Naked Economics: Undressing the Dismal Science pdfdrive com

Property rights. Private property may seem like a province of the rich; in fact, it
can have a crucial impact on the poor. The developed world is full of examples
of informal property rights—homes or businesses built on land that is communal
or owned by the government and ignored (such as the shantytowns on the
outskirts of many large cities). Families and entrepreneurs make significant
investments in their “properties.” But there is a crucial difference between those
assets and their counterparts in the developed world: The owners have no legal
title to the property. They cannot legally rent it, subdivide it, sell it, or pass it on
to family. Perhaps most important, they cannot use it as collateral to raise
capital.
Peruvian economist Hernando de Soto has argued convincingly that these
kinds of informal property arrangements should not be ignored. He reckons that
the total value of property held but not legally owned by poor people in the
developing world is worth more than $9 trillion. That is a lot of collateral gone
to waste, or “dead capital” as he calls it. To put that number in perspective, it is
93 times the amount of development assistance that the rich countries provided
to the developing world over the past three decades.
The Economist tells a story of a Malawian couple who make a living
slaughtering goats. Since business is good, they would like to expand. To do so,
however, would require an investment of $250—or $50 more than the average
annual income in Malawi. This couple “owns” a home worth more than that.
Might they borrow against the value of their land and the bungalow they have
built on it? No. The home is built on “customary” land that has no formal title.
The couple has a contract signed by the local village chief, but it is not
enforceable in a court of law. The Economist goes on to note:
About two-thirds of the land in Malawi is owned this way. People
usually till the land their parents tilled. If there is a dispute about
boundaries, the village chief adjudicates. If a family offends gravely
against the rules of the tribe, the chief can take their land away and
give it to someone else.
8
Those informal property rights are like barter—they work fine in a simple
agrarian society, but are woefully inadequate for a more complex economy. It is

---

bad enough that poor countries are poor; it is all the worse that their most
valuable assets are rendered less productive than they might be.
Property rights have another less obvious benefit: They enable people to
spend less time defending their possessions, which frees them up to do more
productive things. Between 1996 and 2003, the Peruvian government issued
property rights to 1.2 million urban squatter households, giving them formal
ownership to what they had previously informally claimed as their own. Harvard
Economist Erica Field determined that property rights enabled residents to work
more hours in the formal labor market. She surmises that property rights give
more flexibility to people who previously had to stay home, or had to operate
improvised businesses out of their home, in order to protect their property. She
also makes another important point: Most programs designed to help the poor
reduce their work effort. (This is the Samaritan’s dilemma; if I ease your
hardship, you have less incentive to help yourself.) Providing formal property
rights does the opposite: It encourages work.
9