Property Rights and the Challenges of Transplanting Institutions

by Dr. Emmanuel Martin

Economists since Adam Smith and Anne Robert Jacques Turgot in the 18th century have argued that the “wealth of nations” – or their remaining in poverty – is to a large degree dependent on their institutions. A society’s political, economic and social rules of the game can either be inclusive, generating opportunities for growth and prosperity for all, or extractive, protecting the economic and political rents of a few at the expense of the many. In such cases, extractive institutions can be a cause of underdevelopment.

Traditionally, inclusive institutions combined elements of the rule of law and economic freedom, such as protection of individual rights, contracts, free exchange, and checks and balances on power. Everything that reduces uncertainty about potential arbitrariness in enforcing the rules in effect amounts to an incentive to trade, produce and prosper, which is the surest path to reducing poverty.

It would follow that the lesson for poorer nations is to evolve local rules to increase institutional quality. This often involves “transplanting” institutions borrowed from foreign settings. However, experience shows that simple “copy-paste” techniques are unlikely to work, given the complex interactions of institutions and their social contexts.

Property rules

One vital component in this “prosperity package” is property rights. Since at least Aristotle, we know that humans cherish what is their own and take much less care of collective goods. Ownership gives owners incentives to maintain and improve their property. Because it encourages investment, property ownership is seen as a cornerstone of development. But to be meaningful and be enforceable, property rights need to be legally recognized. In theory, the establishment of land registries helps establish clear titles and reduce disputes over property, which in turn fosters investment. That is why they are considered important for agricultural productivity and development.

Recognition of the importance of land titling surged in the early 2000s, when Peruvian economist Hernando de Soto published his Mystery of Capital. He placed formal, private property rights at the center of the development recipe, arguing that the poor in poor countries, unlike rich people, suffer from “non-formalized” or “extralegal” property – that is, without officially documented ownership rights. Often, this happens simply because the administrative process of registration costs too much.

Without the security of a formal title registry, such owners have a hard time unlocking the economic potential of their assets. The uncertainties inherent in the informal property system – for example, the risk of being expropriated – drastically weaken incentives to invest in the long term or buy and sell. Such assets remain “dead capital.” Latin American favelas and African shanty towns are examples of the blight that can occur without formal property’s benefits.

Formal benefits

As it enables a formal market, and thus a market value, to emerge through lower transaction costs, formal property first unveils the economic potential of goods. Second, a formal property system with a central land register integrates dispersed data and information, while avoiding confusion and land disputes between neighbors (that can often turn deadly or develop into generations-long feuds). Third, property generates responsibility and liability, which in turn encourage trust, all of which are essential to economic development. Fourth, by making real estate fungible, formal property allows assets to be divided and recombined as capital for more productive uses.

Formal property also provides more security for the circulation of goods and tracking of property (which lowers transaction costs). It allows utility companies or tax administrations to assess payments and bankers to obtain collateral against a loan. This last point is crucial, because credit is a fundamental means to finance productive investment, which can be a stumbling block for small entrepreneurial endeavors that are the basis of economic development.

Finally, the institution of formal property facilitates the division of labor into wider networks. It allows property to be dematerialized into documents or certificates, making it easier for market participants to trust and trade – again, the foundation of prosperity. In this way, formalizing property can serve as a strategy to empower the poor and even minorities or women.

Social context

Given these seemingly undeniable benefits, efforts have multiplied in the past two decades to formalize property through land titling policies, often backed by the World Bank and Western aid agencies. While these programs – especially those adopted since the 1990s in Africa – are intended to benefit the poor, their results have not met expectations.

Formalization can indeed lead to slightly increased investment in the owned assets, but the expectation that formal titles would translate into collateral for private bank loans has quite often been disappointed. This outcome should not be surprising. In many poor countries, the size of the market and the business climate do not allow for a large private banking sector. Those commercial banks that do exist usually have little interest in financing small businesses or family farms. Thus, credit is rationed even when land titles are available for collateral. There are also cultural barriers on the side of borrowers. In traditional societies, the risk of losing family land in case of default can simply be unacceptable, especially when informal lenders do not demand such collateral.

Another reason for disappointment is that strategies to transplant institutions such as formal property rights are necessarily top-down. As such, they tend to ignore subtleties and complexities on the ground, and override decentralized, non-state, customary forms or sources of legitimacy. This approach to institutional reform can produce unexpected consequences, because institutions are embedded in complex webs of rules. If the imported formal rules do not mesh with the preexisting set of informal rules, the result is institutional conflicts or confusion. The key point is that formalization does not occur in an institutional vacuum; it is deeply influenced by the interaction with informal rules already in place.

Legitimacy is particularly important in countries with a recent history of violent land collectivization. In places like Vietnam, Cambodia or Tanzania, people can feel land-titling can protect them from public predation. Elsewhere, however, the informal, customary authority pertaining to recognition of land ownership and transactions may still matter much more to ordinary people than state authority and statutory law. After Benin enacted a land titling law in 2007, many villagers continued to rely on traditional authority for land transactions, bypassing the formal system’s certificates. The result was a dual system in which the official land registry quickly became outdated, deepening confusion instead of providing legal clarity.

