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Gummersbach

Fourth IAF workshop on the importance of private property for free societies, social and economic stability and development, Gummersbach, 12–19 November 2011

• Can there be freedom without private property?
• Are robust property rights a precondition for growth and development?
• Does property generate responsibility and accountability?
• Are there limits to property and property rights from a liberal point of view – what are they?

Group photo on 14 November 2011 behind the modern
archive building, part of the Theodor Heuss Academy

These were some of the questions covered by this year’s IAF workshop on property and freedom – an event devoted to analysing and discussing the manifold links between an important institution and political stability and economic well-being.

It was attended by 20 participants – experts, politicians, educationalists and NGO activists – from all parts of the globe, from Argentina to Burma and from Russia to South Africa and directed by Luz Larissa Arce Ramos, Lima, and Stefan Melnik, based in Berlin. Although the event was not designed as an introduction to institutional economics, a branch of economists pioneering by Douglass North and Nobel Prize winner Ronald Coase, many of the discussions focused on the importance of in explaining development or the lack thereof. Two of these institutions – private property and rule of law – are closely intertwined.
Privatisation – ie, transferring state assets into private ownership – is an important step in the setting up of a market economy. However, principles of rule of law have to be upheld if such privatisation is to have a sustainable impact on the economy.

Rule of Law as a guarantor of secure property ownership

The workshop devoted a session to the concept of “rule of law” because of differences of understanding that emerged. The alternative to “rule of law” is arbitrary rule and all elements that are part of the concept of rule of law do exactly that: prevent arbitrariness (for a list of important elements of rule of law, click here [pdf, 142 KB]). This is the case with “equality before the law” – some people above the law would amount to arbitrariness – as it is with “one legal system,” and “no retroactive law.” Problems with respect to property rights are often closely inter-related with problems of rule of law: competing jurisdictions with respect legal titles is a serious problem in the occupied territories of Palestine we learned. Attempts to renationalise privatised enterprises undermine investor confidence in the law and acts as a deterrent against investment – as Vitaliy Zahynyy of the Association of Ukrainian Cities pointed out – irrespective of the flaws uncovered in the original process of privatisation. Investors look for signs of reliability in emerging market economies and the first indicator they look at is rule of law.

Private property – a neglected concern

Much to everyone’s consternation, property rights are badly protected in almost all countries represented at this year’s workshop. The highest scoring country was South Africa, a country that is ranked 32nd out of 129 countries surveyed in the most recent edition of the International Property Rights Index. The next was Malaysia – 44th. Most were ranked in the bottom half – a reflection of the disregard for the importance of protecting private property in a great number of so-called developing countries.

A working group discussing the international property rights
index: Vitaliy Zahaynyy, Ukraine; Andrey Chervjakov, Russia;
Nirwan Ahmad Arsuka, Indonesia; Moisés Pinto Gomes,
Brazil; Su-Wern Yeoh, (Tricia), Malaysia; Dorde Trikoš, Najmul
Hossain, Bangladesh (from left to right)

Despite participants’ criticisms that the index is not completely reliable and suffers from a number of methodological problems, there was broad agreement that it does highlight the link between robust protection of property on the one hand and good governance and development on the other. Property rights are relatively well-protected in all countries that are economically successful and enjoy a high level of development. Countries like China have realised that there is a link and have taken measures to improve the protection of property accordingly, as Ameet Kumar, Senior Assistant Director of the Federation of Indian Chambers of Commerce and Industry pointed out in a brief lecture held on 14th November. The constitutional amendment of 2004 incorporating guarantees regarding private property was a “landmark accomplishment” contrasting sharply with the legal situation in India where the 44th amendment had removed property rights and the guarantee of full compensation from the constitution. This has resulted in a huge number of unresolved disputes concerning property rights that remain to be resolved and hamper economic and social progress.

