Last Updated
Friday 19 December 2014, 09:33 am.
Why do property rights matter?

I am honoured and flattered to be asked to come to this event and appreciate the opportunity to be able to speak to you about Zimbabwe today.
By Staff Writer Tue 23 Dec 2014, 03:31 am (GMT +2)
Mmegi Online :: Why do property rights matter?








It's been a pleasure to meet with Claire, Zach and Ben Freeth, who have worked tirelessly on behalf of The Mike Campbell Foundation, and thank you to the Royal Geographic Society for hosting the event.

I'm an economist from North Carolina, in the United States, and a common question I get is: So why are YOU so interested in Zimbabwe?  About 20 years ago, I was a young graduate student working on my doctoral thesis in North Carolina on something nothing to do with Zimbabwe.  One day I was called into my graduate advisor's office, and he said he had an opportunity for me to work at the World Bank as a research assistant for a summer and I jumped at the opportunity. But it had nothing to do with my thesis, and would set me back three to four months. Would I go anyway? 

Somehow I knew I couldn't turn down the opportunity, even though it might be a sideways venture. So I drove up to Washington D.C, and the first day, there were three of us grad school students, waiting to meet our boss, Susan Cochrane.She said to us, "We have three countries we want to research and three of you. The countries are Argentina, Columbia and Zimbabwe. What do you want?  I spoke up first and said, I know very little about Africa, so I'll take Zimbabwe."  Such a random answer to a bit of a random journey to Washington D.C. Never in my wildest dreams would I expect that answer would lead me to be an event like this today.

That summer, in 1992, Zimbabwe was still considered the "jewel of Africa."  I learned it had the best education system in Africa, its crime rates were on par with the United Kingdom, and foreign investment was flowing into the country. It exported hundreds of manufactured products, and was moving in a positive direction on most fronts.

By the end of the summer I had written a 100 page, mostly positive background paper on the country, and moved back to North Carolina to focus on getting a job. The following year I got my first job at a small college in North Carolina, and busied myself with teaching. For nearly a decade, my research sat in a dusty file drawer. But in the early 2000s I was stunned at the news I was hearing. 

Hundreds of white owned large scale farms were being seized by the Mugabe government, even though voters and polls showed a majority were against the action. It was meant to address large-scale inequities in the farming sector, and help the political aims of the majority party, but the result was a shock wave that reverberated through the economy. 

I resolved to go back and study the reasons why Zimbabwe began collapsing faster than any economy in the world, and why it descended into billion percent hyperinflation. That was the genesis of my first book, The Collapse of Zimbabwe in the Wake of the 2000-2003 Land Reforms (Mellen Press, 2004). It was an economic, not a political investigation, as I am an economist. I wanted to figure out how a market economy could be crushed so quickly.

What I found in my book was that in my years of training as an economist, I had given very little thought to property rights. Most of the time, they were simply assumed when we discussed markets. But here in Zimbabwe, property rights had been ignored, and land grabs became the norm all through the 2000s. The lessons I have learned I want to share with you today, as they apply not only to Zimbabwe, but to the entire world. Property rights matter, in ways that are visible and invisible to the naked eye. Today, I would like to pull back the curtain on the less visible aspects of this crucial institutional framework in market economies.

Let's take a time machine and imagine you are living in 1400s England, looking over this spot of land that you have been allowed to farm by your feudal overlord.  So the question is: Do you move the rocks?  The incentives to start moving some rocks to improve the land would hinge on the answers to some basic questions that are the same as 15th century England, as in Zimbabwe. They are timeless questions.  

The question is: Can I reap the fruit of my labour?  Can I own the benefits from the energy invested?  What makes someone move a rock? When I drive across the English countryside, I think about the time it took to move each of these rocks out of the ground by some farmer hundreds of years ago, laboriously moving those rocks to form these stone fences. Months, if not years went into the construction. But why? Because somewhere along the line people began to own their property. And when that happened, they started moving rocks. They started thinking about their life in a very different way - a life with a past, a present, and a future.

Property rights shift people's time frames from the present to the future.  The rock that is moved allows a bit more productive activity not just this year, but every year of one's life. It also increases the value of the land, and creates a form of wealth. The stone wall captures the fruit of one's labor, and enables one to also escape from a life of farming, by being able to sell it to someone else.

