Now Think Small

[The World Bank’s]. . . annual World Development Report, which this year looks at the way governments can encourage successful markets, suggests that when poor people are allowed access to the institutions richer people enjoy, they can thrive and help themselves. A great deal of poverty, in other words, may be easily avoidable.

The study, which gathered existing research and added a survey of around 100 countries, found that economies that allowed open flows of information to as many people as possible (with free, competitive media), good protection for the property rights of the poor (especially over land and the efficient collection of loans) and broad access to judicial systems (even for illiterate peasants or people who cannot pay high legal fees) were most likely to be competitive, and to develop.

Efficient formal and informal institutions, in other words, are crucial for turning subsistence farmers, petty traders and other would-be money-makers into a boon for the general economy. If it is too expensive and time-consuming, for example, to open a bank account, the poor will stuff their savings under the mattress. When it takes 19 steps, five months and more than the average person's annual income to register a new business in Mozambique, it is no wonder that aspiring, cash-strapped entrepreneurs do not bother. In general, poorer countries charge far more, relative to income, than rich ones to register new businesses. They also demand that applicants jump through more bureaucratic hoops, and so increase the opportunities for corruption. All this stifles growth.

 Want to Make the Poor Less Poor? Give Them Proper Title to What They Own

. . . [P]eople in poor countries have assets - lots of them. But because they rarely have formal title, they cannot use these assets as collateral to raise cash. Economists tend to think of the informal economy as a marginal phenomenon, of interest only to missionaries, aid workers and the police. But in many, perhaps most, developing countries, the informal economy is bigger than the formal one. In a typical African country, barely one person in ten lives in a formal house, and only one worker in ten holds a formal job.

Take Nashon Zimba, a 25-year-old peasant who grows maize, beans and tobacco on 1.8 hectares (4.5 acres) in Chiponde, a small village in Kasungu district, north-west of Lilongwe. Mr. Zimba is poor even by Malawian standards. His cash income last year was $40. He lives with his wife and baby daughter in a mud shack so small that, if he were not so short, his feet would stick out of the door when he lay down to sleep.

Mr. Zimba frets that he cannot afford enough seeds or fertilizer to make full use of his land. Borrowing is out of the question. Loan sharks – "caterpillars", as they are known in Malawi – charge impossible rates of interest. . . .

Almost 90% of Malawi's 11 m[illion] people live off the land. Their average plot size is tiny: less than a hectare. Productivity is woeful. The population is expected to double by 2020. Unless a lot of people move to the cities, plots will be sliced even smaller than they are today. Smaller plots mean lower productivity; many families could go hungry. Mr. Zimba senses that there is little future in farming. His ambition is to be a hawker. He envisages buying soap and paraffin in the nearest town and selling it in the village. But he does not have the start-up capital.

Some people in Mr. Zimba's position move to the city, find jobs, and save to start a small business. But this is hard. A Malawian peasant cannot usually sell his land without agreement from his family and the village chief. If he leaves his property unattended, there is a danger that the chief will give his land to someone else, or that a sibling will grab it.

The advantages of sound property rights are so taken for granted in the West that it is worth spelling them out. First, secure title makes assets fungible. In a country with good property laws, almost anyone can use a house or a piece of land as collateral to raise a loan. It is also easy to divide assets between multiple owners. Ownership of a factory can be shared out among hundreds of people, any of whom can easily sell all or part of his share without the need to take the factory physically apart. If a French farmer dies, his children can sell the farm, or retain equal shares in it, or the more agriculturally-inclined sibling can buy the others out. . . .

Western property laws protect not merely ownership, but transactions too. People in poor countries can usually prevent their assets from being stolen by forming self-defense groups or hiring the muscle of local mobsters. But they cannot confidently buy anything they cannot see. Poor people carry their pigs and tobacco bales physically to market. The prohibitive cost of carrying them back means that they have to sell them straight away, whether prices are good or not. American farmers sell paper representations of their crops, which is easier. To smooth their cash-flow, they can sell the rights to purchase crops which have not yet been sown. If a Malawian farmer wants cash in advance, he must grow marijuana.

. . . The reason that extra-legal businesses and landowners in poor countries do not become legal is that their path is usually blocked by officialdom. To illustrate . . . researchers set up a one-man clothing workshop on the outskirts of Lima, and tried to register it. The team worked for six hours a day, filling in forms, traveling by bus into central Lima and queuing before the relevant official desks. It took them 289 days to make their micro-enterprise legal, and cost $1,231 – 31 times the monthly minimum wage in Peru.

The story is the same elsewhere. In the Philippines, to formalize a squatter's house built on state-owned land can require 168 steps involving 53 public and private agencies and taking 13 to 25 years. In Egypt, to obtain permission to build a house on land zoned for agriculture takes six to 11 years. If you build first and then try to become legal, you risk having your home demolished and spending time in jail. . . .

All rich industrialized countries have secure property rights, accessible to more or less all citizens. No poor country has. Better property laws are not the only reason that some countries are richer than others, but they clearly make a difference.