Debating Dead Capital

Over at Slate, John Gravois has a piece slamming Hernando de Soto's claim that conferring property rights are key to fighting poverty. Formal property titles, says Gravois, rarely translate to credit access and create incentives to kick the poor off their (newly valuable) land. Even if he has a point, as he may in the case of Cambodia, he completely misses key benefits of land titling. As economist Erica Field has pointed out frequently in her studies of Peru, formal land ownership frees up the urban poor to leave home and go to work rather than keep constant guard of their tenuously held homes. The most dramatic effects seem to be on household labor supply, not credit access, and taking down De Soto means tackling that observation.

Comments

[Shem]

I still can't keep myself from wondering what a former conquistador is doing shilling for private property every time I read Hernando de Soto's name in print.

[Matt F]

"...taking down De Soto means tackling that observation."

Unfortunately, that's not true. De Soto's fundamental argument is that official land tenure provides access to capital and the resulting opportunities for entrepreneurial activity. Benefits such as the labor market changes that Field studies are nice and all, but they are incidental to De Soto's gospel.

Note that Field's paper about access to capital confirms Gravois - not De Soto, and this is even in Peru, where De Soto has presumably had the best opportunity to work his magic.

[toronto libre]

Um, i don't think de Soto intended for his argument about land titling to be presented in a vacuum, do you? Gravois must be yanking all our chains when he uses the example from Cambodia; did de Soto really argue that the mere act of giving a title is the solution, regardless of whether the government is free of corruption?

[Matt F]

No - De Soto didn't intend for his argument to be presented in a vacuum. Rather, he argues that land titling is a way for the poor to better themselves even when the existing legal order is stacked against them. I assume he'd never suggest that his ideas would only work when the government is free of corruption. But if a land titling scheme presents such an opportunity for moral hazard, we ought to know about it and consider that among the possible unintended consequences.

Contrary to the tone of my comment above ("magic," "gospel"), I'm quite a fan of De Soto's theory. But if his policy prescriptions only work in a clean room, they aren't worth much.

[joe]

No, toronto, he wrote that the titling of land was especially important in areas where the government was corrupt, and seeking to protect the interests of the rich by erecting barriers to the poor. In "The Other Path," he goes to greath lengths to demonstrate how the corruption of the regulatory system drives the poor out of the formal, legal economy, and presents the titling of land as the solution to this structural problem.

[Shannon Love]

The real flaw is Gravois' critique is that he mistakes the property system on paper to the actual functioning system in the real world. Unless the actual system functions much like the property systems of the 1st world it won't produce the economic and political benefits that de Soto envisions.

As we learned with "Privatization" and "Deregulation", even in the 1st world, just because a politician slaps a label on some law doesn't mean it will actually accomplish what the name implies. Just because a 3rd world nation passes a law saying that people now have private property and that specific individuals have title to specific lands doesn't mean that the actual system works that way. If actual system doesn't function like something very close to 1st world property system then the new laws have failed to establish a working property system.

Peru and the other countries mentioned have no track record when it comes to private property. Historically, ones ability to secure ones property was based wholly on one's relationship with the political-oligarchs du jour. Peru's experiment is less than decade old and Peru has a poor track record of rule of law. The most likely explanation for the failure of the system so far is that lenders have little confidence in its long term stability. In the 1st world, loans backed by property are usually long term running from 5 years up to 30. I doubt lenders in Peru yet have confidence that the property law will remain unchanged 10-30 out. There is a long track record in Latin America of violent shifts in law based on revolution or even elections. A lender may have every expectation that if a Left of center government comes into power that they will find their liens on mortgaged property worthless.

Field's research is interesting because it shows an effect that seems wholly unanticipated by theorist of any stripe. More evidence that humanity as a collective whole really doesn't understand how economies work.

[Mike]

formal land ownership frees up the urban poor to leave home and go to work rather than keep constant guard of their tenuously held homes.

Right. Because their homes have been stolen by those who can most profit from the new land ownership.

