THEME:SECURITY OF PRIVATE PROPERTY

SOUTH ASIAN ECONOMICS STUDENTS MEET, 29 NOVEMBER 1 DECEMBER, 2010, UNIVERSITY OF COLOMBO, SRI LANKA

WELFARE AND SECURITY OF PROPERTY
An Exploration of Developing Economies
PRIYA BHATTER, UNIVERSITY OF MUMBAI, INDIA

One cannot deny the importance of welfare and development measures initiated by the state, especially in case of developing economies such as those in South Asia These development measures require the subjugation of the rights of individual property holders to the interest of ³greater good.´ However, security of property rights is a much needed component of economic freedom, which is essential to attract much needed private and foreign investment in these economies. This paper proposes to highlight the conflict between private ownership of property on one hand and state initiated welfare and development measures on the other, by using conditions of Pareto optimality. This paper also proposes to develop a regression model correlating security of private property to social welfare

All the other demands of liberalism result from this fundamental demand.. individuals in an economically free society would be entitled to work.. produce.´ This may include patents. Toward a Theory of Property Rights. 1966) 2 Harold Demsetz. with their freedom both protected and respected by the state.2 Intellectual property is ³property that derives from the work of an individual's mind or intellect. and invest in any way they please. Depending on the nature of the property. or give their property as long as their actions do not violate the identical rights of others3. fraud. exchange. The securing of private property rights therefore provides individuals with the opportunity to engage in trade and other activities which they believe will make them better off. therefore. sell. consume. if condensed into a single word. with due backing and protection provided by the state. or destroy the property. that is. Hence an economically free individual is empowered to take decisions solely on consideration of his profit. Hence. Hence. (Chicago: Henry Regnery Company. rent. 3rd rev.INTODUCTION: ORIGIN AND EVOLUTION OF IDEAS ³The program of liberalism. ed. Human Action: A Treatise on Economics. Ludwig von Mises. Economic Freedom of the World: 1996 Annual Report 1 2 . under a rule of law. would have to read: property. or theft is protected from physical invasions by others and they are free to use. an owner of property has the right to consume. transfer. exchange. 57 American Economic.´ ²Ludwig Von Mises 1 Property is traditionally defined as any physical or intangible entity that is owned by a person or jointly by a group of persons. Although it has not been given a large amount of significance in earlier economic phenomena. intellectual property rights form a part of property rights in general. and/or to exclude others from doing these things. Paper 3 James Gwartney and Robert Lawson et al. mortgage. an index of economic freedom should measure the extent to which rightly acquired property is protected and individuals are engaged in voluntary transactions In other words. private ownership of the means of production. Review. etc. these rights are essential in order to provide economic freedom to the people . copyrights.This will enable them to make economic decisions which are best for them Individuals have economic freedom when property they acquire without the use of force.

or at any rate they care for it only to the extent to which each is individually concerned´. An Inquiry into the Nature and Causes of the Wealth of Nations .The Idea of property rights is not new.As efficiency is invariably linked with growth in the traditional ideas of development. Whether they thought private property was a sine qua non of a free society. in his definition of property. they care less for what is common. THE CASE EOR PROTECTION OF PRIVATE PROPERTY IN DEVELOPING NATIONS ³Private property is the most important guarantee of freedom. Men pay most attention to what is their own. 4 Robert L. Improvement of efficiency is especially important in developing countries. although the same might not be said about the distributive efficiency. but the idea has lost much of its significance in the current scenario. 5 Is what results in efficient allocation of resources. Heilbroner . or organised theft. Hence protection of private property rights helps to improve the productive efficiency in the economy. It also incentivizes users to economize their costs because it is they who ultimately bear the costs of their actions. the Noblest Triumph: Property and Prosperity through the Ages (1998). the level of protection provided to private property rights can be viewed as the extent of institutional freedom provided to individuals in order to develop to their fullest potential John Locke includes the individual¶s ownership of himself and the land (resources) he mixed his labour with or traded for. from Adam Smith (1776) to Karl Marx (1891).6 Economists like Marx focused on the denunciation of private property.7 Protection of private property leads to increase in productive efficiency. 3 . accorded a central position to the role of property rights or the ³relations of production´ in the process of economic development. Hayek ³What is common to the greatest number gets the least amount of care. p. Adam Smith explicitly states that the expectation of improving one¶s stock of capital. 95. as it allows individuals to engage in trade and production activities which they believe will make them better off. classical economists.Worldly philosophers (1999) 5 Adam Smith. 1937 6 Hans Herman Hoppe The ethics and Economics of Private Property (1996) 7 Tom Bethell.´ ²Friedrich A.4 The classical economists like Adam Smith assumed its existence as a given condition in the economy. as it is an important prerequisite of development.

