Friday, 11 January 2008

Minto on property rights (updated x2)

In an article in the New Zealand Herald, John Minto, spokesperson for Global Peace and Justice in Auckland, shows he completely misunderstands the nature and importance of property rights. But he also show little understanding for the economics of poverty. Minto claims
The US has the highest levels of poverty in the Western world (more than 30 million) despite one of the highest per capita incomes in the world.
I assume this number 30 million comes from the US Census Bureau. What we learn from this site is that in 2006 12.3% of people are poor or 36.5 million people, not statistically different from 2005. We also learn that the poverty rate in 2006 was lower than in 1959, the first year for which poverty estimates are available. From the most recent trough in 2000, the rate rose for four consecutive years, from 11.3 percent in 2000 to 12.7 percent in 2004, and then declined to 12.3 percent in 2006 – a rate not statistically different from those in 2002 and 2003 (12.1 percent and 12.5 percent, respectively). The Age newspaper in Australia tells us that around 10% people are in poverty there. So US doesn't seem completely out of step with Australia.

What are we to make of the statement "The US has the highest levels of poverty in the Western world". Does his statement mean that other countries have a lower level of poverty because they have less than 30 million people in poverty? But the US has a larger population than most other Western countries so it is no surprise that they have a greater number of people in poverty.

Also we are told
Last year in the US the increase in income of the top 1 per cent of income earners was greater than the entire income of the bottom 20 per cent of the population. What this staggering statistic means is that the bottom 20 per cent of US citizens, all of whom live in poverty, could have had their incomes doubled if the wealthiest 1 per cent had simply forgone an increase in income last year.
Now 20% of the US population is around 60 million, all of whom are in poverty we are told. So what are we to make of the 30 million figure are are quoted before?

Also American economist Stephen Rose tells us, in a Washington Post article, that compared with 1979
... fewer people today live in households with incomes between $30,000 and $100,000 (a reasonable definition of "middle class") than in 1979. But the number of people in households that bring in more than $100,000 also rose from 12 percent to 24 percent. There was no increase in the percentage of people in households making less than $30,000. (My emphasis)
So the percentage of people in households making less than $30,000, which I assume includes the poor, has not increased over the last, roughly, 30 years. But the percentage of people in households that bring in more than $100,000 also rose from 12 percent to 24 percent. So it looks like people are doing better in the US over time.

There is also the question of how Minto plans on carrying out the income transfer from the "rich" to the "poor" implied in his statement "the bottom 20 per cent of US citizens, all of whom live in poverty, could have had their incomes doubled if the wealthiest 1 per cent had simply forgone an increase in income last year." After all if the "rich" know their income is to be taken from them why would they created it in the first place. Not good incentives for wealth creation. In addition Minto's statement would imply that economic activity is a zero-sum game, had the "rich" forgone their income increase, somehow the "poor" would have received it. But how?

Minto also tells us that
[Mike] Moore himself brings to the commission New Zealand's local experience in poverty creation. We have seen huge increases in poverty following policies introduced by the Labour governments of the 1980s, of which Moore was a Cabinet minister and briefly Prime Minister.
The 2005, Ministry of Social Development, Social Report Indicators for Low Incomes and Inequality: Update from the 2004 Household Economic Survey tells us
Figure 2 shows the trends in income poverty using this measure with the three thresholds. Regardless of which threshold is used, the proportion of the population with low incomes increased sharply in the early 1990s, reached a peak in the mid-1990s, and generally declined over the latter half of the decade. The decline continued from 2001 to 2004, with the drop at the 60% threshold being from 22% to 19%.
So according to these figures poverty increased from 1988 to the early-to-mid 90s and has been decreasing since. So Minto has to pick his time period carefully for his statement to be true. Also one could argue that the basis of the economic growth of the mid-to-late 90s, which reduced poverty, were the reforms started by the 84 Labour government.

Turning to Minto's view of the role property rights in people's well being we begin by noting that journalist Tom Bethell argues, in his book The Noblest Triumph: Property and Prosperity Through the Ages that
There are four great blessings that cannot easily be realized in a society that lacks the secure, decentralized, private ownership of goods. These are: liberty, justice, peace and prosperity. The argument of this book is that private property is a necessary (but not a sufficient) condition for these desirable social outcomes.
Harvard historian Richard Pipes in his book Property and Freedom says,
The idea occurred to be some forty years ago that property, ..., provides the key to the emergence of political and legal institutions that guarantee liberty.
Pipes sees the growth of legal protection for the individual in England as being closely associated with the recognition of property rights. He also sees that "the critical factor in the failure of Russia to develop rights and liberties was the liquidation of landed property in the Grand Duchy of Moscow," which resulted in the Russians being unable to limit the power of their sovereigns. In Pipes's view property rights have been a critical factor throughout history in the development of liberty.

