Establishing Formal Rules such as Property Rights is a Promising Road to Sustainable Economic Growth and Peace, December 7, 2009

Elena Panaritis, author of Prosperity Unbound: Building Property Markets with Trust (Palgrave Macmillan, 2007), is an economist and social entrepreneur. She now leads the effort of public sector reform in Greece as an honorary government adviser. Her ideas are particularly timely, especially in the context of the current global economic crisis and the ongoing efforts to eliminate illiquid/informal property markets around the world.

“It is no accident that this crisis has originated in the United States,” Elena explains. “The property system is built on a false assumption: that the property is valued correctly. Unless that’s fixed, the risk will always be far greater than necessary.”

Elena is the founder of a prototype triple-bottom-line investment advisory firm, Panel Group, and is a former World Bank economist. She has played a direct, hands-on role in creating stable property markets and preventing mortgage crisis such as ours. She created a new methodology and used it to spearhead property rights reform in Peru, with enormous and internationally recognized success. Some 9 million people benefited from the reforms in about three years.

Robert Litan of the Brookings Institute and The Kauffman Foundation of Enterpreneurship calls Elena’s work a “real contribution.”

In his Financial Times online column, Willem Buiter specifically recommends Elena’s book Prosperity Unbound. Buiter, a London School of Economics professor and former chief economist at the European Bank for Reconstruction and Development, takes “useless” and “harmful” finance based on derivatives to task and writes that “effective and efficient financial intermediation is a necessary condition for prosperity.” By contrast, he refers to Elena’s work as “useful finance” and continues: “The world described in [Prosperity Unbound], where the foundations of a productive market economy are being put in place, appears light years removed from the world of Wall Street ...”

— Steven L. Spiegel Director, Center for Middle East Development, UCLA

Charter Cities Blog: Property Rights in Peru, December 3, 2009

The laws that govern the ownership, sale, and collateralization of property are a classic example of rules that are important to economic and human development. The story of property reform in Peru illustrates the harm that can come from bad rules, the benefits that come from improving the rules, and the difficulties reformers face when they try to change the rules.

Like many developing countries in the 1990s, Peru undertook structural adjustment programs (taming hyperinflation, privatizing inefficient government enterprises, opening up to foreign trade and investment) as part of lending agreements with the IMF and World Bank. Unlike most developing countries, Peru also made a meaningful institutional overhaul of its property rights system. This deep institutional reform helps to explain Peru’s development strength in relation to its peers.

Peru’s economy is among the best performers in the developing world. Sustained growth lowered the poverty rate from nearly 50% in 2004 to 36.2% in 2008—a year in which GDP growth reached 9.8%. Though growth slowed sharply in 2009, Peru appears set to weather the global recession without entering a recession of its own.

Elena Panaritis helped to redesign Peru’s property system as an economist with the World Bank. At the time, more than half of property owners in Peru were not registered. The goal was to formalize the heretofore informal property and give millions of Peruvians access to the productive potential of their assets.

Panaritis’ book, Prosperity Unbound, describes the experience.

In the early 1990s, Peru’s property rights system was a mess—a relic of land redistribution policies of the 1960s and 70s. The policies broke up large haciendas, creating cooperatives or individual holdings but forbidding the sale of land or its use as collateral. Legal registration of redistributed land was rare. The land belonged to whoever worked it, a principle that kept people close to their informal holdings—greatly reducing labor mobility.

Duplicate property claims were rampant, and resolution of claims took seven years or more. According to Panaritis, a Peruvian wanting to register a title or execute a contract for the sale of property had to deal with 14 different government offices and hundreds of steps. Bribery and corruption were the only way to effectively title property or resolve a claim.

Rather than register people under the existing dysfunctional system, the reformers in the Peruvian government and the World Bank decided to create an entirely new system. In the early 1990s, the government rescinded the laws forbidding the ownership or sale of land, and the reformers set about registering property under a new system based in part on a registry developed by the Lima-based Institute for Liberty and Democracy.

