Prosperity Unbound

Guest Contribution by Henry Musa Kpaka

President Obama’s speech in Ghana outlined his commitment to sub-Saharan African economic and social development (see the Economist article, Barack Obama and Africa: how different is his policy). His message was to usher in a new strategy for development assistance from the U.S. and perhaps the rest of the West.  The debate over ending poverty and bringing economic and social development to sub-Saharan African has exhibited an increasing number of facets in recent years.   One stemming from the rather dismal results from the heavy use of aid, encouraged development agencies such as the World Bank to turn their attentions to the promotion of trade liberalization, macroeconomic and monetary stability, and privatization, all embodied in the structural adjustment programs aka “Washington Consensus”.  Following the poor results and frequent failures of this strategy, a new line of thinking emerged, one with a lot of potential to lift the continent out of poverty: institutional reform.  President Obama was quick to echo this in his Accra speech: “Africa does not need strongmen, it needs strong institutions”.

The focus on institutions as a means to lasting prosperity for all in sub-Saharan Africa has been around far longer than the Obama administration, but this administration is giving it some steam, and rightly so.  A few economists and development practitioners have written about the impacts of institutional reform in sub-Saharan Africa.  In criticizing traditional foreign aid in her book, Dead Aid, Dambisa Moyo observes that aid impairs African institutions. One implication she gives: public revenue/tax collecting institutions are largely absent because African leader build their budget with revenues coming mostly from aid.  Elena Panaritis also spends some time in her work, Prosperity Unbound talking about institutional reform in developing countries.  Panaritis, whose work focuses on transforming the informality of property and property right systems into formal legal systems in developing countries, describes the importance of institutions.  In her words, “institutions structure incentives in human exchange, whether political, social or economic. In other words, they hold together and protect the social contract by enforcing contracts and laws and providing a sense of certainty in human exchange”.

The immediate economic benefit from efficient institutions as various economists have outlined is that it reduces transaction costs of all kinds (i.e. time, money, imperfect information).  Markets work well when there is a predictable and legitimate set of rules that governs doing business.  Well-functioning institutions also promote accountability and give a voice to the poor. The Obama administration’s efforts (making a speech and creating new policy directives are two different animals, the question is how much weight will he put behind the rhetoric) to endorse this approach is certainly a step in the right direction.  My only concern is that this approach has already become another “Washington Consensus” that wipes out all other ideas.

The question of what kind of reform should be promoted is addressed by Dani Rodrik: “The type of institutional reform promoted by multilateral organizations such as the World Bank, IMF, or the World Trade Organization is biased towards a best-practice model. It presumes it is possible to determine a unique set of appropriate institutional arrangements ex ante and views the convergence towards those arrangements as inherently desirable. This approach,” Rodrik continues, “encourages cross-national comparisons, benchmarking.” All of which he rightly claims are based on first-best mindset. He proposes a second-best approach where institutional reform is promoted in a case by case basis, where focus is placed on areas of quick wins and high impact results. Growing up in Sierra Leone, it was easy at first to reject a second-best approach for my continent. However, Rodrik’s idea makes a lot of sense.  Different countries, even in sub-Saharan Africa have different approaches in doing business and rely on unique arrangements of formal and informal institutions. A “one size fit all” approach may cut transaction costs in the short run but has high potential to fail.  The heavy reliance on institutional performance indicators, like the Good Governance Index, can easily misguide us, lead to waste, and subsequently to yet another retreat of a potent solution to the poverty problem in sub-Saharan Africa.  Institutional reform holds a lot of promise for development in sub-Saharan Africa if applied appropriately.

The Bank of Oliver Twist was posted by: lettrist on: June 26, 2009

URL: http://utopiaorbust.wordpress.com/2009/06/26/the-bank-of-oliver-twist/

Guest Contributor: Rachel Beach

Following the logic of Amartya Sen in Development as Freedom, individual property rights in a transparent system is a fundamental means as well as an end to development.  The Lettrist (blogger) is right to remind us that “the poor have always had ‘sizeable amount of assets’”.  The point is to find a way to secure their assets for their own benefit.  For many, one of their most valuable assets, land, is not secure.  Unable to use it as collateral, the poor lose one of their only means to access credit.  Mohammed Yunus, founder of the ever growing micro-credit banking movement, realized how critical access to credit is to upward mobility of the poor.  Just imagine your life without credit cards, access to loans, or any other means of credit. 

There is a plethora of property titling and land reform regimes gone wrong.  Think Zimbabwe.  In the wake of Peru’s achievements, the World Bank and many other well-meaning development agencies have bungled property titling projects by seeing property rights as a panacea for all ills. 

The problem, as Lettrist was right to point out, is looking at “titling” as a solution in a vacuum … a problem that pervades much development work today.  He cannot, however deny the unique successes of Peru.  I understand that advocates such as DeSoto invite strong criticism, but strong property rights is a cornerstone of development.  This is what Elena Panaritis, when at the World Bank and together with the Peruvian government carried out and proved in Peru (as outlined in her book Prosperity Unbound).  The reforms have been noted world wide for a specific reason.  They were not carried out in a vacuum.  Panaritis studied the political institutions, social motivations, and historical backdrop of the property titling mess, using a method she calls Reality Check Analysis.  Elena and her team went door-to-door surveying potential participants and proscribed a complete overhaul the agencies responsible for registering property.  Under a succession of presidents and parliaments, reforms responded to growing public demands for recognition of property.  It was not something foisted upon them, nor was it gentrification.  The reforms followed a specific sequencing of policy and events designed to address problems unique to Peru’s history, regulation, institutions.  This generated their rare success in property rights reform. 

Lettrist must not be aware of the actual benefits a properly-enacted property rights reform given his statement that “no one can be sure if land titling would benefit the poor at all”.  The results spoke for themselves in Peru.  The reforms were designed to cater not to large scale developers, but the poor and middle class who had experienced long-term insecurity of property.  Within three years the markets welcomed seven million new players.  Security of private ownership increased by 94%, initial property values increased by 42%, personal investment [i.e. home improvements, extensions] increased by more than 72%, the probability of child labor among participants decreased by more than 28%.  These are the positive elements of a reform designed to bring excluded sections of a society into the formal market. 

On the other hand the Lettrist was very right in saying that “capitalism has no serious strategy for reaching the poor in the extra-legal sector”.  Those in the extra-legal sector are entrepreneurs.  They simply lack access to formal markets and capital, and create their own informal markets.  Security of property rights is the fundamental bridge to the formal sector.  It provides a capitalist answer for bringing informal activity into the formal economy.

Appropriate community-based property rights systems empower citizens.  Rather than being a “wolf in sheep’s clothing”, they give both citizens a restored trust and mutual gain: the government gains revenue streams, but in return has a responsibility to provide public goods which citizens had previously been deprived of such as access to water, electricity, and roads.  Entrepreneurs can register businesses and invest in the formal economy.  They can secure loans and improve their lives and livelihood, assured that all their efforts will not be swept away by arbitrary expropriation.  Entrepreneurs in the informal sector function, but not efficiently.  Panaritis was not primarily concerned with preventing extra-legals from “bringing down the game” but bringing excluded entrepreneurs into the game.  The point being that as the percentage of citizens forced to live in a semi-informal state (parts of their daily lives secured in the legal sector, and parts outside where they cannot find access) increases, the legitimacy of a government decreases.  If the current government has not found a way to secure the property and person of a large portion of its citizens, nor provide public services to them, nor include them in formal market structures, it has failed to fulfill its role.  It is only expected that citizens would seek an alternative governing body i.e. Abimael Guzman, founder of the Sendero Luminoso aka The Shining Path.