Does It Make Sense To Impose Western Norms Governing Property Rights On Eastern Countries?

Does It Make Sense To Impose Western Norms Governing Property Rights On Eastern Countries?

Does It Make Sense To Impose Western Norms Governing Property Rights On Eastern Countries?

A popular belief is that rich own capital assets while the poor do not. But, if you look more deeply, you will see that the rich and the poor have accumulated capital assets, especially in the form of buildings. Economist Hernando de Soto argues that to extract capital out of buildings, we need a formal system of documented property rights. This is obvious if you think about it. An expert panel formed by the Indian government to decide the Net Present Value (NPV) of forests found that India's forests are worth $1.7 trillion. This is higher than the GDP of Canada, Russia, Mexico, and Korea. But we are not able to extract capital out of such assets because forests are publicly owned. Experts think that it is only when they see such figures people are willing to think of putting forestland to the best use possible. This is true of everything.

Physical assets like buildings are not worth much if we do not know what to do with them. For example, most valuable metals have existed so far as we can go back in history. But we did not know how to extract or produce them. Even when we know what to do with physical assets like houses or office buildings, those assets are not worth much when we do not know how to describe them in an organised way. This is why Goethe called double entry bookkeeping "one of the most beautiful discoveries of the human spirit", long ago. Unlike most intellectuals of his time, Goethe could see the potential of such seeming abstract processes.

The West is prosperous than the East because a formal property was documented very long ago. This did not happen overnight. Not too long ago, western societies were poor, too. The West became prosperous because of the legal reforms that happened in the past two and a half centuries. How? The legal framework in the West allowed people to own property, to document property rights and to enter contractual dealings with other people. In every society, this happens to some degree. But the process is more formal, documented and absolute in the West.

Hernando de Soto once said that the government is involved in land acquisition in Indian cities because property rights of so many people are not clear. So, it is difficult for corporations to acquire land from them directly, or to negotiate arrangements with them. For example, let us assume that Tatas want to buy 1,000 acres of land from farmers in Haryana. This is risky and often impossible because first, farmers may not have the right to sell their land because the conversion of agricultural land for non-agricultural purposes is not permissible, second, most farmers do not have formal property titles. If someone later claims his ownership over the property, Tatas will find themselves in trouble. And third, various land-use laws and regulations prevent the transformation of such land into valuable capital assets. So it is not surprising that the government, local politicians, officials and goons act as brokers in such deals.

To create wealth, entrepreneurs should be free to combine resources in a meaningful way. To do this, it is important to know who owns what. If it is not clear who owns what, it is very difficult for two parties in a transaction to trust each other. The West eliminated such problems to a large degree through a contracting system that people can trust.

India and many other developing countries have tried to become prosperous by importing western norms. For example, the economic reforms of the 90s and many changes that happened in the recent past have much to do with norms India learned from the western countries. However, the attempts of developing countries to become prosperous were not too successful. De Soto points out that this is because developing countries adopted western norms blindly. Western intellectuals did not notice that property rights were not secure in most developing countries because they took property rights for granted. As they took property rights for granted, they did not stop to ask whether people have clear property titles or not.

Is this because imposing western norms on eastern societies is wrong? Certainly not. There is nothing wrong with the western idea of documented property rights. Developing societies were not able to get the most out of this because of their poor understanding of the cultural context of liberal norms. West improved policies through a long, tortuous process. This will change, when similar revolutions happen in developing countries, too.

Last Updated: Mon Aug 22 2016

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