Property rights drive growth

On behalf of Britains Department for International Development (DfID), a team of ODI researchers systematically studied all relevant academic essays on the matter. Their own publication introduces readers to the proponents of the thesis that land rights drive development as well as to their critics.

The ODI quotes four core arguments from a text-book essay (Besley/Ghatak 2009) on the merits of regulated land ownership:

• Security: investors aim for profits, and the profits need to be protected by well-defined laws. A lack of legal certainty may result in corporations or individual persons being deprived of what they have gained economically.
• Efficiency: the rule of law makes it possible to transfer capital to those who are in a position to use it best.
• Less spending on security: individual people need to make less effort to protect what they own. Therefore, they can use their resources more productively. 
• Transaction facilitation: formal land ownership can serve as collateral in financial deals, so real estate can serve to leverage more capital.

There are, however, sceptics who doubt that land rights make much of a difference. The ODI publication re-iterates their arguments too:

• Formalising land ownership can trigger tensions and exacerbate social inequality, and both will hamper growth.
• Defining and implementing land rights is expensive. The funds need would be better used to improve existing legal norms and their enforcement. 
• It is more important to promote other issues that are relevant for fostering growth than land ownership.  

Even the proponents of land rights do not dispute that other issues, such as the fair distribution of wealth and the level of competition in the financial sector, matter too. Most scholars agree that formal land ownership is useful in general. However, the ODI authors point out that the rule of law tends to be weak in very unequal societies, which in turn is an obstacle to economic development.

The ODI publication quotes empirical studies for all hypotheses. They report that many researchers have come up with examples of secure ownership being correlated positively with long-term growth. One study used data from 64 former colonies that had lost their independence in past centuries. The statistics show that formal land ownership plays a significant role.

One of the studies quoted in the context deals with North and South Korea. Both countries share historical and cultural roots, and their geography is similar. The social order, however, is totally different today – and so is the standard of living. The researchers point out that the per-capita income was the equivalent of a mere $ 1000 in Communist-run North Korea in 2000, whereas the respective figure for capitalist South Korea was $ 16,000.

Those who object to the ownership thesis argue that other issues matter more, for example geography, health and human capital. They also use the examples of North and South Korea and the 64 former colonies to make their case, but they interpret the data differently. Their emphasis is on education in particular. They show that, from 1960 to 2000, countries with high levels of knowledge and skills fared much better than those with poorly trained populations.  

The ODI authors admit that it does not make much sense to try to explain complex societal phenomena with one single cause. It is interesting, however, that they struggled to find empirical proof for the notion that formal land ownership facilitates financial services. Ultimately, they argue, more data is needed to analyse trends in different countries conclusively.

Sabine Balk