Liberal Ideas
 

Private Property Rights: Reflections on Pakistan

Ali SalmanAli Salman

The most important deficit which Pakistan faces today is neither budget nor trade deficit, it is the institutional deficit. Testimony is provided by various indices measuring institutional environments. The International Property Rights Index (IPRI) places Pakistan at 95
th position in 115 countries while India is ranked 37th in 2008 edition. Considering that India and Pakistan are comparable countries by virtue of human development and per capita income,  the stark gap between the two countries on property rights indicate the institutional deficit of Pakistan, which is likely to further retard chances of both economic and social development. Pakistan’s relative position on another pro-institutional index, Economic Freedom of the World Index, also confirms the hypothesis of institutional deficit.

 

 Pakistan and India Comparison:

           

India

Pakistan

1

Human Development Index Ranking

128

136

2

Per Capita Income (PPP $)

3540

2450

3

Economic Freedom of the World[1] Ranking

77

104

4

International Property Rights[2] Ranking

37

95

(Sources: Human Development Report 2008, Economic Freedom of the World 2008, International Property Rights Index 2008)

New Institutional Economics (NIE) has arguably become the mainstream of development agenda ever since the idea was introduced by Douglas North and later popularized by Hernando De Soto. The basic argument is very appealing: greater property rights, stronger rule of law, and an effective functioning of governance institutions including judiciary are pre-requisite for economic development. It has been argued by De Soto that the Western economic development is built on the bedrock of strong property rights, and simple transplantation of the Western economic models do not work in environments where property rights are considered alien.

While agreeing with this argument, the conventional positions on private property rights and rule of law are revisited in this article, divided into three sections. The first section argues that private property rights are indeed prerequisite for economic development though they are not enforceable in isolation and relationship is non-linear and even chaotic. The second section argues that even ideas from NIE have been made part of development agenda in many developing countries, including Pakistan, without desirable results. This has occurred largely due to a simplistic and ahistorical conceptualization of property rights, which need a certain kind of enabling environment to be strictly enforced. The third, and the final, section argues that property rights are symptomatic of rule of law and hence any superficial reforms in private property rights are likely to be counter productive and that the future of rule of law in Pakistan depends on the outcomes of a power struggle among various elites.

Property Rights-pre-requisite for economic development

For a historical understanding of an enabling environment, which precedes even property rights, let us compare Russian and English history. Arguing in the favour of importance of private property rights, Richard Pipes (2001) has argued that the key difference between the two otherwise comparable countries has been the private property rights. In the case of England, feudal lords exerted considerable political and economic influence on the Crown as early as 1300s. These feudal lords, who enjoyed absolute ownership of their lands, had great incentive to gain maximum economic benefit from their own capital. The king could little to counter their influence and this grew later into emergence of a parliament, which become the source of real power. Thus a weak central state and a strong society emerged, which were to become the basis of renaissance and then industrial revolution.


In contrast, the Russian tsars, much like their Mughal cousins in the sub-continent, never gave private property rights. Instead they chose to appoint influential people to collect tributes to build a strong state. In time, Russian nobles had to serve the monarch: they held their land in conditional possession only as long as they served him to his satisfaction. Thus, “until late in its history, Russia knew only duties, not rights.” There was hardly any incentive for the tsar’s representatives to either take care of their properties or that of welfare of the people. Thus history fermented ground for a communist revolution, based on negation of the private individual and build-up of totalitarian and despotic regime.

The relationship between property rights and economic development is non-linear and even chaotic. No country has first instituted a structure of property rights and then began the journey of economic progress. The two have moved simultaneously without much conscious and over-arching agenda. In fact, as Chang (2002) has emphatically argued, countries have also curbed certain property rights, in particular intellectual property rights, during the course of technological advancements before fully implementing the laws.

Property rights are important for socio-economic development as long as they are properly contextualized. Government of Pakistan has transferred land to landless peasants several times during last decades. The motive is to give private property rights to landless poor farmers, who worked as share-croppers, known as haris. The percentage of the land transferred remains small, as total area transferred to the landless peasants during the agriculture reforms of 1959, 1972, and 1977 is 1.4 million hectares (about 8% of the country’s cultivated area) resumed from the large landowners, which benefited 288,000 farmers[3]. However, this could also be taken as an action against private property rights!

I have personally taken account of the aftermath of transfer of ownership during 1997 in the case of landless peasants in Sindh. According to local accounts revealed during the interviews I conducted, it transpired that most of the land distributed was on the ‘kucha’ area. The ‘kucha’ area in local parlance means the adjacent banks on each side of the river, in this case Indus. It was revealed that although this land is potentially cultivable and the title of the property was really transferred, this area is subject to control of local criminal gangs, infamous in the whole country. Thus soon after the land was transferred in the districts of Thatta, Khair Pur and Noshehro Feroze, most of the peasants were evicted by force and the criminal gangs took over possession as their bastion. This development also suggests that mere transfer of ownership with disregard of local realities can be counter productive.

