June 01, 2004

Note: Property Reform in Peru

Mark Kleiman goes to the Law and Society meetings:

Mark A. R. Kleiman: What I've learned so far at the Law & Society meetings: What I've learned so far at the Law & Society meetings

1. According to Benito Arrunada of the Universitat Pompeu Fabra in Barcelona, the World Bank, with the support of the Fujimori regime, dumped a whole bunch of money into creating a modern system of land-title registration and transfer for Peru. According to Hernando de Soto's theories, this was supposed to give ordinary folks access to the capital markets by allowing them to mortgage their houses, thus setting off a storm of entrepreneurship and prosperity.

Actual effect: almost zero.

Reason: Even with a good set of land titles, mortgage lending only works if backed by the threat of foreclosure. Peruvian judges, hostile to market transactions, simply wouldn't process foreclosures. Ergo, no mortages.

So we still don't know whether the promised economic miracle would appear if someone could provide not only land titles but courts that would turn them over to lenders when borrowers default.

Arrunada suggested that community responsibilty for default, after the fashion of micro-lending initiatives, was a more promising approach.

Update: A reader points out that De Soto himself had predicted that reforms focusing on land registration alone would fail. That raises the question of why the Peruvians and the World Bank thought their project would work.

2. I have to go read Fred Schauer's Profiles, Probabilities, and Stereotype. All the discussants at the author-meets-readers seemed to think it was stereotypical Schauer, which gives it a probability approaching unity of fitting the profile of a book you don't want to miss.

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Comments

When all you have is a hammer, everything looks like a nail...

Seems to be a common assumption that market mechanisms and scope and style of market organization that is appropriate for modern developed economies is appropriate everywhere and everyhow, no matter what. But I have heard very smart people speak who have more open minds:

http://www.spc.uchicago.edu/users/robt/books.htm#

Robert Townsend, The Medieval Village Economy, Princeton University Press, 1993
...combines the theory of general economic equilibrium with the notion that allocations and institutions of a given economy might be Pareto optimal to try to explain various salient features of the medieval village economy. The medieval village economy in many ways reflects the economies of poor high-risk agrarian villages of the contemporary world and serves as an ideal testing ground for Townsend's theories. The environment of the medieval village resembles those of relatively simple models with such key elements as uncertainty and private information, and its institutions display distinctive features such as fragmented landholding patterns.

Posted by: jml on June 1, 2004 11:35 PM

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Not to say that Peruvian jungles might not benefit from some kinds of market organization, but maybe just hoping that bringing real estate agents to jungle is not the place to start.

by the way, the host said:
"Peruvian judges, hostile to market transactions"
Doesn't the market conquer all? What is the host doing posting things like that?

Posted by: jml on June 1, 2004 11:39 PM

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"Arrunada suggested that community responsibilty for default, after the fashion of micro-lending initiatives, was a more promising approach."

Indeed. In countries like Bolivia, many communities of natives hold votes on who to cast their vote for (as a homogeneous bloc).

Why, oh why, do economists get paid for fitting the data to their models - rather than adapting the models to fit the data?

Posted by: Joerg Wenck on June 2, 2004 01:20 AM

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I read De Soto's book, and I found it quite a convincing read. However, one of his central tenets of providing for title and property reform was a streamlined and efficient judiciary to enforce it. In fact, he listed this problem as one of the central problems, in that in general it was the established judiciary and legal powers that were most resistant to any change in most third world countries. Why change when you can rig the game the way you want it?

I do think that De Soto is onto something quite brilliant. Having lived in South America for several years, access to credit is a huge problem for business development or getting ahead. You can't take out a loan to pay for school or open up a business. You have to have it already (i.e. via the family). With lending interest rates from Banks of 20% or more a year, you would have to be crazy to even think about trying to borrow money from anybody.

Now as to how to effectuate the reforms he describes, that is the more difficult task... But I think he has a great point.

Posted by: non economist on June 2, 2004 01:28 AM

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It is a mistake to think that the only goal of land titling is to have a mortgage market. Protection from being dispossessed by the rich and powerful is a more important goal - and one which is in fact aided by titling.

Financial development takes a while. You know that perfectly well. To think that there is some magical silver bullet that will by itself result in modern, well functioning financial markets is silly. Equally silly is the idea that you can put in place all of the building blocks and requisite institutions all at once in one project.

This kind of thing is easy to criticize. However, I suggest you ask yourself this - Are the poor small farmers better off with a title or without?

Posted by: steve kyle on June 2, 2004 02:24 AM

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"Why, oh why, do economists get paid for fitting the data to their models - rather than adapting the models to fit the data?"

It's a lot easier.

Any "science" in which models are proposed without reference to data, as economics commonly does, is not any more useful and valid than examining tea leaves in the bottom of your cup.

C.D.Nolan, M.S Economics.

Posted by: Chuck Nolan on June 2, 2004 04:45 AM

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Interesting, but I think too pessimisitic. So long as the titles are enforced against theft there should still be a positive labor supply effect. Perhaps you have forgotten Ericq Field's work?

http://www.j-bradford-delong.net/movable_type/archives/001385.html

Alex

Posted by: Alex Tabarrok on June 2, 2004 08:25 AM

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RE Steve Kyle:
I think the idea that a title to real estate as a protection for the poor against the rich is an interesting theoretically, but inconsistent with the history of Central America, and maybe South America as well.
I know that in Central America, the idea of title showing fee simple, or allodial, land tenure with formal title were used by the rich to rob the poor of their land, though I don't know whether it was a plot or it just kind of turned out that way. The idea was to abolish any kind of traditional, often communal, or mixed individual and communal, tenures to real property and replace it all with fee simple, or allodial, tenure. Traditional communities who held unwritten title to property under tenures being abolished had an opportunity to work things out among themselves so that everything would be reorganized under the new absolute and exclusive-style tenures and individuals would have an opportunity to obtain fee simple titles. The idea was to modernize and introduce market mechanisms to increase economic growth -which would of course always help the poor (sound familiar?)

But the deal was that the rules for obtaining the new titles were, or at least were perceived to be, rigged in favor of the rich. For example, the new titles could only be registered in the national capitol, or the prospective owner was responsible for the expense of preparing the legal document rather than having an application process that everyone could participate in, or there was a big registration fee.

So the result was the most of the poor lost their title to land between 1880 and the early decades of the 20th century. At least that was the perception among traditional communities. That is why one of the 19th century peasant revolts in El Salvador was called the Right Hand Rebellion -since a favorite theme was cutting off the right hands of judges who were signing the new titles.

That kind of thing was going on in El Salvador, Panama and Guatemala. To a much lesser extent in Honduras, if I remember correctly. I wonder if something similar happened in places like Peru in South America?

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