Economic Growth and Development

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accepts the standard advantages of property rights and explores the process of
how they come into being. The creation of property rights, he finds, is prohib-
itively expensive for the poorest. De Soto and his research team opened a small
garment factory on the outskirts of Lima, Peru with the goal of creating a new
legal business. They spent six hours a day and took 289 days to register the
business. The workshop employed only one worker but the cost of the legal
registration was $1,231 or thirty-one times the monthly minimum wage (De
Soto, 2001:18). In the Philippines De Soto estimates that the value of real
estate without formal legal ownership is $133 billion or four times the value of
the 216 domestic companies listed on the Philippines Stock Exchange, seven
times the deposits in the country’s commercial banks, and fourteen times the
value of all FDI (2001:31). While the developing world is full of entrepreneurs,
they are constrained to small-scale production and trade because ‘the rights to
these possessions are not adequately documented, these assets cannot readily
be turned into capital, cannot be traded outside of narrow local circles where
people known and trust each other, cannot be used as collateral for a loan and
cannot be used as a share against an investment’ (De Soto, 2001:6).
Without property rights such assets are ‘dead capital’ (De Soto, 2001:7). He
notes some historical examples of the successful conversion of dead into active
capital. In nineteenth-century America settlers had been settling/improving the
land frontier extra-legally for decades before the Homestead Act of 1862. This
act entitled settlers to 160 acres of free land in return for agreeing to live on and
develop it. Property rights here reformed to integrate the practical reality into
the formal legal system. In May 1872 the US Congress passed the general
mining law which incorporated recognition of miners’ own laws and gave the
right to anyone who improved a mine to purchase it from the government at a
reasonable price.
A more recent example is that of Vietnam over the 1990s, where the govern-
ment first gave a greater role to the private controlof state-owned assets, then
only gradually legalized their free exchange. State-owned land was initially
allocated to households equally so the allocation would not be efficient in the
sense of the most productive farmers receiving the most land. Legal changes in
the late 1980s and early 1990s established the right to inherit, transfer, sell,
lease or mortgage land use (though not full ownership) and to receive compen-
sation in case of government expropriation (Deininger and Jin, 2003). It was
hoped that this would gradually lead to the efficient re-allocation of land. This
hypothesis was tested using two nationally representative, high-quality
surveys which showed that between 1993 and 1998 the land market had
become very active. The 1998 survey showed that 27 per cent of households
sampled had received use rights to new land plots through purchase, exchange,
inheritance or allocation, and 13 per cent had sold or exchanged land. There is
often concern in developing economies that market failures in other parts of
the economy will lead to a politically contentious concentration of control over
assets such as land. For example, poorly functioning credit/financial markets
may prevent small-scale farmers from borrowing to improve land or purchase


Institutions 223
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