´9 Consider the following studies conducted by the property rights alliance. a rough observation of the world tends to confirm the importance of private property and economic development. An individual will not invest or try to increase his ³stock of capital´ by productive means.The institute is devoted exclusively to the study of property rights. The values of the index lie between o and 10. security of property also helps in supporting other transactions. It is a universally acknowledged fact that the degree of protection of property provided to individuals influences the level of foreign direct and institutional investment flowing into the economy. Under conditions of a free market economy. Protection of property rights also encourages domestic investment. Although government investment does have a significant impact on the level of economic growth. Property rights alliance. The property rights index is calculated with reference to legal protection available. and improving property rights may increase productivity by enhancing such possibilities. economic and religious strata. and the amount of Interest will increase. When people have their own separate domains of interest. Modern market economies rely on collateral to support a variety of financial market transactions. The institute ranks countries in the basis of their property rights index.(PRA) 4 . because each man will feel that he is applying himself to what is his.´8 This is essential in order to reduce clashes between different interest groups. especially in countries with people from diverse social. 8 Hans Herman Hoppe The ethics and Economics of Private Property (1996) 9 International property rights index report (2009). it must be counterbalanced by private autonomous investment in order to make the growth process self sustaining in the long run. unless he is secure in the knowledge that he will be able to enjoy the fruits of his labour. achieve a higher level of per capita GDP and longer life expectancies. protection of physical property and protection of intellectual property rights. Also ³It is has also been empirically observed that countries which encroach lesser on the property rights of its citizens. for the years 2008 and 2009. with 10 being the highest and 0 being the lowest value.With the failure of communism and Keynesian macroeconomic management programs in the late 20th century. there will not be the same grounds for quarrels. ³Private property prevents conflict and promotes peace. Also.

982 $11.991 $23. in descending order.309 $3.613981 R2 0.341 The countries are divided into quintiles on the basis of their property rights index.3770 Again we can observe a moderately high correlation between HDI and IPTI (R2 nearly equal to 0. I have taken available data from the human development report and the IPRI index to obtain a correlation between the two. .891 $4. using random numbers so that the R value does not get affected by the specific values.924 $5.638 $19. 2. Hence it becomes essential for developing countries to view the security of private property with respect to an increase in per capita GDP Also consider the correlation obtained between the IPRI (international property rights Index) and the HDI (human development index) for the year 2009. The above table clearly demonstrates that the countries enjoying a higher level of protection of private property also have a higher average per capita GDP.029 $8.57725 R2 0. 10 Exhibit 2 Correlation between IPRI and HDI R value 0.817 Average per capita GDP (2009) $39. 3 4 5 Top 20 percent Second quintile Third quintile Fourth quintile Bottom 20 percent Average per capita GDP (2008) $35. International property rights index (IPRI) quintiles 1.Exhibit 1 No.and the HDI and GDP per capita are obtained from the world development report( (2009) 5 . Also IPRI index values are obtained from the IPRI reports(2009). HDI and IPRI Similarly.3332 An R2 value close to point 3 indicates a moderate positive relationship between the two variables.The average per capita GDP for all the countries in each quintile is computed.748 $4. we can also look at the correlation between IPRI and Per Capita GDP as given below: Exhibit 3 Correlation between GDP and IPRI R Value 0.4) 10 I have considered 5 countries from each quintile.

