Property Rights As Growth Strategy

1. Introduction

The property rights school, a dominant philosophy in development strategies pursued by donor agencies, asks for the rapid legal institutionalization of private property that will theoretically move economies towards pareto efficient uses of resources and expand growth. However, pursuit of property stabilization as a means to a growth strategy is deleterious, as brisk institutionalization of private property regimes proved disastrous in a development context and created additional social pressures leading to humanitarian catastrophes. Further, in the history of the countries that now comprise the ‘developed world’, property stabilization was an elongated, bloody transformation that accompanied hundreds of years of conflict, demographic shifts, intricate adjustment, and political alteration. To expect a swift, fastidious, and peaceful transformation during property rights stabilization in light of recent history in Rwanda, Nepal, and across the developing world has shown to be not only myopic and intellectually dishonest, but dangerous as well.

2. Why Property Rights Stabilization as a Growth Strategy?

“Countries with better institutions, more secure property, and less distortionary policies will invest more in physical and human capital, and will use these factors more efficiently to achieve a greater level of income” (Acemoglu, 1369)

The property rights school is closely aligned with neoclassical fields objective of growth through liberalization of markets in developing countries. For those seeking property rights stabilization, this typically means moving towards the final objective of privatization of property. Theoretically, property rights stabilization will reduce transaction costs and risk, thus increase investment, growth, and aggregate social welfare. In the words of Bates, “because the formation of capital spans time, the decision to invest entails risk”, so the minimization of risk will stimulate long-term growth (22). This will be an efficiency maximizing outcome, implying that the framework is neutral as regards to distribution and economically efficient; i.e., simply, unconcerned with distributional inequality as long as net social welfare increases.

The privatization of state enterprises will also be an efficient advancement, as public enterprises are believed to have poorer performance than private enterprises (Boycko 309). Analysis stems from the idea that private enterprises are relatively more productive because public enterprises “address the objectives of politicians rather than maximize efficiency” (Boycko 309). In essence, public enterprises lack the responsiveness, flexibility, and accountability that make private businesses competitive and profitable because they are inhibited by political motivations. Further, Boycko references several studies that highlight the higher costs of public versus private service in America, the inferior profitability of state relative to private firms in Mexico, and the across the globe phenomena of private firm efficiency (309). Privatization of public enterprises will remove the political problem by reducing information politicians have, which will lead to reduction of subsidies, decrease the enticement for corruption, and enhance incentives for restructuring (Boycko 310). The critical agency problem is of politicians rather than managers, and “privatization works because it controls political discretion” (Boycko 318).

Empirically, researchers like Acemoglu have correlated long-term growth with property rights stabilization. Former colonies with higher rates of European settlement are seen to have a strong emphasis on private property rights that have facilitated the industrial rise of countries such as America, Australia, and New Zealand (Acemoglu 1370). By removing public enterprise and creating a legal framework for private property, developing nations should see ‘overall efficiency improve after privatization’ (Boycko 309). Succinctly, for Acemoglu and others, this means pursuing an economic policy that attempts to replicate the institutional success of the ‘neo-Europes’ into the developing world (1370).

3. The Theoretical Shortcomings of Property Rights as Growth

“The real problem with the GKI and World Bank positions is that by failing to identify the real protagonists in possible future conflicts, these models are not even assisting the initiation of a political debate.” (Khan, 77)

Theoretical considerations of property rights stabilization suffer from several disparities and gaps in their conceptualization. In the paradigm of stable property rights, the argument is one of historical prevalence of economy efficiency, rather than a more historically visible political or social process riddled with contestation. While Demsetz and Coase see an economic outcome arising from the economic man, property rights have proven to be an unequal distributive process that often lowers social welfare. The functionality of property rights stability is seen as a cause of, instead of an outcome of, capitalist growth. However, the emergence of stable property rights more properly should be seen as coincidental with advanced capitalism in Western countries, rather than creating growth in its own right.

In the arguments of Barzel and other property rights thinkers, property right stabilization will drive efficiency through profit seeking which investment and technology drives. However, in the developing world, political rent seeking – in the form of corruption, strikes, legal manipulation, and other institutional maneuvering – may be more accessible and cheaper than investing in technology to attain the same level of returns. This situation will inherently mean individuals will invest in political in lieu of technological investments to raise their outputs. Criticism of this fallacy extends to the institutional and bureaucratic capability of developing countries successfully to enact such expansive reforms. As Bates concisely remarks, “Too often, in the developing world, politicians fail to induce the selection of policies that offer attractive prospects to investors and institutions too rarely impose limits upon those who would use power to prey upon the wealth of others” (107). Perilously, the factions that emerge to compete for this political capital are often be divided along the colonial era fault lines, creating the potential for the explosively brutal situations the world has repeatedly witnessed in Rwanda, Malaysia, and across the developing world.