Economist Hernando de Soto's book The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else is basically about poverty and he argues that most Third World poverty is both misunderstood, as John Minto shows, and unnecessary.

de Soto shows that there is tremendous amount of wealth generated by poor people in Third World countries. In many of the Third World countries, the legal economy is much smaller than the underground economy and the wealth of all the poor in total "dramatically outweighs the total wealth of the rich." But, and this is crucial, this wealth cannot be used, as you would expect to see it used in the west, as investments which lead to creation of still more income and wealth, thereby raising the standard of living of the poor. This simply because real estate, businesses and other assets in the Third world underground economies can not be used as collateral to raise capital to finance commercial or industrial expansion. Illegality also creates other economic problems.

Many businesses in the west are started by someone who used his or her home as collateral on the loan used to finance the business. But if the home is outside the legal system then the "owner" has no legal title and thus nothing that a bank will accept as collateral for the loan. This is also true for businesses created and run without having gone through all the necessary legal processes.

Those in the Third World "have houses but not titles, crops but not deeds, businesses but not statutes of incorporation." An obvious question is, Why then do they not get legal titles? In short because it can be an seriously difficult ordeal, especially if the people involved have little education and are in countries where red tape is virtually boundless.

de Soto examined the processes in a number of Third World countries. In Peru, for example, the process to get a legal title to your home "consists of 5 stages" and the first stage alone "involves 207 steps."

Another example is Egypt. Here anyone "who wants to acquire and legally register a lot on state-owned desert land must wend his way through at least 77 bureaucratic procedures at thirty-one public and private agencies." This process "can take anywhere from five to fourteen years." But it can be worse, in Haiti it can take up to 19 years!

Given this situation, it is not surprising that most economic activity in the Third World (and the former Communist countries) takes place outside the legal economy. When a combination of mad bureaucracy and frustrating legal systems force economic activity outside the legal economy, the losers are not just those actually carrying out these activities. The whole country loses when legal property rights are not readily available because investment is stifled. And when this happens investment doesn't take place, economic activity stagnates, and poverty remains. Minto should read de Soto's book since he seems to think that property rights are just privileges for the rich. But it is the poor who need them most, especially if they want to stop being the poor.

William Easterly makes the same basic point in his book The White Man's Burden: Why the West's Efforts to Aid the Rest Have Done So Much Ill and So Little Good,
Property rights also determine whether markets work. Do I have title to the land, building, and equipment making up my taco stand? Hernando de Soto noted in his great book The Mystery of Capital that the majority of land occupied by the poor urban majorities in the developing world does not have legal title-nobody owns it. Only if I felt secure that I would keep my taco stand would I invest in more sanitary food-processing equipment. I can borrow from a bank to purchase such equipment only if I have title to the property to put down as collateral. Only then will the bank feel secure that I will not abscond with the loan. Even then, the loans will be available only if the laws allow the bank to take my taqueria if I default on the loan. Property rights are also critical if I opt for incorporation. Lenders and shareholders need to feel secure that they really do have a claim on corporate property.

Property rights are an incentive to accumulate assets over time and across generations, which is often necessary to have the productive capacity to meet consumer needs. When I sacrifice consumption to buy land, factories, or other assets, I don't want someone else seizing the assets. For example, a man in Isla Trinitaria, Ecuador, cut back even on food and clothing to save enough to build up a small shellfish business. But he lost it all when the mayor seized the land.

What determines property rights? Alas, property rights are more complicated than the state enforcing them from the top down (and the state itself may be a thief, as the next chapter discusses). Property arises from a decentralized searching for solutions, just like the other complexities of markets.


Even countries with strong property rights today had those rights emerge gradually from the bottom up. American property rights did not spring full-blown from the minds of the Founding Fathers, ...
Recently the Institute of Economic Affairs in London released a book Paths to Property: Approaches to Institutional Change in International Development that makes the same point about the bottom up evolution of property rights. In this book authors Karol Boudreaux and Paul Aligica argue that the result of traditional approaches to development has, to a large degree, been failure. Boudreaux and Aligica point out that successful development requires the creation of sound political and legal institutions – in particular, secure and functional property rights. In their view clearly defined and enforced private property rights are needed to encourage entrepreneurship and thus economic growth.