It is the availability of such infrastructure facilities which enables the economy to function smoothly and which induces private autonomous investment. dams. roadways. etc. According to the theory of eminent domain. These countries are deficient in infrastructural facilities and heavy industries. as the state has the responsibility of ensuring the well being of its citizens. primary healthcare centres.11 11 R. Pioneering research and development in the field of healthcare may also be used by the government in order to provide life saving drugs and other essential medical amenities to the people. require large amounts of land. The government may also wish to use certain technological innovations to build such projects. but without the owner's consent for public purpose and /or public welfare. According to Tom Bethel in The Noblest Triumph. The growth of these two sectors is extremely essential in order to induce growth and development of the economy as a whole.Hence the case for protection of private property rights. especially in developing countries becomes intellectually compelling. Hence the state can appropriate private property of the individuals citing eminent domain. the state has the inherent power to seize a citizen's private property. power-plants etc. economies will prosper and civilization will blossom. schools. Governments also need to invest heavily in the development of social and economic infrastructure. Large scale government spending on welfare schemes is a norm in the modern social welfare state. or seize a citizen's rights in property with due monetary compensation.³ THE IMPORTANCE OF DEVELOPMENT PROJECTS AND THE USE OF EMINENT DOMAIN IN DEVELOPING NATIONS There exists a special need for large scale government spending on welfare and development schemes in developing countries. however. Hence the governments in developing countries may need to encroach on individual private property rights (including intellectual property) in order to fulfil their desired developmental objectives. and the rule of law is established in such a way that all including the rulers themselves are subject to the same law.A. The development of the above mentioned infrastructure projects. bridges. economic infrastructure typically includes railways. highways. hospitals. Epstein 1985 6 . ³When property is privatized. While social infrastructure typically consists of medical facilities.

According to Hobbes.´12 The theory of eminent domain emphasizes the need for collective development. The provision regarding freedom of ³trade and intercourse. several governments have allowed property to be acquired for a private company which is engaged in or is taking steps for engaging itself in any industry or work for a public purpose. STATUS OF PROPERTY RIGHTS IN INDIA The right to property is often derided as the least defensible right in the Indian constitution .The Constitution of India derives its foundation from the Government of India Act. According to article 31.´ which was originally in the chapter of fundamental rights. the development of the economy as a whole rather than the aggregation of private gain are to be given importance. We construe public purpose to be the development of facilities in order to enable individuals to fully realize their potential. that the exact nature of public purpose has never been clear either in uses of eminent domain by various governments across the world. to which India is a signatory. For example a private company may take over land using eminent domain in order to build a bridge. was later removed from that chapter and put into a separate part (Article 301). or in political and economic literature. power plant or any other project which could generate significant levels of employment and other benefits to the people. Hence. to hold and dispose of property. I.While due monetary compensation is required in case of encroachment of private property. 12 P Nichols. the pursuit of ³unbridled self interest´ turns individuals against the ³common good.13 In recent years however. simply by declaring it as state property.e. Article 17 of the Universal Declaration of Human Rights (1948). Section 299 of the Government of India Act. Private property and the power of eminent domain 7 . every citizen has the individual right to acquire. the state can also take over common property and natural resources. 1935 and the Universal Declaration of Human Rights (1948). The law of eminent Domain 1917 13 Richard Epstein. also recognises the right to private property. It must be mentioned here. eminent domain can be used for both public and private benefit. 1935 secured the right to property and contained safeguards against expropriation without compensation and against acquisition for a non-public purpose. and is now a legal right. in this way.

That rights in property are basic civil rights has long been recognised. People have rights. 14 ³Property Rights under the Constitution´ (1969) Also. Hence this right should be reasonably exercised. The state also has the power to acquire the land of a citizen for a public purpose after paying due and adequate compensation. and hence welfare. Sushant Saliant: The History of the Removal of the fundamental Right to property article. Neither could have meaning without the other.´ 19 Moreover the right to property as shown above is an essential condition for attracting economic development and economic growth. and through the relevant principles. It is subject to the law of reasonable restrictions in the interest of the general public. Indeed.14 THE CONFLICT While the advocates of Property rights believe that ³The dichotomy between personal liberties and property rights is a false one. In fact. not less than the right to speak or the right to travel is in truth a µpersonal¶ right. The state¶s power is also subject to the condition that the law made by it in so far it infringes the said fundamental right should stand the double test of reasonableness and public interest. 8 . whether the µproperty¶ in question be a welfare cheque. Property does not have rights. The right to enjoy property without unlawful deprivation. the state is directed to ensure that the ownership and control of the material resources of the community are so distributed as best to subserve the common good and that the operation of the economic system does not result in the concentration of wealth and means of production to the common detriment. a fundamental interdependence exists between the personal right to liberty and the personal right in property. namely that it should be so reasonably exercised as not to interfere with similar rights of other citizens. in accordance with public interest. The said fundamental right is not absolute. the state in exercising the power to enforce this principle does in fact enforce the duty implicit in the exercise of the fundamental right. a home or a savings account. The conflict between the citizen¶s right and the state¶s power to implement the said principles are reconciled by putting limitations both on the right and the power. The Directive principles of state policy lay down the fundamental principles of state policy and the governance of the country.A duty is implicit in this right.

