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.
Published January 16, 2019
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.

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