Freedom's Fidelity

Tuesday, April 05, 2005

Dead Capital and Third World Poverty

Zimbabwe's economy has collapsed, but not because of anything unique to Zimbabweans. Once again, tragedy in Africa is due to corrupt government action and a failure to protect fundamental necessities of capital institutions. Roger Bate reports:

When I first visited Zimbabwe in 1996, $1US would buy about $8Zimbabwe (Z$8). When I was there last November, $1 would get you Z$7000 at the official rate, but Z$12,000 when traded on the black market (with those desperate to get hard currency in another country). Today's bank notes are printed on only one side and with an expiration date; bank collapses occur on a regular basis; not surprisingly, unemployment is about 80 percent, and the economy has halved in the past five years.

But what is the fundamental reason for the recent collapse in Zimbabwe? It is not the loss of freedom of the press, or unsound monetary policy, or high military expenditure from fighting wars in other countries that benefit cronies, or low health expenditure -- although all these factors have a negative impact.

No, the real reason that Zimbabwe has collapsed is that there is no protection of private property. The executive rides roughshod over the judiciary in all matters of property. The result is "dead capital" -- a term invented by Hernando de Soto -- and total economic annihilation. The economy is now worth barely more than one percent (in US$ terms) of its value in 2000, when the Mugabe regime's "land reform" program, in which they appropriated farms and land-holdings from private owners, really started.

In short, Zimbabwe provides the reverse of the good news offered by De Soto. In The Mystery of Capital, De Soto exhaustively demonstrated that where private property rights are delineated and enforced, economies can grow rapidly. When someone can borrow against his one large asset (for nearly everyone this is his home) he can establish a business, buy supplies, establish marketing programs, sell products and make a profit and thrive.

For some countries the vast majority of capital is dead -- one cannot prove one owns it outright, and hence no capital market will lend against it. For example in the mid-1990s when De Soto was asked by President Hosni Mubarak to assess the situation in Egypt, De Soto found that 90% of the capital was dead. Today the situation is slowly improving as more and more people can prove they own their property.

If one can't prove they own their property, then one really doesn't own that property in any meaningful sense at all. In nations where property rights are protected, every piece of land, equipment, building, etc. is legally represented by some sort of 'deed.' Because of this, property can lead a sort of parallel existence acting as collateral for credit in addition to its material existence. A homeowner’s mortgage, for example, is the single largest source for funds in new business ventures. Property rights provide a link to a borrower's credit history, as well as a real accountable address for debt collection.

I've written in the past that property rights are just as important as the other inalienables. One big reason that individuals living in more advanced, free market societies have a much higher living standard is because they have the ability and the available institutions (mortgage lenders, banks, etc.) to go into debt. Imagine where you would be if, when you purchased a car, you had to pay for it up front. Then imagine having to do such for a house - only the wealthy would have access to property.

Without the paper trail of ownership it is near impossible to trade these assets. The efforts that would be required for a lender to discern the basics of a transaction in Zimbabwe would be prohibitive. Does the seller really own the real estate and the right to put it up as collateral? Is there another with a claim on the property? And even if ownership could be proved at a reasonable cost, there are obviously no gurantees that a government like Zimbabwe’s will enforce the ownership. Rather than property/real estate/capital generating wealth, government policy has rendered it dead, which of course leads to stagnation and no hope of investment influx.

What the third world needs, is international trade, it needs to be an attractive place for corporations to locate and expand. Enforcement of property rights is a neccessary prerequisite to attract investment and develop and nurture the institutions that create opportunity for its populous to climb out of poverty. Poverty stricken third world citizens do not need bored teenagers from mature democracies protesting 'Globalization' on their behalf, as Thomas Sowell has so eloquently stated:

Those who vent their moral indignation over low pay for Third World workers employed by multinational companies ignore the plain fact that these workers' employers are usually supplying them with better opportunities than they had before, while those who are morally indignant on their behalf are providing them with nothing.

posted by Paul  permalink | |