However modern developing economies.Economics 9 . must be able to reconcile the differences between the two paths . I propose to do so by using the Pareto optimality welfare criterion. Ahuja . While the decision regarding the appropriateness of the need for expropriation is one of policy.This can be done by providing due and adequate compensation to the holders of titles. Given a set of alternative allocations of goods or outcomes for a set of individuals. the decision regarding the comparison of utilities can be analyse with the help of economic models.15 15 Samuelson:. nor can one deny the importance of eminent domain as an important tool in achieving that objective. The inherent problems in the above are the problem of holdouts and the fact that there might be differences in the value of the property to the developer/state and the citizen. Care must also be taken to ensure that the benefits obtained from the development measures must reach the individuals whose property has been expropriated.Neither can one negate the need for developmental schemes undertaken by the state.l. Foundations of economic analysis 17 H. An allocation is defined as Pareto efficient or Pareto optimal when no further Pareto improvements can be made. The increase in overall social welfare must not be at the cost of those who sacrifice their right to property. but after due evaluation of the cost and benefits of the proposed project. especially those in South Asia. Another fact which must be considered is that expropriation does not take place arbitrarily. The increase in utility/development achieved by the expropriation should not be offset by a loss in utility/development caused due to a loss of faith in the state because of its inability to secure property rights. THE PARETO OPTIMAL CRITERION The Pareto optimality criterion was developed by the Italian economist Vilfredo Pareto. a change from one allocation to another that makes at least one individual better off without making any other individual worse off is called a Pareto improvement or a Pareto-optimal move. Hence there exists a conflict between the two paths towards economic development: The path of state planning and development schemes and the path of free-market economy with emphasis on the protection of private property rights and improvement in efficiency. whose property has been expropriated.

The different indifference curves indicate the different levels of development which an economy reaches.IC represent t e 10 .becomes indiffe rent between the two. ¦ Also let IC . IC . represent the indifference curves of communit B. is indifferent between the two. et t e indi erence curves IC IC . however at the given levels of compensation. where communit A prefers protection of private propert rights over development schemes. but with the loss in economic growth due to loss of economic freedom . where communit B prefers development Schemes over protection of propert rights. IC ¥ ¤ . by choosing different combinations of the level of protection of private property rights and expropriation of property through eminent domain.Exhibit 4 Community A s private property rights Comm unity Bs exprop riation Communi ty A s expropria tion Community B s private property rights indi erence curves of communit A. £ ¡¢ ¡   C i t Edgewort box gi en above.

(This is given by the points where the two indifference curves are tangent to each other.A single community reaches equili rium when its costs are equal to its benefits. I. Moreover at any point outside the contract curve. This can be obtained by combining the cost ratios and indifference curves of each community. without decreasing the welfare of the other. the welfare of either community can be increased. The points on the curve AB represent the Edgeworth contract curve. which is the locus of all such points . where the two communities A and B prefer the same combination of security of private property rights and expropriation through eminent domain. The Marginal Rate of substitution between security of private property and expropriation will be the same for both the communities.e. Equilibrium in the economy is reached when the two communities are in agreement about the level of protectionism and expropriation. let us consider the following diagram: Exhibit 5 Community A S loss in development due to lack of state initiative Communit y B s loss in developm ent due to lack of freedom Community B s loss in development due to lack of state initiative § Commu nity A's loss in develop ment due to loss in freedom 11 . the cost ratio in terms of loss in development in both cases equals the marginal rate of substitution between the two choices available. we can say that a Pareto efficient condition might be obtained along the curve AB.) As at all point on the contract curve. by shifting to a point on the contract curve Further.

