TCS Daily

Self-Ownership Is a Key to China's Future Prosperity

By Christopher Lingle - February 23, 2005 12:00 AM

President Hu Jintao understands the importance of improving the lives of Chinas rural poor. As it is, most of the 800 million Chinese peasants feel they were left out of the boom that brought relative prosperity and modernity to many coastal cities.

Having been left out of the burst of prosperity, they have also suffered under high taxes, corruption and arbitrary acts by local leaders. In turn, there have been a growing number of farmers staging violent protests.


In order to reduce poverty and ease the burdens causing rural unrest, Beijing is promising to lower taxes on farmers while offering them higher subsidies. Additionally, there are promises of new public spending on education and health programs in the rural areas as well as on irrigation and other physical infrastructure.


Most farm families do not have a deed or formal title for the land they occupy, so it can be taken from them with little or no compensation for their loss. Some Chinese peasants have been given long-term leases. But these cannot be used as collateral for bank loans to gain access to credit.


They also may suffer from internal restrictions on migration that remain as an artefact of central planning, when most aspects of material life were dictated by ones place of work. Housing, education, and medical services were provided by enterprises so that workers could not live away from their place of employment.


Now, many peasants displaced by increased agricultural productivity or attracted to the bright lights and better job prospects have moved to cities. Those without residency papers can be detained and sent home, or they may have to bribe corrupt officials to leave them alone.


Bringing about greater balance and social justice to Chinas peasants does not require spending massive amounts of government funds. Instead, it would be much cheaper to grant guarantees of self ownership that include clear rights to own land and the freedom to move in search of a job.


It turns out that China shares striking similarities with other countries that suffer from extensive and persistent cases of extreme poverty. It is not for want of resources that countries are poor. Japan has to import many of its most vital material inputs that fuel its powerhouse economy. And large population density is an unsatisfactory explanation since Holland, Singapore and Hong Kong produce riches amidst some of the most crowded population masses in the world.


A recent book by Hernando de Soto provides a clear explanation for the misery of so many citizens of so many countries. In essence, poverty is perpetuated by the absence of clear laws to promote and protect both individual rights and private property.


Research in various underdeveloped economies revealed a consistent pattern. It was found that entrenched poverty tends to occur where a lack of legal supports, often combined with extensive bureaucratic barriers, inhibits entry of property and housing stock as well as businesses into the formal sector.


Like Chinas peasant, most of the worlds poor may possess an extensive amount of assets, but without legal tile they cannot be legally traded or used as collateral for loans. This assets constitute what de Soto calls dead capital.


In his findings, capital is dead when that it cannot be utilized as the basis for borrowing to promote additional fixed asset investments that would generate surplus value. As long as possessions remain extralegal, ownership and transfer has no legal basis.


One implication of these observations is that the focus upon a need for foreign investment is somewhat misguided. Activating frozen domestic capital would be much more effective in boosting economic activity and widening the base of expanded wealth.


Along with well-defined and enforced private property rights, there must be impartial enforcement of contracts for long-term investments toward capital formation. Another guarantee that must become explicit is to stop predatory behavior so that individuals and government officials do not steal property.


De Soto and his team discovered that countries that suffer from mass poverty tend to have extensive licensing requirements, high registration fees and Byzantine registration procedures involving many steps through a maze of government agencies.


So the formula for sustained economic growth is rather simple, even if it is not easy to implement. First, there must be an accumulation of capital and a private commitment of capital for investment in productive activities that generate surpluses. Yet this requires an appropriate set policies that operate within an institutional infrastructure, providing stable and predictable rules, especially widespread access to private property rights.


An interesting conclusion of this research is that the poor are part of the solution rather than being a problem. They possess a stock of assets and savings that in many cases exceeds those held by the wealthier sectors of their communities. And so, reforming legal and administrative systems can bring enormous social gains by allowing entrepreneurs from among the poor to join the formal economy.


Christopher Lingle is Global Strategist for eConoLytics.


*Hernando de Soto. The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. New York: Basic Books, 2000.




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