Are insecure property rights holding back Pakistan’s economy?

We need to attempt to reform the institutions which govern us, better property rights might be a good place to start.
Updated 01 Aug, 2019 03:59pm
Traffic snarls up outside the Zaman Park residence of Prime Minister Imran Khan during protest by Eden Housing scam victims in September 2018.— White Star
Traffic snarls up outside the Zaman Park residence of Prime Minister Imran Khan during protest by Eden Housing scam victims in September 2018.— White Star

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We live in an unequal world. I don’t mean inequality in the sense of within country, but between countries.

This essentially means that, for a minority of the world’s population, their place of birth allows them to be wealthier and healthier than those born in a less developed country.

Interestingly, before the late-1700s, the world might have been significantly more equal. While England, the Netherlands and some other European states had started to pull ahead a few centuries earlier, the gap wasn’t as stark as it became over the next century as technological innovation grew at a rapid scale.

As other countries followed, some countries — starting with England — industrialised, others didn’t. The income gap increased between countries — this is known as the Great Divergence.

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Since then there has been some convergence — with some (mainly Asian) countries growing rapidly and, and as a consequence, the gap between advanced and developing countries has narrowed, but still remains significant.

The question which arises here is this: what allows some countries to be significantly richer than others? Similarly, why have some developing countries been able to move ahead so rapidly, and many others, like Pakistan, haven’t?

The answer to why some countries have done better is complicated and heavily contested. So is the premise I just set here.

This is because there are likely to be many reasons for this — certainly more than what can be covered here, and probably more than what economists have been able to identify — but one explanation might have do with the existence of secure private property rights allowing some countries to move ahead of others.

Why property rights?

Let’s start with the basics. Property rights refer to an owners right to consume, use or even sell, barter, or gift, of an asset.

Think about this way: when you buy a plot of land, you acquire right to that property. You have the right to use it, build on it, exchange it for something else, sell it or gift it.

You can legally exclude other people from using your plot of land.

The same logic can be applied to intellectual property — if you come up with an idea, access to secure property rights would give you the ability to own that idea and benefit from it.

This has enormous benefits. It incentivises people to invest in the accumulation of assets — whether it is plots of land or ideas. Because these rights are tradable, they can be marketed and efficiently allocated within the economy.

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Consider a rather common anecdotal scenario which I have often heard a version of in Pakistan.

Imagine you own an undeveloped plot of land in the centre of Lahore. From your perspective, you want to sell the land to a buyer who has the capital to invest in it, but you cannot because your property rights aren’t secure. Perhaps the ownership over the land is contested and the courts have blocked its sale.

From the larger market perspective, that land acts as dead capital. It has an opportunity to be used for an economic activity, which would generate growth, but it cannot because the property rights are insecure.

When you drive around the centre of a bustling city like Lahore or Karachi and see some plots lying empty despite economic growth, it might be a reflection of insecure private property rights.

Going away from the analogy of plots, let’s briefly talk about something which is even more critical to economic development: ideas.

Ideas reflect innovation. If you come up with something new — perhaps a smartphone application or a new way of manufacturing something — and your ideas can be stolen, you have less incentive to spend time and energy in developing them.

In this way, lack of property rights ends up disincentivising innovation.

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In England, it has been argued, though with significant detractors, that the Glorious Revolution of 1688 led to the strengthening of private property rights. Due to the the monarch's shrinking power and the strengthening of the parliament, the state's power to expropriate property was reduced.

This security incentivised commercial expansion, with people theoretically more willing to invest, take the risk and acquire more assets.

It is hard to empirically prove that property rights were the most important determinant which led to this commercial expansion. However, it is likely that it is part of the story.

Even those who disagree that property rights were at the core of the Great Divergence and part of the growth story of many other countries since then, do not argue that secure, marketable private property rights are not conducive to economic growth.

This is more than reason enough for Pakistan to strongly consider how to strengthen private property rights.

How to establish secure property rights?

There are four interlinked features suggested which would allow such protection to emerge.

First, property rights need to be well-defined. This would deter the emergence of disputes and create a common stock of knowledge on who owns what.

For example, Pakistan's notorious patwari system is essentially a manifestation of badly-defined property rights.

The system empowers a person — a land record officer — to maintain large records of property owners. These officers are ill-famed for seeking bribes to grant the right to property, creating unnecessary costs.

Second, property rights need to entail a credible commitment that property cannot be expropriated, either by the state or another private party.

In other words, once a person acquires an asset, they can maintain a credible expectation that their asset will not be taken over by the government or any other party.

Keeping with the analogy of land, the current affair surrounding Bahria Town, a large, under-construction gated community located north of Karachi, symbolises this lack of credibility rather well.

It does so in two ways.