4. Now. 6 represent the costs to community A. Equilibrium for a single community is obtained when the ratio of the costs in terms of loss in development due to lack of freedom and lack of state initiative are the same as the ratio of the availability of these 2 factors. 4.e. Curves 1. Hence curve C represents the point at which the communities are in equilibrium. while curves 2. as the benefits received . represent the costs at different levels of development to community B.i. Equilibrium for the economy is obtained at the points where the costs to both communities are the same. at the locus of the points of tangency of the 2 curves. The Marginal rate of technical substitution must equal the cost ratio for the factors for the community to be in equilibrium. 3. the Pareto optimal situation can be explained as follows: Consider the diagram given below Exhibit 6 E x p r o p r i a t i o n Private property rights 12 .The diagram given above represents the costs (in terms of loss in development) to both communities A and B in case of expropriation and lack of freedom.

Similarly. for community B. Each point on this frontier represents the level of development that can be achieved by using expropriation and security of private property.The production possibility frontier represents the equilibrium mentioned in exhibit 5. Community A will have RT level of expropriation and QS level of property rights. the government will be able to ensure OQ level of freedom of property rights and will take OT level of land for expropriation. the level of expropriation and the level of development (i.e. which represents the efficient combination of the two factors in question. The Pareto optimal situation occurs at point B. where the efficient combination of the two factors for the communities A and B are equal to the rate at which the economy can substitute security of private property rights.e. Secondly. Fifthly The assumption of long run. security of property rights and eminent domain for the 2 communities A and B. All other factors in the economy remain constant i. the assumption of perfect competition in the economy holds Pareto optimality criterion cannot be explained without the assumption of perfect competition. The frontier will tend to shift outward with an increase in efficiency and improvement in economic stability. ceteris paribus. utility obtained from development) are measurable quantities. At this level of development. as price and cost uniformity exists only in perfect competition. Fourthly. The discussion on the level of development is based on the level of utility attained by the two communities from the development process. Hence we can arrive at an equilibrium combination of both the factors i. Thirdly. ASSUMPTIONS While trying to explain the above situation the following assumptions are to be considered. 13 . The level of property rights. Firstly. the demand for the 2 cannot be mutually exclusive. with expropriation in order to secure the objective of development. given all other factors in the economy. The equilibrium combination of security of property rights and expropriation can be achieved by superimposing the Edgeworth box in exhibit 4. as the equilibrium positions will only be obtained in the long run. the cardinalist assumption i. Sixthly Both the communities A and B need both protection and appropriation.e.e. the utility can be measured.

´16 However. The essence of the matter lies in an appropriate and effective combination of both protection and expropriation. Hence governments. Nobody uses somebody else's resources as carefully as he uses his own. 2002). Therefore. So if you want efficiency and effectiveness. the importance of the´ greatest good for the greatest number´ cannot be denied. you have to do it through the means of private property. A and B.e. very carefully.And finally.( i. I conclude my paper by stating: ³The protection of private property is essential as: Nobody spends somebody else's money as carefully as he spends his own. capitalism and freedom 14 . The economy consists of only 2 communities. the impact of such decisions on the overall economic condition must also be considered. it becomes essential to ensure that the level of compensation given to those whose property is being expropriated is such that their welfare does not decrease . especially those in developing countries must tread the knife edge path between protection and expropriation. Protection of a few should not be favoured over the objective of overall development of society. the level of disutility in terms of encroachment . they are not made worse off) while the overall welfare in question increases ( by making other people better off) Hence just compensation is essential in order to achieve a balance between expropriation and protection. while development which tramples on individual economic freedom will do greater harm than good Hence stringent decision making criterion should be applied to each development project under consideration These criteria must take into account the following The effectiveness of the proposed project in increasing welfare and prompting development. ` 16 Milton Freidman (November 15. if you want knowledge to be properly utilized. In case of development using eminent domain. in order to realize their goals of development.

Sign up to vote on this title
UsefulNot useful