Abrupt, nationwide changes in the rules were not feasible. Opposition to property reform was too strong, and reformers needed time to try and revise. An initial pilot program successfully registered 88,000 properties, primarily in urban areas. The pilot convinced property owners that the new system was effective and trustworthy. The demonstrated success of the new rules acted as a catalyst for change across Peru.

As formal property registration expanded through the late 1990s and the early 2000s, collateral-based lending increased. Newly formal property owners felt secure enough to make improvements to their property. With formal rights, people were free to pursue earnings opportunities away from their property without fear of losing it to another claimant. Panaritis also reports lower levels of child labor and higher levels of school enrollment among families with formal property rights compared to their informal counterparts.

The reforms made made property a tradable asset and gave Peruvians the freedom to use their property in ways that best served their interests. The reform effort was not a simple matter handing out titles under the existing system—it required the creation of a new system for registering property. To this end, the pilot program was key. It allowed reformers and property owners to try and revise the new system, the success of which engendered trust in the pilot participants and sparked enthusiasm for the reforms elsewhere in Peru.

— Brandon Fuller writing for Paul Romer's Charter Cities Blog

Financial Times Blog: Maverecon, April 12, 2009

“It describes the fascinating story of how personal possessions (characterised through informal, insecure property rights) were turned into secure property rights and thence into productive capital through a World Bank project in Peru. The book shows the importance of local knowledge and of a deep understanding of the institutional prerequisites for a successful market economy based on collateralisable wealth (especially real estate). To raise the quality of the rule of law in the property sector to the point small businesses can credibly offer land and other real estate as collateral for formal sector finance requires a formal titling authority, a state capable of reliably maintaining property records, a functional judicial system, corruption levels bounded from above etc.

The world described in these books, where the foundations of a productive market economy are being put in place, appears light years removed from the world of Wall Street and the City of London. In Peru, access to formal sector finance on reasonable terms thanks to the newly created ability to offer collateral and perfect security interest, has lifted many out of grinding poverty. In Wall Street and the City of London, massive resources and lobbying power were devoted to turning complex, long-term relationships into tradable securities - preferably into tradable bearer securities, even when the informational preconditions for this transformation to be effective were not satisfied. Increasingly, as in the case of bearer instruments like mortgage-backed securities for instance, the ultimate issuer and the current owner of the instrument knew nothing about each other. And even with simpler bearer securities, most of the time no-one knows who the current owner is, not even the supervisor and regulator.

The endless churning of contingent claims, including derivatives, when the purchaser has no identifiable insurable interest, turns financial intermediation into a market-mediated betting shop. Then the betting slips become bearer securities and are themselves traded, either OTC or on organised exchanges, and the derivative transactions volumes expand to dwarf the transactions in the markets for the underlying financial claims (let alone the markets for the underlying real resources). At that point, the betting tip of the financial tail of the real economy dog does all the wagging. It does not create value but redistributes it in a way that consumes real resources and exposes the real economy to unnecessary risk. It’s time to tame the tiger.”

— Willem Buiter, Professor of European Political Economy, London School of Economics and Political Science; former chief economist of the EBRD

"In order to solve the problem of "unreal estate" in inefficient markets, Panaritis coins the term "Reality Check Analysis." She uses this as her diagnostic tool to give policy makers effective guidelines for reforming a property system in any country or society and eventually converting unreal estate into real estate. Trust is the basis for the use of this tool." When the phrase "institutional reform" comes up in today's economic and policy rhetoric, we tend to view it in a positive light, as an action that will perhaps help liberalize societies and open doors to free trade by downsizing or somehow igniting improvement in government organizations. But are we correct in our assessment about the cause and effect of institutional reform and improved economic development? Are we right to believe that reforming institutions will always result in benefits to the system regardless of when and how they take place? Are some institutions more important than others? Elena Panaritis's debut work, Prosperity Unbound, not only answers these questions but ... read the rest of the article

— Knowledge@Wharton

For many people around the world, property rights are not well defined, enforced or monitored; resulting in over half of the world’s population living and working on ‘unreal estate’, that is, without the security of property ownership. Basic economic principles outline that secure property rights are important for efficiency, investment and growth; people living and working on land with the constant uncertainty of losing their lands or properties are unlikely to make the long-term investments that can help create economic growth and eradicate poverty. Farmers, for example, are likely to continue farming low-return, single period crops, instead of investing in higher-return cash crops such as coffee. In her book Prosperity Unbound: Building Property Markets With Trust, Elena Panaritis presents a holistic approach to combating this lack of formal rights.... she uses what she calls 'reality check analysis' ... read the rest of the article

— Rahilla Zafar, INSEAD

“A fascinating book worth reading by all students, practitioners, and socially responsible investors. Through a lively narrative based on personal experiences, it highlights the catalytic impact of institutions, most notably of property rights, on the functioning of markets and on development.”

