Prosperity Unbound

Please read Michael Shermer’s blog posting on “Build a 1st-World Country (in 12 easy steps)” and support his publication “The Skeptic” (Skeptic.com).

Shermer coins the phrase “Panaritis’ Panacea” which refers to Elena Panaritis’ groundbreaking work in Peru, which lends empirical evidence to the direct relationship between sound property rights markets and broad-based prosperity. More importantly, her achievement in transforming informal real estate and practices in Peru suggests that property rights are not prerogative of rich nations or attributes of fully-developed societies. In other words, property rights and the corresponding norms, contracts, and institutions that create and apply them are fundamental pre-requisite for economic growth and wealth-generation.

While the key ingredients to successful socio-economic development are hardly a mystery, the primacy of property rights markets and institutions remains understated and misunderstood. Michael Shermer restores their importance by zeroing on Ms. Panaritis’ pioneering work in Peru.

Full text available below:

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How do you turn a 3rd-world developing nation into a 1st-world developed nation? It actually isn’t that hard.

In 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 liquid. In such cases, immovable property that once had little formal exchange value is transformed to a marketable asset. What seemed “unreal” becomes real.

Basically, once you have set up a system of establishing property rights, a rule of law to enforce those rights, and a judicial system to settle property rights disputes, everything else will fall into place and prosperity will prosper (with the caveat, of course, of remembering Yogi’s Maxim). This is, in practice, what David Hume meant in principle: “Any person ought to have the right to enjoy the fruits of his own work.”

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Contents copyright © Michael Shermer.

Michael Shermer is the publisher of Skeptic magazine, a monthly columnist for Scientific American, a professor in the School of Politics and Economics at Claremont Graduate University, and the author of The Mind of the Market (Times Books). Contact: mshermer@skeptic.com

Guest Contributor: Barun Mitra, the director of Liberty Institute, an independent public policy think tank in New Delhi, India (www.InDefenceofLiberty.org)

The Department of Land Resources in the Ministry of Rural Development, Government of India, has placed the draft of Land Titling Bill 2010, on their web site: http://www.dolr.nic.in/landtitlingbill_notice.htm

The date for submission of comments and suggestions has been extended to Aug 31, 2010.

Below is a12-point summary on the Land Titling Bill, based on the detailed comment that we submitted to the government. Would greatly appreciate your comments.

1. Land being a state subject, the preamble should contain a short explanation as to why a national level model legislation is being proposed.

2. Since the Bill is modeled on the Torrens title system, it is vital to detail specific exceptions for granting Indefeasible title in the Act so that the judiciary is not burdened in the same way as at present in attempting to establish titles and defeating the very purpose of an Indefeasible title.

3. “Part ownership” of a whole property is a complex issue involving various forms of associations by property owners. However, the draft Bill does not go into specifics of titling procedures under the Community Development Scheme and Strata Title. Rather than leaving such important issues for subordinate legislations, it would be prudent to leave such concepts outside of this Land Title Bill, and separate statutes be framed by appropriate authorities to deal with these issues.

4. The requirement that Registers be maintained on paper, along with electronic forms, will entail an avoidable duplication, and can be avoided by simple  security procedures.

5. With the operation of the new titling system, the current documents or deeds will change. These documents/templates should therefore form part of the statute itself, and the Bill needs to include the prescribed documents under the land titling regime.

6. The Registry should be allowed to make basic parcel data, owner identification, and valuations publicly available without need for approval of the Director. This information is extremely valuable to the private sector and making it public will encourage development and improve securitisation.

7. Title guarantee proposed by this Bill seeks to reverse the presumptive nature of property titles that have evolved from the common law and in India it finds statutory cover in the Land Revenue Codes of the States. The draft Bill should seek deletion of the provisions in the State Land Revenue Codes which provide for the principle of presumption in favour of the record-of-rights.

8. The draft Bill needs to detail the valuation principles. It needs to replace Registration fees and Stamp Duties levied by States, with a nominal user charge to meet the costs of record keeping. The aim should be to discourage the use of Registration fees and Stamp Duties as primarily revenue gathering measures, rather than facilitating property transaction. This has led to massive evasion, corruption, and loss of revenue to the state exchequers. For the Bill to achieve its objective, transaction costs need to be bare minimum, so that property owners have the incentive to participate in the registration process.