Widespread lack of awareness of the importance of private property

One of the biggest problems mentioned throughout the workshop was a lack of awareness and knowledge about the importance of well-established property rights for economic well-being and political stability. Ordinary citizens tend to think that property rights are only important for wealthy members of society. Amongst the educated and cultural elites of this world the feeling is widespread that property is a materialistic concern that must be overcome: the choice is between “to have or to be,” to use the words of the famous psychoanalyst Erich Fromm.
This was discussed in the session discussion “visions of life without property” in which we focused on the ideas of Marx, Proudhon and of modern “post-modernist” thinkers. The unanimous conclusion was that criticisms of property are paternalistic, scientifically wrong and pay no attention to the importance of incentives in motivating human action. Furthermore, the abolition of property involves resorting to the use arbitrary criteria in allocating resources and to their use in a manner that is wasteful and unsustainable.

Politicians are often as unaware of the importance of property as the people they represent. And yet to play with property rights callously is to play with fire. The reaction to loss property is always anger – as all participants agreed. The concept of property is deeply embedded in the human psyche. Words such as “to steal” wouldn’t exist without the notion of property and have a strong emotive force in all languages.

Confiscation, even if allegedly for the “common good,” will invariably result in hostility and disaffection and lead to demands for restitution, demands that won’t go away even after three or more generations – as many European examples show. It undermines the trust and confidence citizens have in their politicians. As Lourens Bosman, MP, from South Africa emphasised, the suspended ANC Youth Leader, Julius Malema, has – with his demands to nationalise the mining industry and other major parts of the economy – done a lot to undermine the confidence of both national and international investors.

The nationalisation of private pension fund assets in Argentina is another case confiscation that was brought to our attention. As Franco Amati Daniel, an IT manager, pointed out, however, the reaction was apathy. This is also a dangerous development. Rights have to be defended actively if they are to have any meaning.

From left to right: Aye Win Myint, Myanmar; Lourens Bosman, MP,
South Africa; Nirwan Ahmad Arsuka, Indonesia; Jose Layon,
Philippines; Ornyajai Phoolthanang, Thailand, and Jazgul
Beyshenalieva, Kyrgyzstan

But what do you do in countries in which people have become cynical or defeatist – or who have purportedly learned to live without private property, as in former communist countries? Andrey Chervjakov, Vice President of a Russian foundation, vividly portrayed widespread incomprehension as to why property should be so important. The prevailing attitude is that “we have the state” – even when the state does little to improve the lot of ordinary citizens.

The effects of such attitudes are obvious: entrepreneurship is scarce and difficult to encourage. Again there was general agreement that squandered trust in institutions – the institutions of private property and rule of law in particular – can only be regained in the long term. Education and active campaigning highlighting the significance of private property are important. Highlighting and explaining the differences between developing and developed countries in this respect is part of the process.

Formal property rights and development

Hernando de Soto’s ideas, expounded in his book The Mystery of Capital, were the subject of discussion on 17th November and were introduced by his compatriot, moderator Luz Larissa Arce Ramos (click here for text of presentation [pdf, 83 KB]).

23 November 2011: a woman blocks
the entrance to Congress as riot police
stand guard in Guatemala City.
Protesters want Congress to approve
a Housing Act that would grant them legal
titles to the land on which they have built
their homes

De Soto believes that those locked out of development – the majority of people living in third-world and former communist countries – will only accept “capitalism” if they see the system working on their behalf. And capitalism is characterised by the institution of private property. He emphasises that their precarious existence and inability to develop their full economic potential is often the result of a system that excludes them. His central proposition is that legal recognition of de facto rights to property would boost development in an unprecedented way by activating huge amounts of “dead capital.” After considerable discussion, mainly on the benefits informal ownership may have (such as not paying taxes), participants agreed that, other things being equal, granting legal titles would increase security and improve the bargaining position of underprivileged members of society vis-à-vis the state and big business if disputes arise. Arbitrary mass evictions for purposes of “development” would be more difficult to engineer because of legal titles proving ownership. Proper compensation would be more forthcoming.

Nevertheless, the problem remains that for many development projects governments need to find ways of acquiring property that are both efficient and equitable. To fail to do so may have dire consequences as Ornyajai Phoolthanang, legal adviser in the Thai Ministry of Justice, pointed out, referring to the recent floods. One of the major problems exacerbating the effects of heavy rainfall is the failure to acquire land for more effective drainage channels in the capital city.