- Integrating Technology and Institutional ChangeToward the Design and Deployment of 21st Century Digital Property Rights Institutions
If you ask any economist what drives the development of human societies over the long term, you are likely to get one of two answers: technological change and innovation, or institutions, notably those that enable the definition and defense of formal property rights.1 While the individual importance of each of these factors is largely uncontested, the interaction between the two is almost unstudied.
Granted, human societies existed for millennia before the development of formal property rights—deeds, titles, and the like. In some societies, the very concept of private property is still almost alien. Yet in the absence of both robust informal mechanisms to structure social relationships and formal mechanisms to establish clear ownership over goods, the incentive to engage in economic exchange is severely attenuated. After all, how is it possible to engage in exchange if the parties involved do not know who owns what, or what is implied by a trade? Moreover, without property rights, individuals have less of an incentive to engage in productive activities and invest their assets to create economic value.
Property rights also are crucial to the functioning of credit markets, where individuals and businesses pledge assets as collateral; credit markets in turn are a key to economy-wide growth.2 For these reasons, wherever societies have grown and informal mechanisms for tracking reputations have become strained, the definition and enforcement of formal property rights have correspondingly increased in importance.
Over the past 25 years, economists and policymakers have increasingly recognized the role played by institutions in general, and property rights in particular, [End Page 113] in the process of economic development. The impetus for this new emphasis has come from both the core and the edge of economic theory. Iconoclastic Peruvian economist Hernando DeSoto is one of the most prominent advocates of the importance of property rights in economic development and alleviating poverty. In his book The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, he states:
Property, then, is not mere paper but a mediating device that captures and stores most of the stuff required to make a market economy run. Property seeds the system by making people accountable and assets fungible, by tracking transactions, and so providing all the mechanisms required for the monetary and banking system to work and for investment to function.3
Although organizations such as DeSoto’s Institute for Liberty and Democracy have sought to persuade governments around the world to advance development by reforming their formal property rights institutions, the outcomes for which DeSoto and his allies have advocated have been slow to materialize, despite increased appreciation among development professionals of the importance of property rights. Cumbersome processes persist, making economic “formalization” more costly than it’s worth for many impoverished households and small-scale entrepreneurs. Moreover, enforcement is often lacking, which results in expensive and time-consuming judicial processes that render formal property rights institutions of little use to individuals and businesses. More to the point is the fact that, in many places, incumbent elites who advance narrow interests have sought to obstruct rather than embrace systematic improvements to property rights systems.4
Why have reform efforts failed to yield more satisfactory outcomes? In this essay, we consider several of the challenges of formal institutional reform. We argue that the current environment of technological possibility provides opportunities for significant improvements to formal property rights institutions. We believe that appreciation for the manner in which technology sets the context for the documentation, validation, and enforcement of property rights has been lacking, both in theory and in practice. In this context, technology not only refers to the physical hardware required to maintain a formal property rights registry—paper filing systems, computers, mobile phones, etc.—but also to the specific organizational routines that enable the hardware to function. Furthermore, we note that a property rights system has multiple components, each of which may use a different technology. These include systems to communicate the existence of rights and to share instructions with potential users; the registry itself; a mechanism...