[Mike]

Peru's experiment is less than decade old and Peru has a poor track record of rule of law.

If that's the case, isn't transferring land ownership putting the cart before the horse?

[R C Dean]

Far better not to burden the poor with property, one supposes, so that they can truly experience the freedom of utter poverty and life at the whim of those with the whip.

Cambodia! Nothing like a country wrecked by Communism to show that capitalism can't work.

[Shannon Love]

Mike,

"isn't transferring land ownership putting the cart before the horse"

I think there is a feedback loop established between the rule of law and private property. People with private property, especially small owners, become keenly interested in creating and maintaining a stable body of law that will protect their property rights regardless of which way the political winds blow.

If you look around in the real world you will see a direct correlation in different countries between the rule of law and private property with the latter driving the former. Historically, in the West, private property existed as a cultural phenomenon before it was encoded into law. The desire to protect property from confiscation by the state was a principle driver for limited government and rule by law.

Like all feedback loops it can be very difficult to get started. Hopefully formal law can start the cycle. The tipping point will occur when private property becomes viewed as a cultural right independent of the political system du jour. At that point, the property owners will fight to maintain the rule of law that secures their property.

[toronto libre]

Might this be a case of giving good ideas a bad name by executing them improperly? This seems to be the case with many free market ideas that get besmirched. A problem for libertarians is that when they try to bring this up in their defence, it sounds like the communists who believed that it would work if only it were tried the RIGHT way. Is de Soto's theory missing something, is it right and they just haven't implemented it properly, or is it just proven wrong, as Gravois claims, by empirical data?

[Jason Ligon]

Remeber, everyone. Creating $100 in wealth for someone in a very poor part of the world is a negative because it increases the probability that he will get robbed.

Much better to have nothing. What demonstrates economic policy success so clearly as having too little to rob?

[Mike]

Remeber, everyone. Creating $100 in wealth for someone in a very poor part of the world is a negative because it increases the probability that he will get robbed.

And remember, the fantasy of free markets is more important than the reality of squatters camps being burned to the ground. The same thugs that own the sweatshop you work in can now also own the land you used to live on!

The point is not that they shouldn't be getting the $100. The point is they are not getting in the old system, and they're not getting it in the new system. The article is not saying they *shouldn't* get the $100, it's saying they are *not* getting it.

[joe]

RC, Jason, did you even RTFA?

Nobody is proposing taking away anything that the squatters already have, either legally or de facto. In fact, had you R'edTFA, you would have noticed that in some cases, the process of titling the land made it more likely that the land and "rights" "owned" by the squatters would be forcibly taken away from them.

Now, do you have anything relevant to add, or will you limit your postings on the topic to the ignorant vitriol above?

[Jason Ligon]

Mike:

"The same thugs that own the sweatshop you work in can now also own the land you used to live on!"

They do anyway. Squatters have no claim on the land they squat currently. People with big sticks can always knock their houses down if there is no deterrent.

There is a rule of law axis and a wealth axis to this problem. I am unconvinced that you get more rule of law by fixing wealth at zero.

There is an aspect to the critique I don't follow. If the land occupied by squatters is desirable due to a robust real estate market after titles are given, why is that same land not valuable to developers before title is given? Who owns that land - the same government officials who are making money on the land after titles are handed out? Why would they wait until titles are issued to burn down squatter homes and line their pockets?

[Dynamist]

Giving a person property rights is giving that person the ability to collect rent, or not pay rent to another. If we cannot break the landed monopoly on rent, we might make everyone a landholder so there is a universal monopoly.

Combined with a protection to each for the product of his labor (personal property rights), one might be well on the way to an end of poverty.

[Jennifer]

I got the impression from the article that, while granting title couldn't hurt and often helps, it doesn't always help and should not be viewed as a cure-all for all places.

