The War on Property Rights

And What it Means to You

 by Michael S. Coffman, Ph.D.

Part II of III. The High Cost of Socialism

Legal property rights are the key factor in the success of capitalism in the West. The legal structure in the West documents every parcel of land, every building, every piece of equipment, or store of inventory in some form as property. Property can be used as an asset to finance expansion or an­other investment. The process of legally registering property takes only a few days at most and connects all these assets to the rest of the economy. In the United States, for instance, about 70 percent of the credit new businesses receive comes from using formal titles as collateral for home mortgages.

This is not the case in developing nations. Private property rights are diametrically opposed to the socialist’s fundamental belief that the state should either control or own those rights. Consequently, they never allowed private property rights in the great capitalistic venture of the late twentieth century. Registering titles in most developing nations takes not days, not months, not even years. Legally registering property usually takes decades as a person must get approval through dozens, if not hundreds of bureaucratic steps because these bureaucrats have no incentive to process the application expeditiously. Worse, the entire system is vulnerable to corruption, as petty bureaucrats at each stage demand their payoffs.

Although people in developing nations may actually own property, which the local community recognizes, they rarely register it because of the corrupt regulatory quagmire. Consequently, it has no legal value for collateral or building wealth. Since it has no legal value, it represents vast, but dead capital.

In his compelling book The Mystery of Capital, Hernando de Soto   accurately identifies formal private property rights as the key to reducing poverty and producing wealth. Legal title to use property represents equity. In turn, this equity can become collateral to create the capital needed to start, expand or buy into a business, which then yields income and wealth. The amount of equity can be stunning, even in the United States. The average net worth of home-owning Americans in 2002 was $132,100 verses $4,200 for American renters – 30 times less! True, other factors also play into these numbers, but property remains the key factor in creating wealth.

The developing nations of the world perhaps provide the most striking example of how socialism destroys the wealth-building capability of property. In these nations, de Soto found that the simple act of legally transferring the title to property is very costly. It can take years, even decades because of a sea of bureaucratic corruption and regulations. Few people have the time or resources to own property legally. This “extralegal” property therefore has no legal asset value.

De Soto has shown that the total value of this kind of extralegal property within developing nations and former communist countries is at least $9.3 trillion! This is ninety-three times as much as all development assistance to the developing nations from all advanced countries during the past thirty years. There would be no need for development assistance if these poverty-stricken people could have access to the asset value of their own property that is presently dead capital. Yet, the United Nations and the international community are presently putting together a series of international treaties in the name of “sustainable development that systematically prevents citizens in the third world nations from ever attaining the formal property rights that will give them wealth and liberty.

Denial of private property rights has been the policy of the United Nations and other international institutions since the 1970s.  The Preamble of Agenda Item 10 of the UN Conference on Human Settlements (Habitat I) held in Vancouver, May 31 - June 11, 1976 states that:

Land...cannot be treated as an ordinary asset, controlled by individuals and subject to the pressures and inefficiencies of the market. Private land ownership is also a principal instrument of accumulation and concentration of wealth and therefore contributes to social injustice; if unchecked, it may become a major obstacle in the planning and implementation of development schemes. The provision of decent dwellings and healthy conditions for the people can only be achieved if land is used in the interests of society as a whole. Public control of land use is therefore indispensable...."

Throughout this United Nations document, the socialist model for private property rights is set forth as the basis for future United Nations policy:  

Public ownership or effective control of land in the public interest is the single most important means of...achieving a more equitable distribution of the benefits of development…. Governments must maintain full jurisdiction and exercise complete sovereignty over such land…. Change in the use of land...should be subject to public control and regulation…of the common good. 

This socialist view of private property rights has infected all areas of international policy. Joseph E. Stiglitz, winner of the Nobel Prize in Economics and former Senior Vice President of the World Bank, identifies the desperate need for the poor in the third world nations to have property rights. In his book Globalization and Its Discontents Stiglitz understands that a free market system “requires clearly established property rights and the courts to enforce them.” He blames the international institutions such as the International Monetary Fund (IMF) and World Bank for making the plight of the poor even worse. Only the transnational corporations or the wealthiest 10 percent in the nations population that invest in factories and business are blessed with property rights. The poor and middle class must have legally protected private property rights to benefit from a market economy. Because the IMF denies the poor this type of protection by only giving lip service to property rights, they become the victims of globalism. The IMF merely creates the perception of property rights without requiring the legal structure that protects them in an equitable manner.

To prove the point, the World Bank  loaned $37 million in 1997 to the Institute for Liberty and Democracy. The loan helped Peruvians register their property under a new law passed in 1988 that made it easier to secure legal property rights. The loan helped over four million Peruvians register their property. The $37 million instantly created an incredible $6 billion in assets that was available for investment back into the Peruvian economy!

