Lack of land titling: more than a cause, a consequence of poverty
Discussions on economic development have lately focused on the role of institutions in protecting property rights and reducing transaction costs. In particular, the idea has taken root that development would benefit from facilitating access to legality. It is thought that, if those in possession of even small buildings and plots of land have good titles, they will enjoy better incentives to invest and can use these real assets as collateral for credit. Similarly, if business entrepreneurs are able to “formalize” (for our purposes, publicly register) their firms easily, they will benefit from operating them as legal entities. For instance, they will have access to the courts for enforcing contracts and settling disputes, and will also be able to obtain credit and invest more. Consequently, firms will grow faster and be more productive.
These simple ideas, inspired by the works of Ronald Coase, Douglass North, and Oliver Williamson, and reminiscent of widespread arguments in the most advanced economies of the nineteenth century, have motivated thousands of reform and aid programs in developing countries, where the state of legal institutions is often considered to be inadequate. Some authors have even held that providing better institutions would in itself lead to greater development. Similar ideas have also influenced reform policy in developed countries, where some of the institutions for registering property and businesses have become outdated or captured by private interests. In both cases, simplifying administrative procedures was expected to have considerable impact on economic activity.
However, outcomes from these efforts in institutional building and reform have often been disappointing, failing to fulfill their promise of economic growth or even improve the institutional environment. Common mistakes have often been committed, such as seeing registries’ controls as mere entry barriers to legality, forgetting that they must be reliable to be socially useful. This has often led to reforms that emphasize quantity and speed, thereby sacrificing quality and making registries speedy but useless. Of course, registries, like any other institution, can be used to capture rents and deter competition. This possibility must be considered and avoided, but it only imposes one more policy and organizational constraint—it does not define registries’ function and should not, therefore, be treated as their only design factor.
In other cases, the error comes from mixing up cause and consequence when assuming that informality is causing poverty instead of the other way around. This has led, for instance, to the building of universal land titling systems that spend huge amounts to little effect, as they usually miss key objectives, such as the use of land as collateral for credit. In fact, given that formalization incurs fixed costs, informality may be appropriate for low-value assets and small, incipient firms. Registries are not silver bullets for development. Decisions on the creation and coverage of registries must be guided by considerations of costs and benefits, which depend on the particular circumstances of each country.
In an article titled “How to Make Land Titling More Rational”, published at the Brigham-Kanner Property Rights Conference Journal (2017) I critically examine these issues, focusing on the costs and benefits of the two main sets of policy decisions in land titling: (1) whether to create a public titling system or to rely exclusively on private titling; and (2) the choice between selective (i.e., voluntary) and universal (often mandatory) titling. The analysis concludes that universal titling is seldom optimal. Based on the costs and benefits analyzed to examine these questions, the paper then suggests that lack of land titling is more a consequence than a cause of poverty.