In the conclusion of the property stabilization process, total social welfare should theoretically rise from adjusted incentives, reduced transaction costs, and improved economic growth. However, raised social welfare may derive from the relative increase of welfare of the few at the expense of the many, where prior wealth may be the main determinant of property distribution in ‘reformed systems’. Class antagonisms will inherently increase, and in the words of Khan, “this is hardly surprising since those who stand to lose from system change are hardly likely to be comforted by the fact that society in aggregate will be better off” (7). The explicit process of land privatization and redistribution is extremely delicate for those in the developing world, especially sub-Saharan Africa, where the majority of the population engages in small or subsistence agriculture. Redistribution of lands will often leave those reliant on agriculture for basic needs landless and further disempowered, hence more prone to conflict mechanisms for grievance reconciliation.

The framework suffers in general from trying to apply complex processes witnessed in the developed world that are historically and socially misinterpreted. This is reflected in the reliance by theorists on utilizing recent examples in the West – inefficiency of public sector in America and Boycko’s ‘success stories’ of privatization reformers in Great Britain and the Czech Republic – to justify instituting a like policy in the developing framework. By focusing on the policies of the West, the complexities and realities of the developing world are discounted to the detriment of the property stability model and the developing nations such thinking is thrust upon.

4. Empirical Examples: Property Stabilization for the Developing World

“Aggressively championing plans for rapid economic development, political elites in the developing world used their control over the economy to organize the polity, distributing patronage in order to stay in power… The politics of patronage gave way to democracy, on the one hand, and on the other, political violence.” (Bates 100)

Stabilization efforts in developing countries often undermines social cohesion, traditional and local balances, and ignites conflict, stemming from externally-imposed policies that lack indigenous legitimacy and effective internal enforcement mechanisms. Still grappling with ineffective governance and multifarious remnants from colonialism, developing countries can lack the appropriate institutional or social frameworks to enact such far-reaching property stabilization programs. The privatization of property often leads to the demonopolization of violence in developing nations, creating a militarization that Bates terms as “the private provision of coercion providing security only within the penumbra of violence” that “can work, it can produce peace, but the peace it produces is unstable” (47, 49). Indeed, examples used from the past by the privatization school, specifically Acemoglu, typically disclude the experience of original habitants of the success stories of colonial history, such as the near-genocidal treatment of Native Americans in the Americas or the aboriginals in Australia. In the following cases, government efforts became empty legalities without appropriate and corresponding enforcement mechanisms, leading to inefficient economic outcomes, environmental degradation, intense society-wide violence, and propelling a Wild West mentality to land, resources, and other humans.

4.1 Property Stabilization and Conflict: Rwanda in the 1980’s and 1990’s

Rwanda in the late 1980’s pursued agricultural commercialization in conjunction with a privatization strategy under the tutelage of the World Bank, a significant measure as 92 percent of the population worked in the agricultural sector (Storey 52). The program resulted in increasing levels of land inequality where richer elements were able to amass larger land holdings at the cost of mass displacement of large segments of rural population (Storey 54). Low levels of violence riddled the transformation from the onset, where the lack of enforcement or observational mechanisms allowed a milieu where violence and coercion determined property rights. By 1994, 25 percent of the population was landless, one in six were affected by famine, kilocalorie production per farmer decreased by 25 percent, and even in areas untouched by violence, PCGDP had fallen by 35 percent a year (Storey 50, 54).

Following rural collapse, the system of hierarchical structure through tribes, exploited by Belgian colonization, reemerged and strengthened as political factions in the Rwandan democracy (Storey 36). This manifested itself through group confrontations between Hutus and Tutsis. Land hunger became a motive factor in the social sanctioning of conflict and political contestation that took on an increasingly ethnic coloring (Storey 54). In the words of Storey, “inequality, and its corollary – landlessness, certainly added to the situation of what Uvin terms ‘structural violence’ from which more direct violence then flowed” (54). The subsequent political collapse and civil war was directly attributed to the adjustment program by thinkers like Chossudovsky, who witnessed “a state administrative apparatus in disarray, state enterprises in bankruptcy, and the total collapse of public services”, leaving little room for peaceful negotiation or alterations. While the property adjustment program does not capture the entirety or complexities of causation of the Rwandan genocide, it does illustrate that pressures stemming from property stabilization programs can often unleash violent and uncontrollable consequences.

