Importance Of Property Rights

One of the determining factors of the prosperity of a country is the respect and protection it accords to the property rights of its citizens.

Property rights allow people to be entrepreneurial. And enterprise allows people to create wealth and prosper. The security of property allows people to pursue their enterprise. A farmer, for instance, would not grow crops, or further develop his land if he knows that his land faces the threat of being seized by the government. A businessman would not expand his business if he perceives a credible threat of his business being taken over by the state. Individuals would not undertake risks, or make investments in land improvements if they feel that their ownership can be challenged. In the absence of a secure system of property rights, enterprise is throttled. Indeed, the one determining factor of the prosperity of a nation is the respect and protection it accords to the property rights of its citizens.

Prosperity and Property

A number of reasons are proposed to explain the prosperity (or lack thereof) in different countries. The standard reasons proposed are a country’s endowment of natural resources, population density, geographical location, state spending in education and healthcare, cultural values and a variety of other factors. When we go on to examine each of these factors, none of them manage to adequately explain why some countries are rich while others remain poor. Take the case of Singapore and Hong Kong. Both countries are city states, virtually devoid of natural resources. Yet, they are some of the most prosperous regions in the world. The case of South Korea is particularly astonishing: after being devastated in the Korean War in the 1950s, it has today—in the space of a few short decades—emerged as one of the most developed nations in the world. There are then, many anomalies when it comes to development—countries that prosper despite the lack of resources (Hong Kong); and countries that do not despite being rich in oil (Argentina). Likewise, there are some countries with high population densities that perform better than countries with low populating densities. Anomalies abound.

What explains these anomalies?

To be sure, development is a complex play of a number of variables. But when we cut through the complexity—a definite pattern emerges. Countries that value property rights, prosper; countries that do not—don’t. What ultimately does explain the difference in the levels of prosperity between nations is the institutional framework a country adopts—the most fundamental of these institutions being private property and the rule of law. Institutions can be thought to be the laws and formal rules that govern our interactions with each other. Institutions determine (to borrow an expression from Douglass C North), the ‘rules of the game.’ If the rules are well-defined, definite and conducive to enterprise—people prosper. If the rules are uncertain, and do not protect people’s property, then people are prevented from prospering. In India, the rules or institutions that govern us are uncertain and restrictive. Further, the rules can be perverted by some—the rich and politically connected–for their benefit. If we are to affect real change, we need to tackle questions of how we can make our laws and institutions more just and inclusive. Today, the rules work against millions of India’s poor. While the rich have relatively secure titles to their property, the poor do not. We have regulatory restrictions that prevent the poor from freely employing their property and enjoying the fruits of their enterprise. If we are to secure justice and prosperity for all Indians, we need to make sure that the rules work for them. To quote Hernando De Soto, “The poor aren’t breaking the laws, the laws are breaking them.”