Poverty and Property
Thirty years ago, the hills around Turkish cities were stacked with unlicensed shantytowns with no proper infrastructures. Today, even the slums in Turkish cities have proper sanitation, tidy paved streets and even parks and well-maintained schools1. Turkey has achieved urban explosions and economic growth similarly seems in India and China in the recent decades1. The stories however are very different in many other countries. For example, Zimbabwe has not been able to recoil from economic turmoil since the 1990s, and about 20% of the Zimbabweans population has left the countries to escape hunger and poverty since then8. In fact, earlier this year, the government of Zimbabwe came to the believe that their unemployment rate has achieved an astonishing 95%
. Why have some nations developed and others have not? The issue of poverty and development is a wicked and complicated problem but the story in Peru during the 20th century seems to offer an insight to a solution.
Since the 1960s, Peru has been experiencing economic and political chaos. Despite various political reforms adopting various strategies, economic problem worsened and hyper inflation achieved upwards of 7600% inflation in the 1980s 3. The issues revolving around poverty and development have constantly bothered Hernando de Soto since he was an economic student and eventually became an obsession. Instead of speculating theories only, Hernando left his job as a managing director of Universal Engineering Corporation and pursued the problem solving at the ground level. What Hernando and his institution uncovered in Peru and later many other parts of the world was a large-scale informal sector or black market at a magnitude nobody could have ever imagined. For example, during 1960-1980s, the black market entrepreneurs have constructed housing for low income families valued at $8.3 billion, which was 48 times more than what the state has spent4. 95% of the transportation in Lima was provided by the black market, which has totaled an investment of more than $1 billion in vehicles and vehicle maintenance.
The informal sector is either invisible to the world or is associated with negative stigma. To the policy makers of Peruvian governments, these are law breaking people depriving of state of funds and a problem to be dealt with. To the western world, top down planners are not aware of the informal sector and generally believe that uneducated people of the developing world are not capable of conducting business and creating their own value 4. It was only until the 1980s that Hernando and his institution IDE became genuinely interested of these peoples' perspectives at and saw the sector as opportunities. They were the only and first organization that took interest in understanding the street vendors about their activities, their plans, and problems as the only discussion held before with the vendors were only aimed at suggesting ways to getting them off the streets or into jail. While this informal market are breeding grounds for providing jobs and creating some values, it is susceptible to many pitfalls and dangers. Hernando argues that the wealth and value are locked in the black market , prevented from maximizing its full potential.
After his years of research at the ground level, in 1987, Hernando published his famous book “The Alternative Path” in which he encourages the government to become assign property rights and people to embrace market economy that has already been undergoing, albeit an informal one. The central message is that no successful market can run without a proper record of ownerships an enforceable property and business rights. Hernando argues that insecure property rights weaken the incentives for owners to make long-term capital investments. It also hinders the ability of owners to use their property investments as collateral to secure loans to expand businesses. Without property rights, there is no way to access credit, which is the fundamental element required for economic growth.
To further demonstrate why informal market hinders wealth creation, imagine you are a citizen who owns an illegal housing. On one hand, you are not likely to invest in proper maintenance if you are not sure you own it. On the other hand, even if you are willing to invest in proper infrastructure such as water and sewage system, the legal companies with permits simply cannot do its work since you have no ownership and records. Property rights and securing titles have been shown to encourage the poor to invest in improving their houses. Another problem with extralegal sector is that the system inherently cannot evolve into a complicated monetary system. For example, without title, business and landowners or family owners cannot turn their assets into credits and expand into more business. The whole economic system cannot evolve to produce more complicated activities such as stocks without the most fundamental records of ownership and securities. Lastly, the extralegal sector leads to a huge waste of time and resources to resolve business exchange and conflicts due to lack of proper political securities in place. The success of entrepreneurs who want to make a living for their families depends not on innovation or hard work but their abilities to corrupt the institutions. The environment encourages growth in activities that are nonproductive and parasitic.
While critics of Hernando’s points out his reforms regarding property rights are biased toward the people who do have ownership of assets, the ripple effects of economic activities would ideally have positive influences to those who may have been left out initially. The economic changes in Peru under the advisory of Hernando de Soto and ILD seems to be the most evident clue that confirms Hernando de Soto’s theory on poverty rights and development. In particular, ILD designed the administrative reform of Peru's property system, which has given titles to more than 1.2 million families and helped some 380,000 firms, which previously operated in the black market to enter the formal economy9,10. Between 1990 and 2012, Peru’s middle class grew four times faster than the rest of Latin America’s 10. To further test the hypothesis of Hernando de Soto, economic professor Claudia Williamson decided to map the property rights against the economic well being of nations5. It was shown that property rights are strongly correlated to positive economic growth such as gross domestic product per capital and domestic credit. The study concluded that as property becomes more secure against risk of expropriation, the level of development increases dramatically.
While there are many factors at play around the issue of development, it seems that property rights and ownerships plays a huge role in a nation’s trajectory. Since the 1980s, Turkey has been slowly recognizing the simple economic fact that ownership matters. On the other hand, it is clear that Zimbabwe has failed to recognize this as a serious problem. It is unlikely that unemployment rate is as high as 95% in Zimbabwe. What is happening is that most employment resides in the informal economy due to lack or access to property rights . These businesses resides outside of regulations and taxation, and unable to maximize its full value and potential. The stories repeated throughout the world seem to reconfirm this: proper recording of ownership matters.
