8 April 2016

Property rights underpin development in Latin America

By Moisés Rendón Fermin

In 1763 immigrants to the North American colonies had more secure property rights than a native-born Venezuelan does in the twenty-first century. Property rights in the U.S. were “constituted, secure, and out of reach of oppression from the most powerful” even before America’s independence. The concept of property rights runs in the blood of North America, fueling its market system, and helping the country to prosper. While the importance of having well-defined and strongly protected property rights is now widely recognized among policymakers, Latin America lags behind on securing the property of its people.

Property rights are the laws that allow individuals to manage, benefit from, and transfer property. Government enforcement of strong property rights is generally linked with more prosperous and developed countries. As the 2015 International Property Rights Index (IPRI) shows, the five best performing countries have an average GDP per capita of $72,000, whereas the five worst performing countries have an extremely low average of $3,900. The Latin America and the Caribbean region ranks just ahead of Africa, and countries with ongoing-armed conflicts like Nigeria or Chad have better protection of land rights than Argentina, Haiti, and Venezuela. Countries that flourish economically understand the difference between prosperity and poverty: property.

In Latin America, Venezuela and Argentina stand out for the consistent and institutional undermining of property rights. Venezuela, a country that the International Monetary Fund (IMF) identified with inflation of 720 percent this year, is ranked second to last on the protection of property rights in the region. In fact, more than 1,200 private companies were expropriated during Hugo Chavez’ administration from 1999 to 2013. Similarly, Argentina has a poor track record of respecting property rights. In 2012 Repsol, a Spanish oil group, underwent the traumatic experience of seeing its subsidiary unit in Argentina stripped from it by the government of President Cristina Kirchner. The expropriation of private property is the perfect recipe to frighten off investors. With few exceptions like Colombia and Peru, Latin America has seen major capital flows trying to reach other, more investor-friendly regions.

On the other hand, Peru’s success in reforming and improving its property rights has helped to transform the country into one of the best-performing economies in the region. In the 1980s, the Institute for Liberty and Democracy (ILD) helped to move Peru’s street vendors, transport drivers, poor farmers in remote areas of the Andes, and millions of other participants in Peru’s huge informal sector (or the “extralegal economy”), into the legalized economy. Policy reforms like simplifying administrative processes, improving access to public information, unifying business registries, and democratizing rulemaking have helped make Peru the second highest ranked country in Latin American and the Caribbean in the World Bank’s 2016 Doing Business report. Hernando de Soto, ILD’s founder, affirmed that they have received more than 44 requests from reform-minded governments from all over the world seeking to learn from Peru’s positive experience on protecting property rights. As a matter of fact, this kind of policy reform put Peru ahead of countries including Canada, the UK, and Japan on the Registering Property Indicator of the 2016 Doing Business report.

In the still ideologically bipolar Latin America, torn between the free market and the regulated market system, some governments are seeking to strengthen property rights while others are not. Brazil, which has generally demonstrated strong growth in the last decade, still has room for improvement. The idea that rights serve a social function was first introduced into the legal culture in the early twentieth Century. The Institute of the Social Function of Property, a Brazilian legal institution, punished owners if their property did not accomplish its “social function,” thereby weakening the importance and value of private property. The owners have obligations with respect to their property and are obligated to make it productive. The state intervention on Brazilians’ property clearly had a negative impact on the economic dynamics and the legal insecurity of the country, scaring away investments.

Despite the unprecedented economic crisis that Venezuela is going through, the newly elected National Assembly (dominated by the opposition) proposed a law in February that grants property deeds to more than 593,000 holding owners – and now full owners – who benefited from one of the most popular policies during Hugo Chavez’ era: “Mission Vivienda,” a government program that gave houses (but not deeds) to poor Venezuelans. The new objective is to democratize existing property, and provide house owners with access to the market by giving them, for example, the legal instruments to use their property as collateral for a bank credit and start a business.

Since 2012, Latin America has experienced low growth averages, of about 2 percent-2.5 percent of GDP – compared to a robust 5 percent during the previous decade. The deceleration is associated with decreasing commodity prices, a slower Chinese economy, and shrinking investments. In the midst of this downturn, policymakers must consider sustainable approaches for sustainable inclusive economic growth. Others in the region have an opportunity to learn from successful examples of property rights reform, as seen in Peru, to jumpstart development progress and drive investment back to the continent.

The recognition of the inherent and inalienable right to own property is stated in the Article 17 of the Universal Declaration of Human Rights (UDHR). The foundation of freedom, justice, and peace in the world relies on important institutions such as that of private property. Prosperity and property rights are inextricably linked, and development actors worldwide increasingly accept this fact. If governments across Latin America want to see their people lifting themselves out of poverty, respect for and formal recognition of private property is a crucial step in the right direction.

Moises Rendon is a CapX contributor