Prosperity Unbound

Guest Contribution by Rachel Beach

Per a recent article in the Washington Post:

China provides an interesting case, where hundreds of U.S. companies have chosen to do business inside the Great China Wall, even when threatened by insecurity of Intellectual Property Rights and financial assets. It is understood in financial markets that the threat of expropriation of property requires a risk premium on investments in such an environment, but even given this, when so much is at stake, businesses continue choosing to operate in the country. And many are getting stung in the process. Ebay, Google, and Time Warner number among those that have either pulled out of the market or are reconsidering, locked in legal battles to protect their interest and investments in the market.

Is it worth it? Over a billion potential customers should offer a resounding yes! But when there is potential for those same billions to steal your business concepts and intellectual property rights, your customer base, and a government to change its laws once again, acquiring much of your assets or restricting your mode of operation, the answer becomes a little more blurry. As stated by Kevin Smith, head of General Motors in China, “there are different rules in China”.

The question arises: how are companies to deal with theft of Intellectual Property Rights in a country of a billion plus people? A Washington Post article suggests that China is a “very unique country” in this regard, and attacking every violator is not the best strategy. Should it be? Shouldn’t a company strive to protect its Intellectual Property Rights wherever it does business? The question returns us to the considerations of government provisions of security of property. Where the government does not provide security, how much are private businesses and how much should private businesses invest to protect their rights and property by other means? To an extent, in a country like China, where this means any number of its billion citizens could be violating your intellectual property rights, it is a futile effort. It’s almost like chasing a flock of chickens: chase one and exhaust yourself catching it, only to find that all the others have scattered far beyond your reach. In a country like China, a business with broad potential for theft of IPR, its energies would be better devoted in lobbying the government to strengthen IPR regulations and enforcement. If this is true, how does this make China a “unique country”? The greater the market size, the greater the potential for loss (in parallel with the potential for profits).

Grabbing the perfect opportunity to reform and revive a country’s growth capacity… through a tough economic crisis!

I have been mired in the Greek economic crisis in my new capacity with the Greek government. Once again I observe a country that has been suffering from the vast permeation of informality resulting in a sluggish growth and endless leakages in public finances. Once again I notice the great opportunity to align the incentives of all parties in the Greek society for a fundamental reform that will transform the informal sector to the formal secure growing economy – based on secure rules and rights to assets.

Greece provides us with an excellent example of a country where the strength of the informal economy signals the weakness of existing rules in terms of predictability and enforcement. Combating informal property rights, establishing secure and predictable process and rules will allow the country to move not only ahead but revive its latent assets and wealth.

• Indebted Dubai puts on brave face for tower – International Business Times

from Michael Shermer’s blog “Skeptic“:

How do you turn a 3rd-world developing nation into a 1st-world developed nation? It actually isn’t that hard. Picture 3In fact, it is so simple it can be explained in a blog-length essay. You need twelve conditions. I call them the Developing Dirty Dozen:

1. Property rights.
2. The rule of law.
3. Economic stability through a secure and trustworthy banking and monetary system.
4. A reliable infrastructure and the freedom to move about the country.
5. Freedom of speech and the press.
6. Freedom of association.
7. Mass education.
8. Protection of civil liberties.
9. A robust military for protection of liberties from attacks by other states.
10. A potent police force for protection of freedoms from attacks by other people within the state.
11. A viable legislative system for establishing fair and just laws.
12. An effective judicial system for the equitable enforcement of those fair and just laws.

Of course, we should remember what the sage pop philosopher Yogi Berra once said: “In theory, there is no difference between theory and practice. In practice there is.” Let’s call this Yogi’s Maxim. In theory, just implement the Developing Dirty Dozen. In practice, this might not be so easy. I recommend starting with just the first one: property rights. And the playbook on how to do so is already written: Prosperity Unbound: Building Property Markets with Trust (Palgrave Macmillan, 2007) by former World Bank economist Elena Panaritis, now working with developing nations around the world to build trust through property rights.

Panaritis explains how to change informal property into formal property, illiquid property into liquid property, and un-real estate into real estate. Presto-chango. It’s like magic. Property = Prosperity. Call it Panaritis’s Panacea.

Pioneered with pilot programs in Peru, Panaritis explains how to make property real and investments secure through property rights enforced through law. Unfortunately, there are plenty of other places to test this theory: about 70% of the world’s population, or about 4 billion people, are sitting on roughly $9 trillion in illiquid property. By “illiquid,” Panaritis means that the property can be lost or taken away without compensation, and it has little to no value as an investment tool outside of immediate bartering for goods and services needed at the moment.

Panaritis makes a distinction between “the haves and the have-nots,” but not as the phrase is customarily employed. What she means is those who have property rights and the security of their finances and investments, and those who do not. This difference is what, in the long run, creates a wealth or income disparity.

By “un-real estate,” Panaritis means that even if there is property you can see, if it is illiquid it means that you cannot use it to secure investments in your future, and thus you have no secure future and so your real estate is unreal. A houseboat on a river Southeast Asia is the epitome of informal property: just a family on a boat floating on a river, so precarious that it likely won’t last a single generation. How do you build a future on such an unstable foundation?

The lack of formal property rights leads to numerous economic distortions: distorted valuations up and down, distressed property markets, illiquidity of savings, limited labor mobility, weak capital markets, and limited investment in infrastructure such as utilities, energy, and telecommunications. In Ecuador, for example, having passed through the country many times on my way to the Galapagos Islands, I noted that Ecuadorians largely skipped the land-line stage on the way to cell phones. Establishing a land-line telephone infrastructure was the responsibility of the government, which they did with their usual corrupt ineptitude, leading the developing free market of cell phone technology to sweep in and displace the old with the new almost overnight. Fortunately, the Ecuadorian government was prescient enough to secure the property rights of cell phone carriers in their country, and a cell phone as property can fit in your pocket!

Without property rights, in addition to economic distortions there are social distortions: enduring inequalities, violence, corruption, criminality, child labor, and social discontent, especially among women and minorities, who have the least control of their property. As well, there are environmental distortions such as land quality degradation and poor waste management.

The solution? Simple: transform property from illiquid to liquid, or from un-real estate to real estate. Property = Prosperity. Panaritis’s Panacea. Case in point: In Peru, Panaritis worked with a woman named Margarita, a seamstress whose labor was valued in 1990 at $80/month, but who is today worth thousands of dollars a month. How did this happen? Untangling property rights and removing the bureaucratic red tape that it takes to own your own business, by reducing the number of government agencies from 14 to 2, by reducing the time it takes to obtain a license to own your own business from 7 years to 2 days, and the cost from $7,000 to $14! Now that is change we can believe in!

Can it work anywhere? Of course, as Panaritis explains:

The problem of “unreal estate” is global, but its solution local, and it can lead to unbound prosperity. The approach worked in Peru and it can be repeated elsewhere. Done right, institutional reform of property rights can reduce risk, ambiguity, costs of transactions and create new possibilities for those who hold assets informally by turning them