricultural productivity in Haiti. He said President Broyer’s popular land redistribution ruined the potential for commercial agriculture. Farmers only had enough land to cultivate to respond to domestic needs, such as their own household and their local market. I know, unlike Broyer’s reform, your plan is on a minuscule scale and there are no big coffee or sugar plantations involved, but in principle I have found this reform very educational for future endeavors in land redistributed in Haiti.

After many years of small properties being broken down to pieces as they are were passed along from generations to generations, most farmers are stuck with small plots of land that can’t even respond their own need for food. Therefore, the national market has suffered and will continue to suffer, and the idea of export (the engine of economy) is unheard of. Now, here is a question that has been brought to my mind. If most properties in your area are somewhat bigger properties owned by relatively rich people who don’t even live in the community, would it not be safer that these farmers keep renting from these wealthy people to alleviate the risk of too small properties as they would be passed down? Or if you were successful at buying properties, would it not be better for the mission to own them to make sure they are not broken down?

Curtis, I bring these points up not to discourage you, but to encourage you to continue your work in Haiti that to my knowledge has been fair to the Haitian people and pleasing to God. In my small experience in trying to help in Haiti, I am sure I have hurt the very people that I have tried to help. Sometimes our good intentions can produce immediate results and long lasting damages instead of long lasting solutions depending on how we take action. You are a man of great insights and you get your sociological facts straight. I would like to know what you think about these points that I brought up.

There is no doubt that there will be huge issues with land deeds and ownership. There are people out there who actually own some pieces of land and so I think it is possible, but you are definitely right that there are some pieces owned by places like the church and government. Even if the government took back some land, it would still save the people who rent it some money for a period of time.

I don’t know, it is interesting to think about. I think that we are small enough to where we could do it somewhat unnoticed, not completely unnoticed, but it is not like we would buy the whole valley or anything. I would love to see any info that you collected if you have that in print, and I will definitely talk to Toussaint and some of the other leaders in La Baie. It might even be worth bringing up with Senator Melius, have you had any encounters with him?

Thanks again for the response, let me know any other ideas you may have.

Any story of land reform in Haiti that I know of has resulted in chaos. A few km from your location, some years ago a massacre “massaque Jean-Rabelle” occurred over some type of a land reform. In the last 15 years, the Haitian government has attempted many land reforms “ reforme agraire”, especially in the Latobonite department that sparked uprisings that led to massacres.

A lot of properties in the Far West area belong to the Haitian government or they are colonial properties that had been claimed by some Haitians since after independence and has been passed on from generations to generations. Legally they belong to the Haitian government, and they can be claimed anytime for any reason. Especially, after they find out some American organization has purchased them. Talk to Pastor Robert, the Haitian guy who started the development project in Port-a-Lecue. He recently had to deal with some of the similar issues with the government.

from when I surveyed parts of the Far West in 2006 with Toussaint, I learned the Catholic Church (not a Catholic Church in particular, but the headquarter) owns a lot of properties that are managed by individuals in the community.

In 2006, I was so disappointed when I learned a lot of the land that people farm did not actually belong them. As you may know it, part of Growing Hope For Haiti’s plans is to invest in sustainable agriculture and that will be huge bump in the way. You know, you can’t have self-sustain community when the land in the community does not belong to the community.

We can talk a little more about if you would like to. I think both of us can learn a bit more about how to safely pursue a project like that. You can also talk with Toussaint, he has a lot of insight and he is from la Baie community

Mary