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For richer or poorer, property rights transform lives

I HAVE OFTEN wondered if there is some kind of systemic difference between the western world, where wealth creation seems to be able to flourish and standards of living pretty much rise year by year, and the seemingly endless poverty of the developing world, where levels of personal income are stuck at barely sustainable levels.

 

One persuasive answer to this conundrum has been given by the eminent economist, Hernando de Soto, in his work The Mystery of Capital (published by Black Swan, 2000). De Soto is the president of the Institute of Liberty and Democracy in Lima, Peru - rated one of the world’s leading think tanks - and his views have been acclaimed by many leading political figures such as Bill Clinton, Margaret Thatcher and David Owen.

 

The reason that five-sixths of the world are poor, argues De Soto, is not because they don’t have assets, but that they have no means of fixing the value of what wealth they do have in the way that the western world does, through legal ownership of their own property.

 

The fact that so many people live in shanty towns and have, at best, squatter rights over the place in which they live means that in many cases they cannot regularise their ownership, sell their property or borrow money on the back of it.

 

The relentless global rise of urban life, where people are attracted away from the fields into the cities, only contributes to this problem. This issue is crucial. Even in as relatively developed a nation as Egypt the vast majority of people live without property rights and the infrastructure to lend and borrow on the back of property is not available to them.

 

This makes a huge difference. Think of the millions of pounds worth of value tied up in the property in any suburban street in Edinburgh or Glasgow. Just think of the many businesses where the start-up capital has been borrowed on the collateral of private houses.

 

Property rights in the UK have been regularised for hundreds of years, but it is the American experience at the end of the nineteenth century which provides a good example of how to regulate property ownership. Before then, property ownership was largely unregulated in the US, but the situation was transformed largely by allowing squatters rights to become regularised.

 

This is what could and should be done in the Third World today. Anyone who has built a house on land could have their ownership recognised in a way which allows them to buy, sell or borrow.

 

Of course, once property ownership becomes legally protected, it can all get out of hand, as it seems to have done in the West. The Economist reckons that the total value of residential property in developed countries has risen over the past five years by more than $30 trillion to over $70 trillion; an increase equivalent to 100 per cent of the combined GDP of those nations.

 

This is the biggest bubble in history - bigger than the internet bubble of the late 90s, or the stock market boom before the 1929 crash.

 

This situation is caused by low interest rates and the keenness of banks to lend on the back of property even if the money is intended for holidays or hi-fis. One thing is for sure - this situation can’t last. Sooner rather than later, we are going to have to use something else for a piggy bank. 

 

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