If strangling socialist regulations encumber property rights, there is little to no equity, and therefore little to no capital with which to create wealth. Without wealth, a nation cannot protect the environment. A family whose primary focus is to put food on the table is not going to be interested in protecting the environment. The contrast between the United States, Europe and the Third World is striking. The U.S. has some of the best-defined property rights in the world giving its citizens a per capita Gross Domestic Product of $42,000 in 2005. In contrast, the average for socialist Europeans is only $28,100, and that for Third World Nations is less than $10,000.

Thousands of communities are implementing socialist smart growth and growth-management planning that does exactly the same thing that Hernando de Soto found in third world nations. Rather than days, it often takes years, if ever, to get a permit to do anything in these communities because of feel-good regulatory restrictions. Many of these communities “appear” to be wealthy, but usually it is wealth created outside the smart growth community. It is just a matter of time before the community begins to suffer. Many cities having smart growth and growth-management for more than twenty years are already experiencing consequences. Planning can have a devastating impact.   

For instance, research done at the Fraser Institute of Canada provides an “Economic Freedom Index” that uses thirty-eight variables to determine the relative economic freedom of any nation in the world. Several of them concern the legal security of private property rights. This data shows that property rights play the single greatest role in per capita Gross Domestic Product (GDP) in countries around the world. There is a high correlation between the level of property rights and per capita GDP. Impoverished Third World nations having limited property rights have less than $8000 per capita income, while those having little to no property rights fall below $1000. Conversely, Western nations having legal property rights have incomes of greater than $12,000, usually greater than $20,000. There is a 74 percent correlation between the Fraser Institute’s property rights index and per capita gross domestic product of 126 nations.

Other factors obviously contribute to the per capita gross domestic product besides property rights. For instance, the property rights index for the United States is 7.9 while that of South Africa is 7.1. Although there is not much difference in the index of legal property rights between the two nations, the difference in the per capita GDP is huge, $42,000 and $12,100 respectively. Apartheid has kept South Africa’s data skewed because the law kept the black population from enjoying the same property rights as whites until the early 1990s. It will take decades to erase that disparity. However, it is happening. South Africa has gone from a Security of Property Rights index of 6.2 in 1980, to 2.9 in 1990 as blacks were factored in, to 7.1 today. At the same time, the index declined for the United States from 8.3 in 1980 to 7.9 as increasing regulations and erosion of legal protection chip away at private property rights. The South Africa example does show that any kind of artificial limitations to the rights of every citizen has a negative affect on the economic prosperity of the entire nation.

The Fraser Institute also showed the same relation exists between the states and provinces of North America. The Institute determined an “Index of Economic Freedom” made up of 1) Size of Government; 2) Takings and Discriminatory Taxation; and 3) Labor Market Freedom. These are all good measures of the degree each state or province has imposed socialistic regulations on their citizens.

In the United States, Delaware, Colorado, North Carolina, Georgia and Texas had the five highest Economic Freedom Indices, averaging an index of 7.7. Maine, Mississippi, Montana, New Mexico and West Virginia had the lowest, averaging 5.5 on the Economic Freedom Index. States having large per capita government, discriminatory taxation and onerous labor laws impose a severe penalty on its citizens by reducing economic activity and per capita income. For instance, a one-point improvement in economic freedom increases per-capita GDP by US$5,907. The reverse is also true. Consequently, the five states having the lowest economic freedom indices had annual per capita GDP incomes that were $13,000 less than the five highest states – a severe penalty for citizens living in those states. For a modest city of 50,000 people, that adds up to $650 million dollars of lost economic activity annually.

Numerous studies show there is a negative impact on communities where government imposes growth manage­ment and smart growth regulations. The Harvard Institute of Economic Research at Harvard University published a study that found that growth management and smart growth zoning dramatically affect housing costs. The study found that when regulatory zoning does not artificially drive up the price of land, the cost of an extra quarter-acre in a single lot is very similar to a separate and independent buildable quarter-acre lot. This condition exists in urban Kansas City.

However, in San Francisco, Los Angeles, Anaheim, San Diego, California, New York City, Seattle and other smart growth cities like them, the difference between the cost of an extra quarter-acre in a lot, and a separate buildable quarter-acre lot is in the hundreds of thousands of dollars. In these areas, claims the Harvard study, “Meas-ures of zoning strictness are highly correlated with high prices…. Only 10 percent of the value of the land comes from an intrinsically high land price.” The authors found that their evidence “suggests that zoning and other land use controls play the dominant role in making housing expensive.” Although many other variables were tested, land-use regulation was the only one correlated with the huge cost increases.