Tuesday, 13 March 2007

Halfway to paradise

Like children wearing their ASBOs as a badge of honour, liberal activists are struggling to get their websites banned by Chinese officials who fear that their poor, ignorant people cannot cope with all these freely-exchanged ideas. So what better time to write a story critical of the Chinese Government.

This is not going to be the usual anti-Chinese tirade, however, for the policy that I am concerned with today is in essence a good one. China’s new law on property rights is a clear step in the right direction. However, it does not go far enough nor protect enough of the population, crucially the poorest – the rural masses – who remain mired in the misery of collectivism.

Despite its embrace of capitalism, China still has many vestiges of its communist past. One of these is its attitude to individual property. Traditionally all land has been owned either by the state or by collectives (generally farms) which in practice were the play-things of local party officials. As the Economist reports, this is beginning to change. Three years ago the constitution was changed to declare that private property was “not to be encroached upon”. Now a law has been brought in to give that proviso teeth.

The private exchange of housing has become increasingly common in a country that used to allocate housing by official fiat, and these private owners wish to enshrine their possessions in law. Similarly, private enterprises need legal protection for their businesses and premises. The middle class’s fear of expropriation by pubic authorities is more real than one might imagine: in China, whole cities are built on farmland for which the former occupants received little or no compensation, sometimes living as homeless people on the site of their former farms, surrounded by factories and shops.

Yet it is the poor that have most to gain from the allocation of land ownership certificates and protection of their rights, a fact to which both the Communist Party’s collectivist and socialist wing, that opposes the new law – including many academics –, and the market-oriented leadership that proposed it, seem blind.

A couple of Sunday’s ago I read Hernando de Soto’s Mystery of Capital (the joys of long plane journeys being that one can read a book in a day). De Soto is a Peruvian economist who sought to explain Why Capitalism Triumphs in the West and Fails Everywhere Else. His answer is that it is only in Europe and its largely-European colonies that individual property rights are protected in law that is upheld by the authorities. In the rest of the world, billions of people live on land to which they have no legal claim, and from which they may be expelled at any time. This leads on the one hand to a rapacious approach to resources (the slash-and-burn farming of Brazilian farmers) and on the other to under-investment (as people are reluctant to improve property that they may lose at any time). Thus it is not unusual to see nice cars parked outside miserable shanties in South Africa; moveable property is more clearly “owned” – and easier to take with you if you are moved on.

The problem goes deeper than bad housing and the fear of expropriation, however. Even in countries where governments do not arbitrarily evict people to build cities, one cannot leverage the capital locked up in property that one does not own; to put it simply, nobody will lend money if one can only offer as security property that is not secure. This is the “mystery of capital”: that because poor people in the Third World cannot borrow against or sell their houses and land, they can neither borrow to invest nor realise their capital. Thus they are obliged either to continue to work in primitive conditions that they cannot afford to improve, or to abandon the land – and any capital they have invested therein – and go penniless to the city, where rather than buy a business or study for qualifications, the best they can hope for is a menial job.

So it is good that China is beginning to realise that private property is essential to successful and equitable development. It is also at the core of liberty (though that’s probably something the Chinese Government does not want to unleash). The Chinese should be applauded for this single step, but they must expand these rights across the whole population if their people are to prosper and their society not become divided between an ever-wealthier class of owners and a rural poor, condemned to the misery of uncertainty on the collective farms.


ChinaLawBlog said...

Great post, but if you want to get banned in china, just switch to LiveJournal or WordPress. Host service is actually more determinative than content.

The Governor of Northern Rhodesia said...


I'm glad you enjoyed the book! Feel free to chuck it my way next time we meet.

The property ownership issues you raise don't only restrict access to capital but also contribute heavily to poor performance in the banking sector in Africa. Banks on this continent are bad at allocating capital when property is not used as security (unsurprisingly). This makes all loans more expensive as banks pass on the cost of non recovery of debts to their customers.

Microfinance, while seemingly very effective at giving and recovering small loans to many people, can never be an effective alternative to the large banks. Property rights would seem to be the be the key to making loans more widely available and cheaper to all.