Today, there is a broad consensus among policymakers and mainstream economists in developed countries and international institutions that a secure property rights regime (defined in terms of the transparency, impartiality, and competence of the judicial system) plays a critical role in economic development. Yet this view is a recent phenomenon; it is only in recent decades that the importance of property rights has entered the economic literature. Of course, throughout much of the early history of modern economics, the existence of private property rights was a presumption that underlay the work of leading economic thinkers. It is no wonder then that until recently, modern economists saw little need to explain the correlates between robust property rights and economic prosperity. In his book on the history of property rights, Tom Bethell argues that the basic facts are these: Prior to the 19th century, economists rarely spoke of the notion of private property for two primary reasons: historically, protecting property rights is just what the government did first and foremost, and most mainstream economists saw no viable alternatives to the property-rights regime. As economics matured into a discipline during the middle of the 19th century, economists John Stuart Mill, Karl Marx, and Alfred Marshal were leading a growing chorus of voices that were critical of property rights. These early debates put the economic literature on a path to a comprehensive theory on the interplay between a robust property rights regime and the ideal conditions for economic growth.
Indeed, the advent of the modern property rights literature would not have been possible without the contributions of Armen Alchian, Ronald Coase, and Harold Demsetz. Their objectives were twofold: explain the correlates between property rights and economic growth, and identify the conditions critical to the creation and allocation of private property. Alchian outlines the conceptual framework for the property rights school of modern economics:
Coarse was among the first to demonstrate that the manner in which property rights are at first identified and allocated has no bearing on the way economic goods are used when the voluntary transfers of property are not associated with transaction costs and there are no enforcement costs. And so, because the process of defining, allocating and securing property rights create transaction costs, such rights will be assigned and enforced only if the economic advantages of doing so exceed the costs. Accordingly, property rights are appropriately described as an economic good with four distinctive features, described as a bundle of rights: (1) exclusivity of the right to how an individual exercises this property rights; (2) exclusivity of the right to generative income from this use; (3) exclusivity of the right to transfer property rights to others; and (4) and exclusivity of right to protection of those rights.
Why property rights matter?
Empirical studies show that securing property rights enhances countries’ economic growth and development perspectives.
Why does a strong property rights system play such a critical role in economic development? The short answer: The absence of secure property rights is attenuated economic growth, and building strong property rights regime is a cure for a depressed economy.
The longer answer: property affords society a protected domain against the state. For Pipes, well defined and enforced property rights are preconditions “to the emergence of political and legal institutions that guarantee liberty.” By contrast, totalitarianism has its roots in “patrimonial” systems in which sovereignty and property are linked. Not surprisingly, totalitarianism “reached its consummation in the Soviet Union,” as throughout much of Russian’s history there was no distinction between sovereignty and property. The extent to which property rights are respected and enforced affects how effectively prices in the marketplace will distribute goods and services. Indeed, economies with effective price structures are better at generating wealth opportunities.
Of course, there are some economists who criticize a strong property-rights regime on the grounds that robust property rights regimes incur high external costs. The presence of these costs are used to justify policies that weaken property rights. Indeed, both experience and theory indicate that governments should intervene in response to externalities or other forms of textbook “market failures.” Even so, experience and theory also indicate that the existence of an externality is a necessary, but insufficient condition for government intervention. Simply put, government actions (or inaction for that matter) have their own costs and should be measured against the potential advantages of such actions.
Even if the problem of high external costs as an objection to property rights falls apart under closer scrutiny, economists tend to agree that the creation of strong property rights regimes in developing countries is a challenge. True: the complexities of building strong property rights systems in developing countries are legion: a paucity of natural resources; insufficient funding levels for education, culture, religion, and history; and, recently, geography. It is also true that the emergence of democratic institutions in developing countries is, by itself, an insufficient context for the creation of a robust property-rights regime. In fact, democratic institutions are not always necessary conditions for the proper enforcement of property rights; experience tells us that even dictatorial regimes are more than capable and willing to ensure property rights. Even so, the most durable systems seem to emerge from within prosperous, well-developed democracies. The success within democratic institutions is not so much the result of strong governments, as it is the fact that these governments tend to prioritize first and foremost legal protections of property interests and the exclusivity of the right of individuals to use that property in the marketplace for goods and services.