As a result, some people could move to a life different from farming, if their talents lay elsewhere.  In Zimbabwe I was presented with what we call a natural experiment - differences in property rights were happening side by side - not evolving over hundreds of years. In examining satellite photos, and superimposing administrative boundaries (yellow dotted line) on communal property vs private property, something became immediately apparent to me.  I created all these slides using Google Earth, which enables one to "fly" to any location as if in an airplane using integrated satellite photo technology.

These photos (next page, too) represent "snapshots" of my virtual trip to Zimbabwe. The so-called rationale for the land grabs in Zimbabwe was that white commercial farmers had taken the richest farmland for themselves.  But here was land that was right next door, which had dramatic differences that were immediately apparent.  There were elements of productivity occurred wherever there was property rights. Which is on the right side of this photo.On the left, there were communal farms. Yes they were more densely populated, but no more than England was and is. 

The land suffered wide-scale erosion, deforestation and poor returns.  The barrenness that one sees around villages in Africa is a result of lack of ownership. On the right, commercial. The blue lakes are all the man-made dams which enabled commercial farms to get through most droughts.  This is not photo-shopped - this was the actual Google earth satellite photo, with the yellow line showing the boundary between communal and private property.

Wherever I looked in Zimbabwe, I saw dramatic differences in how land was managed, depending upon its ownership status. This is low-grade grazing land in the south of Zimbabwe.Property rights not only create improved incentives for managing the land, but also have a great deal of other invisible effects not commonly understood.

There are a good number of academics who are smart and capable, but have blinders on about this crucial insight of Bastiat's, a French economist.  Some who have studied the Zimbabwe problem are ecologists, or Marxists, or historians, or agricultural field economists, and focus only on gains and losses to agriculture. Because of the lack of understanding of the invisible linkages between property rights and other aspects of the economy, the ripple effects are missed. 

Today I want you to see what is not only in front of you, but to think about the unseen. Here is a commercial farm in Zimbabwe. What did the Mugabe government see?  Assets to be spread to favoured friends and political allies.  What did poor farmers see?  Richly developed facilities with excellent land which they did not have.  Of course, they wished they had that land... their land was deforested and ill-managed, because they did not own it.  Some see inequity in the haves and the have-nots. 

What did commercial farmers see?  They saw years of work, and a future, based on holding a property title that had been declared "off limits". That commercial farm in the center holds as its key an entire invisible network of economic activity.  It creates a demand for dozens, if not hundreds of new markets in tractors, which creates a demand for fuel, which creates a demand for retail stores, mechanics, computers, and on and on.

Each "node" in this picture should be thought of as a new market that arises from the original farm.  And each one is a new job that adds great complexity and variety to an economy, shielding it from the vagaries of world commodity prices. It is all supported by a strong system property rights. This was the insight held by Hernando de Soto as he looked at impoverished countries around the world. His book showed that countries which improved property rights also improved access in investment.

My research also shows the opposite: When property rights are damaged or destroyed, the economy quickly collapses. The incentives to improve the land quickly collapse.The property title acts as an insurance mechanism for banks, that creates a means for lending. But like a spider's web, the web is fragile.  It all depends on secure property rights.

When the Zimbabwe government took over thousands of farms, it only accounted for 15% of the economy. But it took far more down with it - 60% of the economy was tied to the farming sector, for reasons that were just explained. In one year, tractor sales fell from more than 5,000 to only seven. Hundreds of bank branches closed.The economy collapsed to half its former size.

What most observers missed was that all these other economic activities were LINKED to the institution of strong property rights. Foreign investors fled the country as well. This area is a farm in Zimbabwe. I took these photos using Google Earth. The first was taken in June 2005 and the second was in October 2010. 

Although they are taken at different times of the year and with different satellites (hence the difference in look of the photos), it is quite easy to spot what has happened since this farm was taken over. The irrigation equipment, which is the long pipes creating the rich irrigation, has been stolen or sold off, and what is now farmed is spotty, inconsistent and ragged. Any farmer can look at this and know that something disastrous has happened to this farm that does not involve droughts.

And it's not what we just see, it's what we DON'T see.. The lost wages from the mechanics who repaired the tractors, the lost gasoline sales, the lost revenue to banks, the lost fertilizer sales to local salesmen.. And on and on..

Without property titles, communal farmers are destined to remain poor and reliant on crude means of farming (unless given aid for equipment).  There is no collateral, so no way to raise money except through saving the meager bit of money left over from the sales of crops. That is destined to keep these farmers poor. Or some abandon farming altogether, as this person did, after it was formerly owned by a successful tobacco farmer.

