Here's How Clear Property Rights Drive Prosperity

Private spaces are usually much cleaner than public spaces. Shopping malls, for example, are much cleaner and better maintained than railway stations. Rent-controlled properties are poorly maintained, and often in a poor condition. This is because when the security of property rights declines, investment in property management declines, too.

When a property is privately owned, the owner has a strong incentive to run it well —  and profitably. Customers are likely to shun a restaurant that is not clean. If a restaurant is well-run, the owner makes profits. If it is not, the owner loses money. But government employees and politicians who manage public enterprises do not face similar incentives.

The countries where the sanctity of private property is recognised are, on the other hand, more prosperous. On the International Property Rights Index 2015, the countries on the top were Finland, Norway, New Zealand, Luxembourg, Singapore, Switzerland, Sweden, Japan, Canada and Netherlands. These are some of the most prosperous countries on earth. India's position was 62nd among 129 countries. Income levels in India are among the lowest in the world. Housing affordability in the country is also among the lowest in the world. The countries at the bottom of the list, such as Zimbabwe, Bangladesh and Haiti, are among the poorest countries.

Why are countries with more secure property rights more prosperous? To begin with, prosperity itself is a recent phenomenon. As economist John Kenneth Galbraith once observed, human societies were very poor for much of human history. There is a common belief that the world became more prosperous because of technological progress, which led to industrial revolution, and later to the information age. But that may not be correct. It is, of course, undeniable that technological progress played an important role in human progress. But it was secure property titles in England and other parts of the world that led to industrial revolution. Without more secure property rights, industrial revolution would not have happened. Without industrial revolution, living standards would not have risen so much in the past 200 years. In Russia, for example, millions died when collective farming was imposed, even though Russia has some of the most fertile land in the world. And, Russia's experience with collective farming is not unique. Dozens of countries have experimented with collective ownership in varying degrees, and the results have been similar.

Technological progress does not happen by accident. If you look at countries that contribute the most to technological progress, you will notice that property rights are more secure in these countries. In the countries that produce the largest number of Nobel Prize winners property rights are more secure. This shows that property rights, prosperity and technological progress go hand in hand.

Some economists and moral philosophers even argue that all rights boil down to property rights. They could be right. Theft is a violation of your property rights in your assets. Murder is a violation of your property rights in yourself. Adultery is a violation of your property rights in your spouse, and so on.

It is not surprising that societies with weaker property rights are poorer. It is difficult to get the most out of your assets when your ownership is not absolute, or when you fear that your property may be expropriated at any moment. Decades ago, Jawaharlal Nehru, the then Prime Minister of India, said, “Of course, we want to socialise. But we are not opposed to private enterprise. We want to encourage in every way private enterprise. We want to promise the entrepreneurs who invest in our country, that we will not expropriate them nor socialise them for ten years, perhaps even for a longer time.” Foreign investors were not, however, very keen on investing in India when they heard that the government might seize their assets after a decade or so. Weak property rights and the risk of expropriation are the greatest barriers to human progress, and this is especially true of India.

When property rights are secure, people are free to weigh the costs and benefits of their actions. For example, the owner of a shopping mall is free to weigh the costs and benefits while renovating his property. This is not true of public undertakings. There is no way to measure whether a road is profitably run or not, especially when people are not charged for driving. The decision to build a road is not based on profit-loss calculations, either. This leads to inefficient outcomes, because the government does not have a fool-proof way of deciding where to build a road, and how. For example, a private firm might find it more profitable to build a road in a dense metropolitan area than in a remote village, as the demand for such services is higher in urban areas.

Similarly, the owner of a rent-controlled building is not in a position to decide whether to renovate his property or not. As his property rights in the asset are weak, he would find such decisions difficult. Since the owner of a rent-controlled property is not allowed to raise the rent, there is no incentive for him to manage his assets well. Similarly, the owner of a shanty in a slum does not have a strong incentive to improve his property, either, because he might lose it at any moment. This is why property rights matter a lot.

So, as economist Hernando de Soto points out, developing countries could well end large-scale poverty almost overnight by granting secure property titles to everybody.

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