Saturday, March 10, 2007

A very quiet, very big step...

Economist Hernando de Soto captured it best (if over-emphatically) in his brilliant book, The Mystery of Capital: the biggest impediment for poor people around the globe in the lack of a system of property rights. Even as I wade through a legal morass of deeds, abstracts, and title insurance to rationalize my mother's estate, I recognize the power of this system whereby I can say with considerable assurance, "This is mine".
According to de Soto, the poor of Third-World countries are not victims of rapacious capitalism, but rather are wronged by the lack of property rights and with outright bureaucratic barriers that prevent the poor from gaining access to capital. Thus, they languish in the vast "informal sectors," or underground markets, that so characterize much of the Third World.
The elite of Third-World nations, he writes, have been able to use the Western systems of laws and property rights to participate in ownership of capital, which is why they are prosperous. Using Braudel’s (1992) analogy of the "bell jar," de Soto writes that the elite are inside this "jar" and take advantage of the blessings of capitalism, while the poor, who are "outside the jar," are left out. [More]
Such a fundamental and overlooked capacity here in the US. Yet this mundane paperwork jungle has unleashed the power of American innovation and hidden capital with astonishing results.

Now China is poised on the brink of unleashing this power in their communist country. Not all at once, of course, but it appears the first step has been taken. (For a semi-humorous, state-approved account of this development, check here.)
This latest law, likewise, will not bring the full property-rights revolution China's development demands. Indeed, it will not meet the most crying need: to give peasants marketable ownership rights to the land they farm. If they could sell their land, tens of millions of underemployed farmers might find productive work. Those who stay on the farm could acquire bigger land holdings and use them more efficiently. Nor will the new law let peasants use their land as security on which they could borrow and invest to boost productivity. Nor, even now, will they be free from the threat of expropriation, another disincentive to investment. Much good land has already been grabbed, and the new law will merely protect the grabbers' gains.

This law cannot in itself resolve the murkiest question: who owns what? This is especially true in the countryside, where the mass collectivisation during Mao's Great Leap Forward of half a century ago left farmland “collectively” owned. Peasants have since been granted short (30-year) leases. But even outside agriculture it is often unclear whether a “private” enterprise is really owned by individuals or by a local government or party unit. Conversely, some “collective” or “state” enterprises operate in ways indistinguishable from the private interests of their bosses. Moreover, should an underdog try to use the new law to enforce his rights, the corrupt and pliant judiciary would usually ensure he was wasting his time. Since the Cultural Revolution, when the NPC passed just one law between 1967 and 1976, the legislature has been legislating quite prolifically. But the passage of laws is not the rule of law.

Which leads to a final obstacle: without an accountable executive branch, the necessary reform of the legal system is not going to happen. As the passage of the property law itself demonstrates, the party is showing itself somewhat more responsive to public opinion than it was in the past. But it still runs a government that does its best to silence most dissenting voices, strictly controls the press, and lavishes resources on the best cyber-censorship money can buy. Property rights are a start; but only contested politics and relatively open media can ensure that they are enforceable. [More of a must -read article]
The implications are hard to overestimate. While making other steps toward free markets, The government action could be pivotal for millions of peasants. The industriousness of the Chinese is awe-inspiring. By coupling that with an ability control wealth and build on it, China may be on the verge of a long-needed transition to greater possibilities for all their citizens.

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