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Brookings-Wharton Papers on Financial Services 2001 (2001) 272-278



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Comment and Discussion

[Effective Property Rights and Economic Development:
Next Steps]

Comment by Jenny Lanjouw: I agree with the general thrust of the paper and also with the entire program to encourage governments in developing countries to think about the importance of formalizing informal property rights. In that spirit, I am going to air some concerns that came to mind as I was reading this paper.

First, I want to take issue with the idea that formalizing property rights is essential to getting poor people to buy into a capitalist system. There are many examples in developed and developing countries where a large part of the economy is operating in the gray market or extralegally and people are not at all unhappy with being in a capitalist system. The bottom line is how people view the distribution of economic benefits; whether they have formal rights or informal rights is not always essential to that view. So, although I agree that privatizing rights could be instrumental in helping people to buy into the system, I do not think that it is essential.

Privatizing property rights has the potential to be positively detrimental to achieving the desired goal. A certain kind of distributional optimism pervades the paper. For example, it says that the beneficiaries
of any program that formally recognizes informal property rights inevitably--and that is my emphasis--are the poorest workers and residents in the country.

Bear in mind that what is being suggested is a very large transfer of wealth. It is the creation of wealth, because property will be used more efficiently, but it is also a big transfer of wealth. This is true whether you are talking about large landowners with squatters all over their property who are now going to get titles, which is a transfer from large private landowners to small landowners, or whether you are talking about government [End Page 272] property held in the name of the whole society that is being converted into individual private plots, which is a transfer from society into individual hands.

If the figures presented in the paper represent the scope of the project that the authors are suggesting, then they propose opening up property claims in most of the developing world. In that kind of a situation, I would make the opposite assertion: any program to formalize property rights will inevitably convey most of its benefits to the rich--a Murphy's law of policy. Other studies show that if you design these kinds of programs well, you can ensure that the right beneficiaries get the benefits, so such a program might benefit the poor if it is well designed. Still, there is a real danger that it will not.

To make that concrete, I have done work in this area with squatters in Ecuador. In big land invasions, several hundred people appear overnight and squat, say, on a park or next to a railroad. Time passes--and the process can be expensive and long drawn out--but eventually many of the squatters obtain title. Public property is transferred to private hands, but at least they appear to be poor private hands. However, those poor people often paid to squat on that property. Whom did they pay? Often the person who is actually benefiting to a large extent is somebody who is not in any danger whatsoever of being described as poor. This is just one example and one that I happen to be familiar with from my own research. I have no doubt that the same kind of situation is found elsewhere.

So if you make it easier for squatters to obtain title and you make property more valuable because it can be used as collateral, the likely result will be to raise the price of squatting in the first place, with much of the benefit going to the rich. This is something to bear in mind, because it implies that we should not be complacent in thinking that we can just formalize titles without worrying about the process and...

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