Guaranteeing Private Property Rights: The Most Important Reform for Developing Countries

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Mohandass Kalaichelvan's picture

Sustainable long-run economic development requires carefully planning from the perspective of developing countries (DCs). This article asserts that the single most important institutional reform that must be undertaken by DCs is to ensure that private property cannot be taken by the government without just compensation. This reform is focused on the protection of private property rights in a DC but it connotes 3 implicit but critical underlying components: (1) a well-functioning, independent and non-corrupt judicial system that is equipped with the will and capacity to enforce private property rights, (2) credible commitment from the government to obey the rulings of the courts regarding private property and (3) strong contracting laws which allows individuals and groups to title private assets and enforce such contracts. The structure of the article is as follows: first, the article will analyze and expound on 3 benefits of private property rights for DCs; second, the article will set 2 domain conditions which are necessary for the reform to be effective in a particular DC; and last, the article will review 1 prominent counter-argument which highlights that the institution of private property rights might not yield satisfactory results on its own.

First, this article asserts that an institutional reform to protect private property rights will improve the allocative efficiency of a DC. In the context of this article, institutions are independent mediums that ensure that private property is protected from unjust government confiscation. Scholars such as Acemoglu believe that, “competitive markets, in conjuncture with well-defined and enforced property rights, allocate resources efficiently” (2011, 5). Hence, the primary benefit of private property rights in a DC is the resulting allocative efficiency in the market. Allocative efficiency is an extremely crucial element for growth in a DC because it ensures the optimal equilibrium between the prices and quantities of goods and services produced in an economy. Without private property rights, the government is able to unjustly confiscate private property which affects the allocative efficiency of the economy because it prevents the functioning of the price mechanism. For example, Bates highlights how state farms in countries such as Ghana came into being by expropriating lands from smaller farmers, subsequently sold produce well below market cost to appease the urban workers, and in the process consumed “an enormous portion of the public resources available for agriculture…” (1981, 47). Hence, this example is a clear indication of the allocative inefficiencies that are caused by a clear violation of property rights by the government. Stronger property rights lead to better allocation in a society through a well-functioning price mechanism, undistorted by needless government intervention.

Second, in addition to allocative efficiency, strong private property rights will also lead to a general increase in wealth of a DC. Scholars such as O’Driscoll Jr. and Hoskins find that GDP per capita is almost 5 times as high in nations with the strongest protection of property [$23,769] than in those which showed clear signs of deteriorating property rights [$4,963] (2003, 9). How exactly does the protection of private property from unjust government confiscation lead to economic growth? Besley and Ghatak highlight 4 critical reasons as to how enhanced private property rights lead to economic growth: first, they argue that through the reduction of expropriation risk, individuals can finally reap the full gains of their labor and capital investment; second, it allows individuals to put their assets to productive use without expending costs to defend it; third, it allows society to reap the gains from free trade since assets are used in their most productive role; and last, enhanced property rights facilitate other market-based transactions since collateral can be valued accurately (2009, 4528). Hence, this article asserts that a market-based economy with property rights will set itself up for long-run economic growth.

Third, this article also argues that property rights would instantaneously increase the wealth of many poor people in DCs. De Soto advances the argument of “dead capital” in many DCs, which he defines as an asset that cannot easily be bought, transferred, sold, or used as collateral because of insecure property rights (2000). Furthermore, De Soto asserts that the value of savings of world’s poor is almost forty times all the foreign aid received throughout the world since 1945 (2000). However, the poor in DCs are unable to title their assets safely, which De Soto argues leads to corruption in society as these assets are not protected by the rule of law (2000). Hence, this article wholly agrees with his view that the poor would be able to improve their lives in a society where their private property is titled and protected by a non-confiscatory government.

Next, the article would like to outline 2 domain conditions for the introduction of this institutional reform in DCs. Despite its aforementioned potential long-run benefits, it is not a one-size-fits-all panacea for all DCs. First, this article asserts that the government must be able to credibly commit to enforcing secure property rights for its citizens. North and Weingast argue that governments can credibly commit by either setting a precedent of responsible behavior or by internal constraints that prevent the governmental abuse of power (1989). This article believes the latter would be the best mechanism for credible commitment in DCs for the security of private property rights. Many DCs are in constant political upheaval and it would be immensely difficult to set a precedent of responsible behavior that would appease individuals and market investors. Hence, this article believes that the enforcement of secure private property rights can only occur in DCs which have internal constraints in the form of independent institutions that can check the power of the ruling government. Without such a guarantee, the market-based economy will not take off in DCs and this deficiency will continue to hinder economic growth.

Second, Acemoglu makes a compelling case that although the enforcement of property rights generally seems to be beneficial to all states; this reform has differing impacts based on the nature of the society that it is implemented in. Acemoglu makes the distinction between “oligarchic” and democratic societies (2008). In “oligarchic” societies, despite the presence of property rights, political power is typically concentrated in the hands of an elite few major producers. This concentration of power in “oligarchic” societies leads to the creation of significant entry barriers which infringe upon the rights of other producers (2008). On the other hand, Acemoglu argues that political power is more diffuse in democratic societies which lead to less significant entry barriers, but such societies suffer from the disincentive effects of redistributive taxation (2008). Acemoglu concludes that “oligarchic” societies will develop a lot more quickly vis-à-vis democratic societies ceteris paribus; however, such “oligarchic” societies eventually run into growth problems in the future because they do not encourage enough entrepreneurship as democratic societies. In addition, new technology is better adapted by democratic societies as there are fewer barriers to the diffusion of novel ideas. Hence, this article asserts that although the protection of private property will yield positive results in both “oligarchic” and democratic societies, higher-quality sustainable growth will only truly occur in countries that are willing to make the transition from “oligarchic” to democratic societies as well.

Despite the aforementioned benefits of private property rights for DCs, this article would like to analyze a compelling counter-argument which suggests that this reform might not be the best solution. A poor country faces great difficulty in trying to engineer a strong property rights system from the bottom-up. Although this article mentioned that democracies are better suited to benefit from strong private property rights in the long-run, O’Driscoll Jr. and Hoskins argue that “establishing a democratic form of government is no guarantee of a strong private property rights system” (2003, 11). For example, the authors explain that there are poor and illiberal democracies such as Argentina that flagrantly violate property rights via a confiscatory government. Another tricky observation is that democracy does not even seem to be a necessary condition for the protection of private property rights. O’Driscoll Jr. and Hoskins highlight that countries such as Chile and Hong Kong, which are being governed by a dictatorship and an external authority respectively, actually possess strong property rights systems (2003, 12). Hence, the question then arises: does a democracy aid the establishment of a strong system of property rights? Or does a system of strong private property rights eventually lead to democratization? More light needs to be shed on the direct flow of causality between these 2 elements before this article’s recommended reform can be established as the single-best reform for a particular DC.

In conclusion, this article strongly advocates for a well-functioning system of private property rights as the best institutional reform for DCs. However, this potential reform must only be utilized when the aforementioned 2 domain conditions are met. In addition, this reform is not a silver bullet for all ailments of a DC; instead, it must be utilized wisely, together with other social, economic and political measures for long-term sustainable economic growth. 

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