9. Valuation is primarily guided by the zoning and land use regulations. This also becomes necessary in view of the land ceiling, and fragmentation of land holding. By removing land ceiling, and facilitating transactions, the scope of zoning and land use regulations would be significantly reduced. This would help significantly reduce the variation in the value of land in the same area. Seeking exemptions to, or modification of, land use regulations, are another source of corruption affecting land transactions. Removal of land ceiling and consolidation of operational holding would help development of localized land use practices among the land holders themselves.

10. The provisions on the Title Guarantee Fund are inadequate. It needs to be dealt with in greater detail and deserves a separate Chapter. The draft Bill may specify conditions of compensation out of the Title Guarantee Fund to ensure that State powers to indemnify is not stretched and the lack of clarity and unlimited indemnity does not discourage private participation providing Title Insurance cover.

11. Compulsory land titling in a five-year time frame is very ambitious, in a country of diverse land recording systems, administrative competence, and widely prevalent informal arrangements. If adopted it will be prone to capture by special interests, and open a new door for corruption, and trigger a new wave of social unrest. The draft Bill should instead look towards mandatory titling for every new transaction and encourage voluntary registration. This will provide an opportunity to fine tune the rules and regulation, help build trust in the new system, and facilitate its acceptance by the public.

12. For an initiative of this scope, and in a country of India’s scale, the draft Bill needs to encourage the participation of private players, both for for-profit and non-profit, to help with the land mapping, documentation, and registration process. The present technologies allow for such bottom up, demand driven services to take full advantage of the changes in the law and procedures.

Please try and take a look at the actual bill, and share your thoughts.

The government of India has proposed a new law to guarantee property titles, based largely on the Torrens system in Australia and England. The draft was open to public debate and input till June 15, 2010.

Details of the draft law are available in the document below:

http://dolr.nic.in/Draft%20Final%20Model%20Land%20Titling%20Act-04.5.10.doc

Recent article on the topic was published in the “Financial Express” on May 27, 2010 by Ravish Tiwari

New law drafted to guarantee property titles in India

To bring uniformity across the country and replace the existing deeds system fraught with litigation due to inaccuracies in property records, the rural development ministry has drafted a model law to usher in a system of conclusive property titles with title guarantees through registration of immovable properties.

The department of land resources under the ministry has drafted the Land Titling Bill, 2010 that provides for establishment and management of a system of conclusive property titles with title guarantees and indemnification against losses due to inaccuracies in property titles, through registration of immovable properties.

“We have prepared the draft Land Titling Bill, 2010 and have invited public comments. We will soon be consulting state governments for their comments on the draft Bill. We will also be organising a workshop with state authorities to create awareness about the Land Titling system,” Rita Sinha, secretary, department of land resources, said.

The system envisaged under the Bill is currently operational in countries like England, Australia and New Zealand. It hopes to replace the existing deeds system under which the government does not give any title to any individual or organisation.

In fact, in the deeds system, all titles of immovable property are ‘presumed titles’, where title to property is claimed by people through diverse legally recognisable instruments. Usually it is the sale deed which is used as the prime instrument to claim title to property. But it gives rise to litigation with different persons furnishing different instruments to contest title claims.

In contrast, under the land titling system, the government guarantees conclusive title, as against presumed title, for every immovable property which is tagged with an unique property identification number.

Titles under the new system would be indefeasible—title of any immovable property entered in the register of titles cannot be altered or made void.

After sale, the register of titles will erase the earlier assignee in the register and replace it with the new holder. In the register will, on behalf of the government, grant a certificate of conclusive title to the new holder.

The proposed draft model Bill envisages a land titling authority which will have four different divisions—title registry, survey settlement and land information system, property valuation, and legal services and title guarantee—to ensure uniformity and usher in the new system. It also envisages instituting a Land Titling Tribunal to adjudicate issues arising at the time of ushering in the system.

Sinha said the National Land Records Modernisation Programme (NLRMP), approved by the Cabinet in the year 2008, has undertaken a massive programme that can be used as a platform to usher in the new system that seeks to address property rights concerns.

The NLRMP has undertaken computerisation of land records which includes data entry, digitisation of cadastral maps and integration of textual and spatial data, strengthening of revenue and survey training institutions, village index maps and core GIS, legal changes and programme management.

“I am given to understand that the West Bengal government has almost completed digitisation of its land records and is now ready to usher in the new system. I hope the model Act will help the state government modernise the property rights system in the state,” said Sinha, expressing the hope that the model law will provide the basis for uniformity across the country.