Property rights are important for socio-economic development but they are not enforceable in isolation. The case of land transfer as well as title transfer in the case of haris from Sindh suggests that prevailing political and social realities must be taken into account before embarking upon a pro poor programme in the name of property rights. One wonders if the current Sindh government, which has ostensibly issued extensive advertisements in the newspapers to transfer more land has learnt any lessons from its predecessors.

A fundamental dimension to the enforcement of property rights is informational- ‘who owns what’- as De Soto puts it. The key problem lies in access to information. I interviewed an official of a world’s leading consulting company[4], which has been hired by the Government of Pakistan to develop sectoral strategies for various business clusters in the small and medium enterprises sector. The problem, according to the official, was that the responsible official agency and its executives were not willing to go out and make their hands dirty to find out information about the real players in the small enterprises sector located in tiny, filthy workshops or backyards of houses. Thus the agency outsourced its own job to a foreign company, which did a good job in the end by documenting real life experiences, as well as data, from the small enterprises sector.

The informational gaps lead to informality, which De Soto has recorded as ‘dead capital’-dead in the sense that this capital does not become a part of formal banking channels and remain economically non-productive. Although this notion of dead capital has been criticized for technical and political reasons, the informality does render planning ineffective. According to an internal document[5] prepared by De Soto’s Institute of Liberty and Democracy team, which visited Pakistan in 2004, as much as 70% of rural and 75% of urban real estate property can be considered ‘dead capital.’ This is dead, as it does not have legal and clean title, and hence cannot be used as equity or collateral to contract a debt from a financing channel.

Piece-meal view of property rights

Having argued that property rights are indeed pre-requisite for socio-economic development, now consider what happens when property rights are viewed piece-meal i.e. disconnected from larger development context. Institutional reforms in the name of private property rights are packaged by the international development corporations and adopted by their counterparts in developing countries without a deep historical conceptualization about centuries old processes in the West. Taking a piece-meal view of the property rights agenda, the government embarks upon ambitious programs for land records computerization and titling of properties. For example, the Government of Punjab has been carrying out ‘Land Revenue Information Management Systems’, a project supported by the World Bank with 45 million dollars to “improve land records service delivery, contributing to long-lasting tenure security and more efficient operation of land markets.”

As De Soto would have us believed that computerization without structural reforms is a superficial exercise. Thus we have not observed any structural reforms in the Revenue department of Government of the Punjab, which should have been preceded computerization. Patwaris-key official figure for land records-remain in power to manipulate with the data, now indeed with the support of some technicians. The basic problem: a great imbalance between the Patwaris power and his official monetary package remains there. Obviously, we should not expect the World Bank to give us money for this purpose, but this is where most investment is needed. It is clear that this problem cannot be resolved by technical assistance, trainings and evaluation exercises. Land records computerization would not result into emergence of property rights.

In the courts of Pakistan, most of the cases relate to property rights in one way or the other, which could easily consume about 10 years before any resolution. In some instances, disputes over property rights have even led to political struggle, the most notable being the case of military farms in Okara, a district in Central Punjab. In 2000, on the military farms in Okara which happen to be the largest military managed farm in the country spanning over 6,800 hectares and tilled by thousands, the tenant farmers revolted. The democratic government had earlier announced that the ownership of these lands will be given to the occupancy tenants. However, when the military took over in 1999, it reversed the decision and instead forced the farmers to sign a new tenure contract, which raised insecurity amongst the farmers.

Human Rights Watch, which issued a 54 page report exclusively on this conflict, reported that the problems in the affected districts result from a straightforward disagreement on property rights. Traditionally, farmers have been sharecroppers, handing over part of their produce as rent to the military, which acts as landlord through military-run farms.  In 2000, the military unilaterally tried to change the rules, demanding that the farmers sign new rental contracts requiring them to pay rent in cash.  The farmers refused, fearing that cash rents would, when times were lean, place them at risk of being evicted from land that their families have lived on for generations. 

This incident suggested that the land tenure, especially for share-croppers, remains a contentious issue and more reforms are needed to protect the interests of tenants. This would mean that broader political and institutional strategies must be in place to ensure property rights for all the stakeholders concerned. The military, as well as the landlord regardless of decreasing land concentration, is a reality and must be taken on board while ensuing any effective reforms.   

Like the piece-meal attempts, another dangerous tendency is bad sequencing- i.e. start skirting the core problems and taking on the softer side of reforms. As the property rights is intractably linked with the functioning of judiciary at all levels, one can say that projects such as Access to Justice (AJP), this one supported by Asian Development Bank, should really help developing this system. However, results again are far from desirable. 

The key development objective of the AJP –worth US$350 million- is to assist the Government of Pakistan to improve access to justice so as to (i) provide security and ensure equal protection under the law to citizens, in particular the poor; (ii) secure and sustain entitlements and thereby reduce the poor's vulnerability; (iii) strengthen the legitimacy of state institutions; and (iv) create conditions conducive to pro-poor growth, especially by fostering investor's confidence.