First, the people who lived on the land — acquired illegally by the developer — lacked this security as the state wasn’t able to secure their right to their asset.

It also demonstrates the failure of this security for the people who bought assets in this gated community. Their property rights are also insecure and would disincentivise investment in asset accumulation in the future.

Third, the right can be leveraged, if possible, for capital. For example, the owner of the asset can use the said asset as collateral to finance further capital accumulation or investment, such as buying a house and then taking a mortgage against it to finance investment in another venture.

For this to happen, the property rights need to widely accepted — something which can only emerge if the prior two points are implemented, but this will also need a robust infrastructure to support contractual arrangements which would allow this to be possible.

When a bank gives you a loan against your house, the bank needs to be reasonably certain that if you default, they can foreclose on your house to secure their risk, as per the contractual arrangements in place.

This brings me to the last aspect of secure private property rights — that the asset is tradable, where possible.

The great thing about good property rights is that you can trade assets — and they should end up being utilised in a more efficient way.

Think about that vacant plot of land you have in the centre of Lahore. Now that you have secure property rights, it means your right of ownership is well-defined and there is credible commitment that no one can illegally take it from you.

At that point, you can sell it. A developer could come in and use that land to build apartments, creating growth and housing in a city which desperately needs both. The dead capital is no more.

No silver bullets

I want to stress that there are unlikely to be any silver bullets which will lift us to prosperity. Moving towards such a future would require broad institutional reforms.

One of these reforms are better protection of private property rights, for the arguments outlined above.


Are you examining Pakistan's potential for economic growth? Share your insights with us at prism@dawn.com

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Shahrukh Wani is an economist at the Blavatnik School of Government, University of Oxford. He tweets at @ShahrukhWani


The views expressed by this writer and commenters below do not necessarily reflect the views and policies of the Dawn Media Group.

Comments (9) Closed

Faraz
Jan 16, 2019 06:04pm
very valid statement made by the author. I too agree that property rights are key to unleashing some of the trapped economic potential of Pakistan. Ownership documents are surprisingly still not computerized in this day and age - perhaps because it aids those who want to take advantage of this flaw and obtain bribes etc.
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Z. Saadi
Jan 16, 2019 07:31pm
An excellent article indeed. yet, the author appears attempting to teach us how to bake a cake while we don't have dough for a bread. In Pakistan, our issues are speedy justice and rule of law. The imaginary plot of land that he alluded to, wouldn't unfortunately get to be taken from the land mafia and handed to the rightful owner by our courts and police till the owner is already dead or at least too old and broke to make any use of it (and that is if he gets really lucky). First and foremost, we need to reform our Justice system to ensure enforcement of laws already in place. I hope our CJ would attend to this challenge also, once he has done away with building dams and visiting hospitals. Enough said.
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Naveed Burki
Jan 16, 2019 07:42pm
Most Pakistanis in USA I have talked to, gave this answer: Closer relatives in Pakistan have assumed the full rights to family property and given the hardworking relatives abroad practically nothing.
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ZuBair
Jan 16, 2019 10:07pm
Man, I am so glad somebody is talking about this. How is a Overseas Pakistani like me supposed to invest in Pakistan. You buy a property in Jhang, the guy behind you sells your land. Now you gotta fight against them Shiek waqas(shiek bakwas) madolal (muturlal) khurrum sayal (jurrum sayal), Rana ajee whose running the sugar mill for Jawas sharif. and spend two years in court, only to get nothing at the end. You buy a 1 kanal in Toba, you can’t open you door on to the street because the lawyer next door won’t allow it. The patwari, won’t make a make a map for you because. The lawyers own him. What a freaking mess. What idiot would want to buy property or invest in Pakistan after that?
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Pathanoo
Jan 17, 2019 02:10am
YES. Do you even have to ask that question?
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sarbjit sidhu
Jan 17, 2019 02:58am
A very needed article. The ill defined property rights are the root cause of endless litigation, corruption and disharmony in families. Police and politicians are able to distribute favors. East Punjab also suffers from this malady. It is our common heritage. Time that this cause of family and social disharmony is corrected.
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junaid
Jan 17, 2019 04:52am
Ideas cannot be copyrighted only implementations. The author has also not touched on the lack of digitalization of property records. Digitalization would bring greater transparency. Right now no one can tell for sure who owns what.
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Kanza
Jan 18, 2019 05:59pm
how do you suggest a commitment be obtained from the state to not expropriate land? The state has the power of eminent domain under the Land Acquisition Act, unless you are suggesting the law be amended, I don't see how it can be done.
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M.A.Naz
Jan 18, 2019 10:52pm
An excellent article. Unless some laws are made to protect the property being taken away by mafiahs and courts drag justice for years, overseas Pakistanis may not be motivated to invest in real estate and other intellectual innovations. Government should give protection and then see the results.
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