By RAHILLA ZAFAR
From INSEAD Knowledge (http://knowledge.insead.edu)
For many people around the world, property rights are not well defined, enforced or monitored, resulting in over half of the world's population living and working on "unreal estate" without the security of property ownership.
Basic economic principles outline that secure property rights are important for efficiency, investment and growth; people living and working on land with the constant uncertainty of losing their lands or properties are unlikely to make the long-term investments that can help create economic growth and eradicate poverty. Farmers, for example, are likely to continue farming low-return, single period crops, instead of investing in higher-return cash crops such as coffee.
In her book "Prosperity Unbound: Building Property Markets With Trust," Elena Panaritis presents a holistic approach to combating this lack of formal rights, arguing that a new thinking process, combined with successful diagnosis and determination for change, could transform society. She says informality has arisen because of the mismatch between institutions, organizations and society's demands.
Panaritis draws on her experience since the early 1990s in Latin America. As a World Bank economist, Panaritis was shocked to find out that in much of the continent, formal bureaucratic processes meant it could take years, sometimes even decades to establish and register property rights. Much of the existing rule of law defining rights in countries such as Peru, Columbia, Ecuador, Venezuela and Mexico dated back to the mercantilist period of colonization.
Panaritis uses what she calls "reality check analysis," an analytical method to better understand why we have informality and why institutions break down, in order to design effective reform. She used this method in the case of Peru where, with World Bank funding, she helped create a new legal structure from the bottom up where trust and understanding among local leaders and government officials developed.
Informal property rights (in terms of ownership of land and buildings) were fully transformed in just three years. They could be registered in just one day for a processing fee a fraction of previous costs, and they would be included in a formal system for ever. More than 6 million people became part of the formal property market with security of ownership. Shortly after the World Bank left, major financial institutions entered the market in Peru offering construction and consumer loans, as well as a whole new set of formal credit.
Countries with property rights systems which functioned well -- such as Canada, Australia and the U.K. -- have also adjusted these systems to reflect a bottom-up rather than top-down approach. Panaritis explains a methodology for bottom-up success in her book. She is currently a social entrepreneur and is the director of Panel Group, a small investment advisory, that seeks to reform property rights worldwide.
Panaritis addresses the issue of how to bring the $9 trillion that are locked into "unreal estate" into the formal economy. "No one has so far attacked the issue with the practical aim to incorporate this wealth pool of $9 trillion and its owners," she says. "Instead, for years and years, we notice 'solutions' that only serve as mere palliatives. These solutions result in segmenting the problem and many times rendering it worst. More often we notice a lot of solutions that are philanthropic, feel-good approaches or massive handouts with again no deep and sustainable change. The proof is that informality increases dramatically and now it starts to permeate even consolidated developed markets."
Crucial to the process, says Panaritis, is for all players -- entrepreneurs, government and citizens -- to understand the central role of property rights in sustainable economic growth and building alliances between these key groups. "It requires focus, vision, conviction and a strong stomach to handle breaking through the old modus operandi," she says. "In order for this to happen, key players from the government, communities, and private sector must come together."
The easiest parties to bring into the dialogue are those people living and working on unreal estate and the private sector. Convincing policymakers and the government is not as simple.
"That's why you need important champions and visionaries among both private investors and in government and policymaking," says Panaritis.
"The reason why some government decision-makers may feel threatened about building secure property rights for everyone and provide a choice of secure ownership across the board, is because empowerment is spread out to citizens. The middle class is becoming wider and stronger as citizens now control their wealth and savings as they wish best. It is this exact fact that makes citizens less controllable by government handouts and special programs.
"This is of course a short-sighted vision of governance but one that keeps many developing country leaders in power. Such government decision-making elites are content with the situation and the status quo. They personally don't suffer from the lack of choice regarding ownership and they are certainly not economically distressed."
Panaritis sees microfinance as playing an important complementary role to secure property rights, but notes it is not a solution in itself. "(Microfinance) is not supposed to suggest major regulatory reforms or establishment of property rights for those who do not have (any). So it is not correct to confuse microfinance with regulatory reform at the core of governance (which property rights reform would be)."
Formal property markets are relevant in all societies, says Panaritis, disagreeing with arguments that informality may be a cultural trait. "In my experience working in 36 countries, I have not met people that are unaware of how to trade or operate in an open market. I have met a lot of people that are frustrated and feel that they have to follow some government regulations and are confused by bureaucracy," she says. "We need to understand the impacts of having the choice of ownership and identify the role of institutions, organizations, history, incentives of the private sector, government and citizens. Solutions have to take into account the interest of all key players and align them. It is only then wealth and empowerment is generated and prosperity can start to (be) unbound."