To date, the programme has focused on the capacity building issues of the judiciary and on the physical infrastructure and computerisation of court records. But it has not made any impact on the level of tenure, salaries and benefits for the lower courts, where exactly the core problem of property rights resides. The programme targeted the peripherals rather than the core elements. This type of sequencing negatively impacts the overall ability of the courts to deliver the results.

Another dimension of a piece-meal view of property rights is the role of financing mechanisms. As assets can be brought to life by financing, the status of financing mechanisms and willingness of people to contract loans for productive purposes against their asset becomes very important. Thus the ownership is really a tip of the iceberg of property rights, as stressed by De Soto as well. The usefulness of a clean and clear asset hinges on the entrepreneurial characteristics of a society a great deal.

Development “packages” tend to be ahistorical in nature and often they are not properly sequenced and paced in relation to local priorities and local histories. Sometimes certain development reforms fail because they are pushed too fast or are dependent on something else that has not been developed sufficiently. Were it otherwise, Pakistan, the third largest recipient of foreign aid in last 60 years, should have done considerably well.

Rule of Law: Emergence of an economic order

The status of property rights in a country should reveal information about the status of rule of law. Therefore the importance of property rights is not just substantive, but also symbolic. As the IPRI compares the countries on the basis of physical property rights, political and legal environment and intellectual property right, the rule of law in each of these sectors can be ‘measured’ in the light of IPRI. In my opinion, human agency assumes a greater role than the structural realities at this stage. 

De Soto suggests that the Western model of private property rights, as discerned by NIE, did not emerge consciously or as a result of a system. As a matter of fact, the related institution of rule of law, emerged as a result of a power struggle between different elites, an argument elaborated by Friedrich Hayek in his classic ‘Constitution of Liberty.’ Hayek basically argued that it was in the interest of the merchant class and feudal class of England to have a system run by rules instead of discretion by the Crown. Thus the balance of power emerged not as a part of any structural reforms, but as rational pursuit of self-interest by certain elites.

In case of Pakistan, we have recently witnessed emergence of a very strong civil society, which just like the English history, emerged in a political battle between the traditional establishment and various factions of the civil society, like media, NGOs and lawyers. In this case, the economic and political interests of media and lawyers happily coincided with the higher ethical positions. It resulted into a political reality in less than a year time, and the sudden rise of Pakistan Muslim League (N) to prominence and power on advocating the rule of law (aka restoration of judiciary) is a clear example of a major political transition. Thus viable institutions, based on rule of law and balance of power, can only emerge through a localized deterrence and diffusion of political power. Private property rights are best protected when private or civil society groups are stronger than the state, and mutually balanced as well.

This article has argued that property rights are pre-requisite for socio-economic development however their symbolic and symptomatic position is more important than their substantive character. The status of private property rights in a country does reveal valuable information about the quality of institution and governance structure. In turn, long run socio-economic development hinges upon the quality of institutions though this relationship is non-linear and even chaotic. Reforms in private property rights therefore must go beyond titles and possession. Incorporating local culture and local history in reforms about property rights-and rule of law-should take precedence over importation of development models. Linkages with other development components would be a key to effective property rights reforms. Ultimately, property rights are created in a unique political economy, which is never universal. Therefore, while the basic idea of property rights does remain universal, the physical shape it will take should be governed by interplay of local dynamics.

References

Chang, Ha-Joon (2002) Kicking Away the Ladder: Development Strategy in Historical Perspective. London: Anthem Press
De Soto, Hernando (2000) The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. Basic Books
Hayek, Friedrich A. (1968) Constitution of Liberty. University of Chicago Press.
Pipes, Richard (2001) ‘Private Property, freedom, and the rule of law. Hoover Digest

 Websites

 

Human Rights Watch. http://hrw.org/reports/2004/pakistan0704/4.htm#_Toc77404856 (Accessed on 20th August 2008)
Human Development Index, http://hdr.undp.org/en/statistics/ (Accessed on 11th November 2008)
Asian Development Bank, http://www.adb.org/Documents/News/2001/nr2001207.asp (Accessed on 10th November 2008)



[1] It is a cross country comparison based on size of government, legal structure and property rights, access to sound money, freedom to trade internationally, and regulation of credit, labor and business.

[2] This cross-country comparison considers legal and political environment, physical property rights and intellectual property rights.

[3] The land allotment to about 15,000 haris under Nawaz Sharif second regime in 1997 resulted in transfer of 64,000 hectares of government land, which is not counted here. This land was not taken from any landlord. 

[4] Name of the consulting company has been kept confidential.

[5] A Spanish version of this internal document prepared by Institute of Liberty and Democracy, invited in Pakistan in 2004 by then President Musharraf, was provided to the author on special request.