But among policy-makers in there is ignorance about how to design, create and secure functional property rights systems in the developing world. To be successful programmes of property rights reform must recognise the complexity and uniqueness of existing property environments. Each individual context calls for its own tailed response. Universal one-size-fits-all solutions are likely to fail. Because there is no unique solution to fit all cases, one needs to think of property rights policy as a strategic process, not a blueprint-based social engineering undertaking. A process view of property rights reform shifts the attention from the creation of a static configuration of rules and laws to the creation of a flexible and resilient system which can adapt to changes in costs, technologies and social circumstances.

Again we see the importance of property rights to development and thus to the poor, who have most to gain from economic growth. But all of this is an anathema to Minto, for him "property rights often mean little, if anything, to people in poverty." Nothing could be further from the truth.

Update: As a addition to my message above, the best summary of the argument as to why property rights are important to the "poor" in a society I've come across (and only just found) comes from Thomas Sowell's book Applied Economics: Thinking Beyond Stage One. This is recommended reading for John Minto and his like:
Those who do not think beyond stage one often think of property rights as simply benefits to those fortunate enough to own property. This ignores the role of property rights as a key link in a chain of events that enable people without property to generate wealth for themselves and the whole society.

One implication of this is that some Third World countries could gain the use of more capital by making property rights more accessible within their own borders than by a ten-fold increase in the amount of foreign aid they receive. Moreover, the increased capital would be in the hands of millions of ordinary people, while foreign aid goes into the hands of the political elite. In short, although property rights are often thought of as things that are important primarily to the affluent and the rich, these legal recognitions of existing assets may be especially needed by poor individuals in poor countries, if they do not wish to continue to be poor. Millions of Third World people have already demonstrated their ability to create, in the aggregate, vast amounts of wealth, even if their tangled legal systems have not yet demonstrated an ability to let that wealth readily become property that can be used for further expansion and development. As Peruvian economist Hernando de Soto concluded, after a worldwide study of this phenomenon:
The lack of legal property thus explains why citizens in developing and former communist nations cannot make profitable contracts with strangers, cannot get credit, insurance, or utilities services. They have no property to lose. Because they have no property to lose, they are taken seriously as contracting partners only by their immediate family and neighbors. People with nothing to lose are trapped in the grubby basement of the precapitalist world.
Put differently, what property rights provide, in countries wherethese rights are readily accessible, is the ability of people to convert phvsical assets into financial assets, which in turn enables them to create additional wealth, whether individually or in combination with others. Property rights enable strangers to cooperate in economic ventures, some of which are beyond the means of any particular individual and must be undertaken by corporations which can mobilize the wealth of thousands or even millions of people, who cannot possibly all know each other. Moreover, property rights provide incentives to monitor their own economic activities more closely than government officials can-and protects them from the over-reaching caprices or corruption of such officials. In short, property rights are an integral part of a price-coordinated economy, without which that economy cannot function as efficiently. This in turn means that its people in general-not just property owners-cannot prosper as much as if it did operate more efficiently. (p.199-201)
Update 2: Owen McShane's response to Minto is here, One man's need is another's wealth (HT: Bryce W)


Anonymous said...

May I just say a sincere 'Thank you' for the clear and simple you have explained things. Minto is a stirrer whose words I've never trusted. A gut feeling. Now I understand and can read further.
Thank you again.


Anonymous said...

There is also a buried proposition in Minto that the poor in the US are as badly off as the poor elsewhere. Evidence to the contrary is provided in the 2004paper EU VERSUS USA by
Fredrik Bergström & Robert Gidehag at

See for example the tables around p 22 associated with the comment that:

"What does it mean to be poor in the USA? Major living standard surveys carried out in
the USA at regular intervals show the poor to have a surprisingly high standard of living;
see Table 3:2. A large proportion own their homes and have one or more cars. Domestic
appliances of different kinds are also relatively common, as are one or more TV sets complete
with video or DVD. Material prosperity, in other words, is high and not associated
with the material standard of living which many people in Europe probably associate with
poverty. Good economic development, in other words, results in even poor people being
relatively well off. Quite simply, it is better to be poor in a rich country than in a poor one."

If Minto's concern is not with the welfare of the poor but with inequality then the implicit proposition appears to be the utopian one that luck, skill and effort should play no role in determining outcomes.

At a more down to earth level, the notion that property rights are not important to those who have few possessions seems to deny the problem of relatively high rates of crime in poorer communities. But who would be hurt more by the theft of one's car or groceries, a poor person or a rich person? The law-abiding poor surely need the law to prevail in respect of personal security and property.

Is Minto's generalised concern for the poor superficial?

By the way the Herald has published a respond by Owen McShane published a response to M's article.

Bryce W