De Soto Update
Hernando de Soto, in The Mystery of Capital (2000), argues that the poor have more assets — shacks, stalls, plots — than you might think. But because they lack title to these assets, they cannot pass them on, divide them up, or offer them as collateral for a loan to expand their makeshift businesses and fully express their entrepreneurial energies.
Sebastian Galiani and Ernesto Schargrodsky have found a case that they believe tests de Soto’s theory (”Property Rights for the Poor.” Pdf file here). In 1981 about 1,800 families occupied a stretch of wasteland in the municipality of Quilmes on the outskirts of Buenos Aires. The squatters outlasted Argentina’s military junta, which tried several times to evict them, and in 1984, after the return of democracy, the provincial government passed a law expropriating the land from its rightful owners so that the squatters could enjoy formal ownership of it.
But the victory of the Buenos Aires squatters was only partial. Eight of the former landowners accepted the government’s compensation in 1986, one did not relent until 1998, and the remaining four are still contesting it in Argentina’s Dickensian courts. As a result, several hundred families now own their land, but their neighbours still squat uneasily on theirs. This is unfortunate for the squatters, but a rare opportunity for economists to test the power of property rights. The families lucky enough to win title can be compared with a ready-made control group: the otherwise identical families that did not.
The landowning families invested more in their homes, which had noticeably better walls and roofs, and they were also more likely to lay concrete pavements. But the titled households enjoyed no better access to bank loans, credit cards or bank accounts, and only 4% of them managed to acquire a mortgage. Argentine banks tend to lend only to workers with high wages and a stable job. Titled or not, the former squatters still fell well below the official poverty line. The cost of making and enforcing a loan contract might exceed the modest sums they were able to borrow.
The credit market has also been slow to respond to a much bigger urban-titling movement in Peru, carried out by the government with the help of Mr de Soto’s think-tank, the Institute for Liberty and Democracy (ILD). The campaign had awarded over 1.5m titles by July 2006. But it did not do them all at once. Erica Field and Maximo Torero have compared 536 households served before March 2000 with another 1,180 households that had yet to be reached by that date, on the assumption that little else distinguished the two groups (”Do Property Titles Increase Credit Access Among the Urban Poor?” Pdf file here).
Households with title were more likely to secure a loan from the government-backed Materials Bank, which buys bricks, mortar and other materials for building and improving homes. They also paid lower interest rates on loans from private sources, including commercial banks and microlenders like Mibanco. But their odds of getting a private loan in the first place did not improve. More than a third could not get a loan or would not take one, for fear of losing their property.
Paradoxically, this fear may not be sharp enough. There are two sides to collateral: enforcing the bank’s right to repossess an asset is as important as recognising the owner’s right to possess it. But titling programmes, the authors write, “unavoidably signal to lenders that a government prioritises housing for the poor, and hence is more likely to side with borrowers in enforcing credit contracts.”
The ILD has always pushed for broader changes in the legal system so that it can handle the kind of collateral the poor provide, at a cost that makes it worthwhile to do so. Credit also appears to have grown quite quickly in Peru after 2000, the year of the survey used by Ms Field and Mr Torero. The World Bank’s own studies show that mortgages worth $136m were approved in 2003, compared with $66m three years earlier. Likewise, formal credit increased from $249m to $367m in the same period, although the bank notes the difficulty in showing why this happened.
“The mystery of capital deepens,” The Economist