Property is usually a good investment, but not always. Even here, in the First World bastion that is Connecticut, there are certain neighborhoods in certain cities that may as well be in the Third World, economically speaking. A cheap, crummy house in most of the state will run you around $200,000, but I know areas where you can buy a fairly large condo for only around $35,000 or so. Problem is, the condo is so old and in such a crummy neighborhood that NO reputable mortgage lender would help you buy it, and it's nearly impossible for the owner to sell because anyone who has $35,000 on hand would use it as a down payment on a decent place, rather than squander it on a crummy condo in Waterbury. Owning title to such a condo would be better than homelessness, to be sure, but it's not exactly giving people a leg up on the financial ladder.

[Jason Ligon]

joe:

Just ignorant vitriol. It is my speciality. It suits the portion of the audience composed of willfully ignorant, condescending central planners.

Of course I don't think you are proposing taking anything away from them. You can't because they don't have anything. They are currently living at the whim of those with bigger guns, and they would be living at the whim of those with bigger guns after a titling program. Now they have nothing to fight for.

What is being said is that it is better for them to have no claim to wealth so that no one will rob them of it. It is an uninformed whitewashing of the plight of the squatter right now. How many are dislocated on a whim every year, even without title?

[Xavier]

The problem with the article is simple. De Soto's argument is that clearly defined and well enforced property rights are an essential condition for economic development. The author of the article misinterprets that to mean that a nominal title system supports economic development. It's a strawman.

[Dynamist]

Jennifer: The condition as you describe in Waterbury seems to present an opportunity for immigrants. Such groups are often more willing to tolerate crappy conditions for the chance to become invested. Are there regulations (zoning or hygiene) that would make it difficult for a group of Somali, Hmong, or Ecuadorans to pick that spot to build there future? Or perhaps there's just more housing in CT than there is need for?

[Matt Frost]

Xavier-
You're wrong about De Soto's argument. He argues emphatically that legal property tenure "supports economic development." I believe he's right, but in the wrong circumstances, the unintended consequences of legal titling can be worse than the status quo.

[Cisco]

The argument that the poor don't have to guard their houses and can go to work might seem a bit ludicrous to First Worlders, but having examples of it my (relatively affluent) town in Southern Brazil, I can say it rings true. A whole slum/squatter campo/favela set on abandoned land has become a large neighborhood here. It is still quite poor, but titling it has been helping.

Of course, there's a downside to titling that Reason readers might find interesting: before it, the people paid no taxes on their lands. Now the city government can charge these (still quite poor people) land taxes.

[Xavier]

Matt: There is a difference between a strong legally enforceable property right and a piece of paper that ostensibly grants a person property rights, which may or may not be accepted by the rest of society. No one would argue that the latter is a means to economic growth, but that seems to be what exists in the property regimes that the author of the article attacks. A country where property owners can be stripped of their land by thugs and arsonists is not a country with secure property rights.

I know de Soto talks a lot about the importance of formal title regimes, but I think it's implied that title needs to be a strong and enforceable claim on property.

[Shannon Love]

Those interested to see how similar events played out in Anglosphere will want to read up on the Enclosure Acts of 1700's.

Commons were divided up into parcels of private lands, most of which ended up in the hands of the wealthy. Former yeoman farmers dependent on the commons for wood or cattle grazing ended up as tenets or moved to the city to become factory workers or part of the emerging middle class.

Though painful for many, the Acts increased agricultural efficiency, lowered food prices and led to an overall rise in the standard of living.

[Ammonium]

I think this debate needs to be put into context.

There is strong historical proof that first world countries with robust economic growth and entrepreneurial activity need strong property rights to exist as well as a minimal regulations on business activity (de Soto's other major focus).

Obviously a formal title system is going to have less of an effect on people who have been placed on little patches of desert than people living in the middle of a large city. Formal titles have less value when they are titling nearly worthless property. It's not unexpected that a formal titling system fails to create an instant economic boom in such a situation. But the system produces some necessary conditions for long-term economic development.