The collapse has been devastating.  The country's per capital GDP is now a third less than it was 12 years ago. Even with recent strong growth rates, it will take years to restore the economy to its former state. 

If Zimbabwe grows at 6% a year, it will take until 2018 for it to return to 1998 income levels. Twenty years of productive economic activity has been lost. Meanwhile, wheat production has collapsed since the land reforms, shown by the years highlighted by the blue arrow.The blue dashed line shows the annual food requirements of Zimbabwe. When corn (maize) production was above the blue line, Zimbabwe exported corn, or used it to offset lean years.

But since the commercial farm expropriations it's easy to see what's happened (shown by the blue arrow). Although there has been some recovery, it is still far from the years of high production. As a result, Zimbabwe has become dependent upon food aid. This from the former "bread basket" of Africa.

It's not just relatively prosperous white commercial farmers who lost their livelihoods. Many people lost personal possessions, including food stocks, during the Operation Murambatsvina demolitions.  Police officers reportedly threatened the residents saying anyone who resisted eviction would be beaten.

The destruction of Porta Farm (in June 2005) went on all day - only ending when darkness fell. Thousands of people were forced to sleep outside in the rubble in mid-winter.A mud hut and a new lease on life...  Literally. In this case a woman had obtained a 99-year lease on her land. The government still owns it, but she is able to buy and sell it. Photo taken in 2007. When I asked her why she was building a house out of bricks, she answered that it was because of her long- term lease which gave her a reason to do so. She had bought glass windows, was having a nice thatched roof put on, and was proud she had designed it herself.  She began moving rocks when she owned them.  I asked him, do you hold a property title?  He said yes, and so far the government has honoured it.  I asked him the importance of it, and he said, "It is everything"

The fact that land reform schemes require outside funding - subsidies or grants or equipment -suggests that this activity does not meet the criteria of economic self-sufficiency.   So the question is, why are academics so focused on making sure all Africans have a plot of land to farm?

Why not think about policies that would release the majority of them from what is hot, tiring, risky low paid and often dangerous work?  Without private property, Zimbabweans cannot be released from small, inefficient farms to pursue their dreams and ambitions.

It is as if all this focus on figuring out how to deliver fertilizer to small-scale farmers, or provide seeds, or irrigation equipment forgot that some Zimbabweans might just want to do something besides farm!

Those who make these assumptions that set their sights for Zimbabwe shockingly low, particularly in a country with one of the highest literacy rates in the world (92%).  These jobs above cannot and will not exist without a system of private property rights that create a complex web of interactive jobs, each supporting the other. So you might be listening and saying, "This is all well and good, but hasn't Zimbabwe been doing really well lately?   And in fact it has.. That is the subject of my latest paper, "Why is one of the world's worst managed economies now growing faster than Hong Kong's?"

This is in fact a puzzle I have been investigating for the past year, keeping an open mind as to the answers. These types of conditions, in which it is very difficult to open a business, make it harder to understand why Zimbabwe is growing so fast.

A big reason is the staggering increase in government spending, which rose from US$257 million in 2008 to US$3.2 billion in 2011. The government's rapid growth is contributing to the huge upswing in GDP. But how does Zimbabwe pay for all this?  Meanwhile the annual deficits are climbing rapidly. Now in the old days, Zimbabwe would PRINT money to facilitate its deficits, which led to hyperinflation and trillion dollar bills which wouldn't buy a gallon of milk. 

But today, Zimbabwe is on the US dollar, and the SA rand, so where does the money come from?  In the US we sell bonds. Property rights are being subverted by the Zim government to extract precious natural and physical assets. The government is using property rights to pull out money from things that are owned by the people of Zimbabwe to run its increasingly precarious finances.

It is using rights to its diamond fields, airport, and the Victoria Falls as collateral for getting hundreds of millions of dollars in new loans.  For every $1 of loans it paid off in recent years, it took on $11 of new loans. First to come are people who work and use the land - often the risk takers in society.

Property rights and titles allow lending to then resume, sometimes taking a generation for people to get access.Last and hardest to build is investor trust.  This is the "brand" of the country, which can take years to rebuild.

Craig J. Richardson, Ph.D.
Associate Professor of Economics and Coordinator, MBA Programme
Winston-Salem State University, North Carolina, USA.
E-mail: 
richardsoncr@wssu.edu



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