— Louka T. Katseli, Director, OECD Development Center

“A brilliant guide to transforming informal assets into financial opportunities benefiting all those involved. Panaritis breaks the vicious cycle of frustration with informal real estate presenting a new practical approach, proven results, and fresh thinking on how to add value by creating value. A must read.”

— Eleni Tsakopoulos-Kounalakis, President, AKT Development Corporation

“Indispensable reading for both public and private sector leaders and for anyone interested in the implications of informality for transforming real-estate markets. It provides critical insights on why and how institutions and property rights matter for economic and social development, and a road map for the way forward.”

— Susan M. Wachter, Wharton School Real Estate and Finance, University of Pennsylvania; former Assistant Secretary at the US Housing and Urban Development Department

When Elena Panaritis brought her idea of writing this book to us at INSEAD’s Euro-Asia and Comparative Research Centre, I was immediately captured by the idea, and for several reasons. In the first place it reflected deep knowledge gained in the field, as she had spent much time coming to terms with the realities of economic and social inequality in the developing world, and with the frustrations of knowing that it need not be like that. What she had taken part in, during the Peru reforms she describes, was revolutionary in its effects, but as she convincingly indicates, was a matter of patient attention to a plethora of detail on the ground. The reality of misguided and incomplete bureaucracy, and the peculiar legacy of historical trials and errors – especially errors – comes across with painful and compelling truthfulness. Her ideas are very firmly grounded.

A further reason for encouraging the writing of this book was that it was driven by the inspiration of several formidable scholars. Francis Fukuyama, Robert Putnam and Hernando de Soto had earlier opened up the field of enquiry into social capital and trust, in ways that begged for further probing. Experimentation was clearly needed over methods of moving forward to apply the lessons. This work does move those ideas forward, and in doing so makes a major contribution to both practice and policy making. Such ideas are likely to be of relevance –whether actively sought or not – to a remarkably large number of the world’s governments, and a disturbingly high percentage of the world’s people.

A third reason for welcoming the study was that it fits perfectly within the Centre’s research agenda. Our work is focused on the idea that economic systems are products of the societies in which they are embedded, and that the societal effect interferes extensively with the ‘universal’ laws of economics, to produce distinct responses. Such societal systems are products of the institutional frameworks that emerge in each country and they reflect the historical legacy so characteristic of each society.

The system of doing business is a system of coordination. That is embedded in a system of order provided by institutions and varying in what it delivers, from high order to confusion. The institutions are embedded in a system of meaning. The impact of that meaning on the institutions is heavily conditioned by history, and for many countries that history is told largely in terms of the injection of foreign systems into older traditional societies. Without knowing this ‘holistic’ context, as Elena Panaritis argues and demonstrates so well, it is not possible to make good policy.

What this book describes is the condition of the institutional layer in several societies, and especially that part of it dealing with social capital. Undoubtedly crucial in the rise of income per capita, the architecture of trust not only determines the volume and intensity of economic exchange a society can carry, but also the ‘shape’ of an economy, in terms of the forms of organization that come to typify it. Here economics meets sociology and history, and the mixture is fruitful; it is also still rare in the literature influencing policy and so is especially to be welcomed.

The Euro-Asia and Comparative Research Centre, INSEAD, is happy to have played a part in the preparation of this work. Our support for it indicates its centrality in our wider set of studies, and our great satisfaction in its demonstrating the value of multi-disciplinary work on complex key issues.

— Gordon Redding, Director Euro-Asia and Comparative Research Centre, INSEAD