Rash assumptions

Another aspect of legitimacy is that the concept of property itself is not one-dimensional. Developing nations have concepts of property, but they do not always fit into the Western model of individual, private ownership inherent to land-titling policies. For example, “property” can mean a right to use certain land for some purposes but not others, and not exclusively. This partial or shared ownership is distinct from the Western concept of a single owner having property at his or her absolute disposal for any use.

In fact, common property is widespread in poor countries because it represents a form of social safety net. This makes it less amenable to individual titling. There is also the question of what to do about grazing rights in pastoralist societies like the Maasai in Tanzania. As mentioned earlier, in many traditional societies land has above all a symbolic or patrimonial value; it is passed down to maintain the family lineage and provide sustenance. In such a context, notions of economic efficiency or profitability are remote, and land sales only occur in family emergencies. Formalization tends to override this legal pluralism, contradicting the reformers’ goal of greater inclusivity.

Formalization is often seen as a way of protecting the poor by making their land tenure more secure and reducing the risk of dispossession. However, the increased legal security this provides is only meaningful if the government is neither weak nor corrupt, and if the rule of law is respected and enforced. In many countries, this is a rash assumption. The titling process requires precise surveys to identify and demarcate land, and must not be too expensive or distant for poor villagers to access. Even with foreign support, some governments do not have the funds or administrative capacity to efficiently provide such services, which may already be performed by informal institutions.

Land grabs

While formalization is supposed to secure land rights, it can sometimes have the opposite effect. Unregistered family members can be deprived of property by unscrupulous relatives. Chiefs or well-connected cliques can seize the opportunity of land reform to “redistribute” land to their advantage and augment their power and authority. Slumlords can pressure titleholders to sell off their assets (which gain in value after formalization) for urban development projects.

The global land rush after the 2008 financial crisis exacerbated such trends. While domestic and foreign investments in agriculture or urban development are certainly welcome, they should respect local land rights. In Papua New Guinea, formalization policies have reportedly been hijacked by local “big men” and investors who have executed a land grab for logging and palm oil operations. It is the ordinary people who suffer – from the dispossession, displacement and poverty that ensues from insecure land tenure.

A related unintended effect of land titling strategies in corrupt environments is that international donors like the World Bank, which generously support property formalization in the name of development, feel they have succeeded when large tracts of land are assigned formal title. However, this can come at the price of closing their eyes to the exclusion of poor people from coveted areas – in effect, denying them the property rights that were supposed to have been protected.

Local notables are almost always better positioned to exploit the options offered by fungible property, such as selling the land to local or foreign investors for development. This appears to be what happened in the sale of a $79 million, 99-year lease of an attractive plot on Boeung Kak Lake near Phnom Penh, Cambodia in the 2000s, after the passage of a new land law. Here again, besides initial lack of transparency, the poor lacked the skills to navigate the complex administrative steps to have their rights recognized, or the political connections to “beat the system.” The consequences of such miscarried reforms can be mass evictions, which can then lead to violent social movements.

Possible paths

One lesson is that “getting institutions right” to increase empowerment is not easy, because you cannot simply transplant an institution into a foreign context and expect the same result. On this point, disappointment with institutional reform during the postcommunist transition in Eastern Europe has much to tell us, since it was caused by the same type of institutional mismatch. Liberalization requires other, complementary institutions if it is to create a genuinely free market.

That does not mean that formalization efforts will not or should not continue. Social evolution takes time, and apparent short-term disappointments should not be confused with total failure. In his research, Hernando de Soto himself notes that the formalization process in the United States took more than a century to be effective. Progress in establishing land ownership is generally slow, as the World Bank’s own recent research shows. As long as there is funding and bureaucratic momentum behind such policies, it is hard to see why they should stop, especially as new technologies like GPS and blockchain have shown promise in reducing surveying and administrative costs in countries such as Zambia.

Another, parallel trend is that Western agencies are becoming more aware of the potentially negative consequences of their land titling policies, especially under pressure from local organizations. In the spirit of the Food and Agriculture Organization’s 2012 Voluntary Guidelines on the Responsible Governance of Tenure of Land, Fisheries and Forests, better recognition of customary rights (the World Bank already recognizes “group titling”) and stricter pressure against violations of such rights could become more systematic.

Serious attempts to include local communities and NGOs, in part through improved transparency and publicity, would go hand in hand with more consideration of the broader institutional context (including corruption and the business climate). Bottom-up procedures could be more widely used in the formalization process. In India, for example, civil society organizations help villagers demarcate their plots with GPS and assist them in the land registration process.

In geopolitical terms, Western organizations can continue to promote land titling as an implicit bulwark against “predatory” purchases and leasing of agricultural land by non-Western powers. But this scenario becomes problematic if such efforts contribute to weakening local rights. In that case, the pressure of international rivalries would exacerbate the focus on narrow efficiency at the expense of justice.

Dr. Emmanuel Martin is the general manager of the French MOOC project “École de la liberté.” He holds a PhD in economics from the University of Aix-en-Provence in France.


The views expressed on austriancenter.com are not necessarily those of the Austrian Economics Center.

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