(English) March 30, 2013

Property rights and economic growth may not always go together

THE halo has slipped from Aung San Suu Kyi’s head, at least in the eyes of the monks and villagers of Ah Lay Daw. The Nobel peace prizewinner, who has resumed her career as a working politician in Myanmar, dismayed villagers earlier this month by giving her backing to the development of a copper mine on nearby Letpadaung Mountain, on land that was confiscated from them by the government.

The villagers had hoped for more when Ms Suu Kyi agreed to chair an inquiry into the project in December, after the government broke up their protests by force. Although she won them compensation at market prices for their land, she dashed the villagers’ hopes of returning it to arable use and, in some cases, of returning to their ancestral homes.

Ms Suu Kyi’s decision seems to have been heavily influenced by the fact that a subsidiary of Norinco, a Chinese conglomerate, is a joint-venture partner in the mine (along with a holding company attached to Myanmar’s military). Stopping the mine could lead foreign investors such as China to “think that our country cannot be trusted on the economy,” she reportedly told the villagers during a visit on March 13th. That, she continued, would mean less of the growth Myanmar badly needs.

In putting the provision of secure property rights for international investors above the property rights of poor members of the country’s population, Ms Suu Kyi is in effect endorsing an approach to economic development that goes back to the land enclosures in Britain in the 18th century, and the forcible removal of native Americans from much of their land in the 19th. This in turn raises an important question for economists, who in recent years have celebrated secure property rights as a vital ingredient of growth. Does it matter whose property rights are secure?

This is the subject of a recent study* by Terra Lawson-Remer, an economist at the Council on Foreign Relations in New York. She argues that economists have tended to take a simplistic view of the security of property rights, which assumes that if foreign investors and local elites have security, so does everyone else. The most commonly used measures of property security include the PRS Group’s International Country Risk Guide, a property-rights index produced by the Heritage Foundation, and the World Bank’s Worldwide Governance Indicators. All extrapolate from the experiences of foreigners and elites, she says. Economists then take evidence of secure property rights as a proxy for the quality of a country’s governance and rule of law.

That may not reflect the experience of all inhabitants, however. Ms Lawson-Remer has developed an alternative property-insecurity index that focuses on the experience of minority groups. The index uses a database of minorities at risk compiled by the University of Maryland. To be counted as at risk, a minority group must have at least 100,000 people or be 1% of a country’s population and, among other criteria, currently experience discrimination, suffer from past discrimination, or support political organisations advocating greater rights for the group. The property-insecurity index looks at certain economic risks faced by these minorities, including expropriation of land and forced resettlement in another part of the country. The countries with the worst property insecurity for minority groups include Burundi, Iraq, Israel, Sudan, Turkey and, yes, Myanmar.

There is a strong correlation between economic growth and secure property rights for foreign and elite investors. But when Ms Lawson-Remer looked for a relationship between property security for minority groups and economic growth, she could find none. Nor was there any correlation between property security and a country’s ranking on the UN Development Programme’s Human Development Index. Securing the property rights of minorities seems to have no clear consequences for economic growth.

That has big and uncomfortable implications. If elite groups are the only ones with the expertise and access to capital to make more productive use of property, and if, as at Letpadaung Mountain, they often acquire those rights at the expense of marginalised people, it may be that greater property security for the likes of the villagers of Ah Lay Daw would actually result in slower growth, says Ms Lawson-Remer. If growth at all costs is desirable, in other words, it may pay to strengthen the property rights of foreigners and elites, if need be at the expense of other groups.

Mine or yours

The question then is how to compensate those on the wrong end of this bargain. Faster growth is not a reward in itself: little evidence suggests that higher growth automatically trickles down to vulnerable groups. Higher-income countries tend to offer property rights to more people but the beneficiaries are not the original resource-owners. In theory, the government could keep compensating people for their lost property rights. But in practice, there are very few examples of any government anywhere doing that adequately, says Ms Lawson-Remer. Once the land is seized, interest in looking after its previous owners typically fades. Brazil’s expansive social spending to benefit indigenous people displaced by hydroelectric dams is a rare exception, she says.

This is Ms Suu Kyi’s quandary. Allowing the copper mine to proceed may well raise growth in Myanmar after half a century of stagnation. It sends a powerful signal to foreign investors. But it threatens to leave the original owners trapped in poverty and without the community safety net on which they have long relied. A fairer solution is to pay a market price that reflects not just the value of land today, but also its potential value when the elites have taken over. That might restore the halo.

Source: The Economist