I'm not sure how the Cambodian situation does anything to disprove de Soto. If anything it shows how important it is to maintain strong property rights, otherwise the government and people in the government's favor can kick people off their land on a whim. What good is a title if it means absolutely nothing? Governments love giving out meaningless little pieces of paper, but it doesn't eliminate poverty or cause economic growth.

[Jennifer]

Dynamist-
There's no housing surplus that I know of, here in Connecticut; it's just that in this very wealthy state there are pockets of land where the crime rate is so bad even the cops won't do anything. (Well, they'll go to Bridgeport or Waterbury if necessary to bust some kid smoking a joint; they just won't do anything about thieves, rapists and murderers. Priorities, y'know.)

Also, except for a few white-hot housing markets like Manhattan, I guess condos don't have much resale value around here. I don't know of the cheap cities being havens for immigrants on their way up; most of the immigrants I know of tend to be in the more suburban cities, doing things like running (and living in) inexpensive, rent-by-the-week motels. Those condos of which I speak--they would provide a place to live, but otherwise they'd be a money sink. Nobody wants to buy them. They're old, they're in a lousy neighborhood and they have no resale value.

[Chip]

A system of "formal property titles" that results in "the poor [geting kicked] off their (newly valuable)land" would seem to be lacking something.

[joe]

Jason, "If the land occupied by squatters is desirable due to a robust real estate market after titles are given, why is that same land not valuable to developers before title is given?... Why would they wait until titles are issued to burn down squatter homes and line their pockets?"

For the same reason developers in this country won't invest in construction until the title is clear - because their investment isn't safe without a title. The land is obviously desireable to developers before title is given, but doesn't really have value to them.

Without titles, they could burn down the squatters homes, but they probably couldn't get financing to build on land they have not title to, they wouldn't be able to provide titles to the buyers of the housing units/office suites they build, and they have no way of knowing whether the government is going to wait until the tower is built, the inform the developers that they are 50% stakeholders, due to their (the government's) ownership of the land.

[robert neuwirth]

An interesting thread. As someone who lived in squatter communities around the developing world for most of two years (I just published a book about them, called Shadow Cities), I'd like to offer this:

In Turkey, squatter communities have been able to grow, improve, and become permanent not because of property rights but because of political rights. Squatter areas are protected by two laws. First comes the gecekondu ('it happened at night') law: if a family builds a habitable dwelling under cover of darkness, or before the authories can find it and stop construction, they cannot be evicted without due process of law. Second, once there are 2,000 people in a squatter area, they can apply to become recognized as a legal sub-municipality. Then the squatters can organize elections and begin to raise money to provide municipal services. These laws, rather than any system of distributing private title deeds, have enabled scores of squatter communities in Istanbul to thrive.

On the other side, I met many squatter families in Turkey who went the property rights route. The problem is this: the government charged them for the piece of paper entitling them to their land. Some families are now so deeply in debt from the purchase price that they no longer have money to improve their homes or educate their kids. In the long run they are secure, but the title deed may in fact have retarded the development of their communities.

And think about this: around the world, there's a vibrant economy of people buying and selling and renting homes and businesses in almost every squatter community in every country (I rented in each community I lived in). That market exists without title deeds. People determine value and turn deals all without formal rules or pieces of paper.

Title deeds can be part of the way the informal city and the formal city choose to interact. But let's not confuse wealth building with community building. Private deeds may help some former squatters build wealth. But they won't necessarily improve the communities in which they're distributed -- and if they do, as Gravois notes, it may not benefit the original residents.

Some of my squatter friends desperately desire title deeds. Others prefer to keep the less formal rules they have thrived under for years. What they all want is a form of security -- a guarantee that they will not be summarily evicted. This can come in many ways -- through a political writ or a property deed or any number of other devices. The decision of what type of community to have and how to engage in social relations is complex and it should rest with the people who live in each squatter area.

[Ivan Osorio]

Here's my two cents.

http://www.techcentralstation.com/020305D.html

And to add another point - Robert Newirth gets at the central point--security.

A titling system that doesn't provide that is not fulfilling its central purpose.