4.2 Environmental Consequences of Property Stability: Nepal

Since attempts to nationalize forest areas began in 1957, Nepal has shifted from nationalization to semi-privatization to local management, only to return fully to the community based management system in the past decade after severe environmental depletion. Forestry represents the dominant land use system with 29 percent of land covered by forest, with an additional 10 percent covered by shrub (Acharya 150). Forests are an integral part of the farming system and are heavily depended on for subsistence farming by providing multiple functionalities, including animal fodder and bedding, firewood, agricultural implements, and timber for building (Acharya 2). More than 80% of the population depends on subsistence farming, meaning forests are important from a socio-cultural and economic standpoint (Acharya 149).

Shift in policy began in 1957 when forests were nationalized as an attempt by the Nepalese government to maximize resource utilization to widen the tax base and increase food production (Gautam 136). Though a massive bureaucracy was created and stringent laws were promulgated, the nationalization process lacked local enforcement apparatuses. Subsequently, massive deforestation and environmental ruin occurred (Gautam 136). After the apparent failure of the nationalization experiment, Nepal moved into a quasi-privatization program in the mid-1970’s. Acharya evaluates the system of privatization in Nepal as imbalanced and prone to manipulation, saying “privatization is more conducive to dominancy of forest properties by members of the elite, though centralized methods also may limit participation, misappropriate power, and not address concerns of poor and marginalized groups” (10). Privatization also appears to have lowered incentives for sustaining what were once shared resources and unveiled an open access mentality to the forests. Forest resource conditions in areas privatized are relatively worse compared to those in collective or centralized institutional arrangements (Acharya 10). From 1979 to 1994, Nepal lost approximately 14 percent of forest and shrub cover (Gautam 142).

In the past decade, Nepal has moved to a community forestry program that empowers user groups to regulate local forestry, reminiscent of the indigenous systems in place before 1957 (Gautam 146). This has met with several successes, including reversing the deforestation process, institution building, and economic benefit to local people, as a result of what Gautam views as “institutions built upon established systems of authority” that allowed for successful monitoring and enforcement mechanisms (146). Indeed, for the first time in three decades, the annual rate of change in forest and shrub cover has increased (Gautam 142). In a process that spanned five decades, Nepal enforced a range of property stabilization techniques, only to learn that various attempts to institute policy without sufficient local legitimacy proved malevolent to environmental and economic outcomes.

4.3 Property Right Stabilization — At What Cost?

Alterations to property carried out en masse, whether privatization or nationalization, lead to an unequal redistribution of rights often politically disadvantageous and socially volatile. Indeed, while Nepal’s and Rwanda’s experiences do not typify the occurrence of property stabilization, the property stabilization program is one that largely has failed to bring substantive and positive change to the developing world. When one reflects that in developing nations, subsistence agriculture is often the main occupation of most inhabitants, enforcing privatization can mean depriving households of basic livelihood. Contestation and conflict over this ‘advancement’ does not seem exceptional but rather inevitable. Where Bates says ‘insecurity is far too often the norm’ that maintains underdevelopment, it is ironic that such property security programs have continued to destabilize states and hinder growth. In essence, asking regimes lacking in institutional legitimacy in developing nations to carry out vast economic programs will necessarily lead to unstable outcomes.

5. Conclusion

Though an important long-term goal, stabilization of property rights is a tenuous process that requires precision, time, and most importantly, legitimacy deriving from the appropriate backing of local and regional enforcement mechanisms. Property stabilization advocates, having misunderstood the history of the industrial world’s own great transformation, mistakenly believe that the application of such schemes can be replicated in the developing framework in the interest of economic development. While Western aid agencies and the property rights school may show a disinterest in the social processes that accompany the private property transition, destabilizing social and political processes will accompany the enactment of property stabilization efforts in the developing world. Recent history has shown that attempts to alter property rights through structural adjustment programs can lead to environmental dilapidation, political fracture, and mass violence. The moral implications and human costs of such policies are far too real and tangible to allow property stabilization measures to continue as a foundation for growth strategy in developing nations.

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See Related: Hey Korea, You May Miss Being a “Developing” Country…, Adriatic Institute vs. the World Bank, When Financial Institutions Collapse, State-Sanctioned Incitement to Genocide: What Can Be Done?, International Aid Transparency Initiative, Himalayan region to adopt environment-friendly technologies, Poverty and Inequality, Poor in Developing Countries are Victims of Our Mistakes (Development Impacts of Financial Crisis), and Rich to pay the poor to preserve forests?

[tags]property rights, economic development, growth strategies, development, third world, transitioning, capitalist development, world bank, Washington consensus, PWC, political economy, institutional growth, institutions, nepal, rwanda, genocide, environmental degradation, environmentalism, privatization, stabilization[/tags]