This video features Peruvian economist Hernando de Soto who estimates that poor people in the developing world hold $US10 trillion worth of assets for which they don’t possess formal property rights. We have talked about free markets and entrepreneurs. But neither of these things can be effective without secure property rights. But what are property rights?
Economist Armen A. Alchian described property rights as:
the exclusive authority to determine how a resource is used
In other words, a property right means that a person owns something. This can be land, a house, a cup of coffee or their own labour. The right to own things goes to the heart of what it is to be human. Property rights are human rights. Alchian also says:
a private property right includes the right to delegate, rent, or sell any portion of the rights by exchange or gift at whatever price the owner determines (provided someone is willing to pay that price)
For the full definition of property rights from the Library of Economics and Liberty, click here.
If property rights aren’t secure then there is less incentive for entrepreneurs to innovate. This is because there is a chance that any new things entrepreneurs may create will be taken from them. If property rights are unclear, then entrepreneurs aren’t able to borrow money from banks, or expand their businesses as easily. In the United States, 70% of businesses are started with bank loans where the family home has acted as collateral. This is not possible without clear property rights.
In many poor countries, however, property rights are not secure or clear. Often people’s property isn’t safe from being stolen by others. Even worse, people may have their property stolen by the government. More commonly in poor countries, it is simply too complicated for people to prove that they own their property to third parties like the government or banks, particularly with regards to land, houses and business assets.
The International Property Rights Index (IPRI) 2014 gives countries a rating on the security and clarity of their property rights. The graph below shows that countries with better property rights have higher GDP per capita, clearly demonstrating the link between property rights and economic wellbeing. For more information on the IPRI, click here.
This piece written by the IPA for The Cambodia Daily is about how improving property rights in Cambodia is a moral imperative and will help the economic growth that is currently occurring in the country reach the poorest corners. This IPA piece published in New Vision Kampala in Uganda examines how property rights for slum-dwellers in Kampala, Uganda’s capital, could mean the end of slums there.