Governance Capabilities and the Property Rights Transition in Developing Countries.

Abstract

The ‘good governance’ property rights reform agenda and the interpretations of colonial history on which it is based, are deeply flawed. A different analytical and policy approach is needed for promoting growth-enhancing governance capabilities for managing the property rights transitions in developing countries.

To sustain growth property rights have to address three problems: (i) how to create security for investors so that they have extended time horizons, (ii) how to make asset transfers efficient; and (iii) how to create incentives and compulsions for productivity growth. There are likely to be conflicts between different goals. As countries grow, rights that were appropriate in the past may require significant changes. Strengthening existing property rights may often be the wrong response. Growth may require changes in existing rights as well as the creation of new ones.

Interventions to modify property rights trigger conflicts because they involve potential winners and losers, even if losers are compensated because there is no ‘right’ way of splitting future gains between affected parties. The new structures of property rights that emerge and the compensation for those who lose out depend on the bargaining power of the contestants often established through costly conflicts. Two important results follow. First, enhancing growth can involve not just the strengthening of some rights but also the weakening of others. Thus, growth requires the reduction of growth-constraining transaction costs. Second, property rights changes also trigger transition costs. The political settlements and the types of growth strategies that are attempted define the trade-off between reductions in growth-constraining transaction costs and increases in transition costs. The less favourable this trade-off, the more difficult it is to trigger or sustain growth.

This ‘growth-stability trade-off’ defines the challenges for property right reforms in particular countries. Our examination of Thailand, the states of West Bengal and Maharashtra in India, Bangladesh and Tanzania shows the historical roots of differences in trade-offs across countries, and explains why different strategies and problems are observed in these countries today.

Colonial history has often been damaging not because it destabilized property rights with extractive policies but because many conflicting rights were created to maintain political stability. These initial conditions shaped how states and businesses interacted to address serious land market failures. A number of partially successful strategies are identified with implications for how growth-enhancing governance can be improved in developing countries. One variant was of agencies aligning political, bureaucratic and economic interests to reduce transition costs to enable growth-enhancing restructurings of rights. Examples include the MIDC in Maharashtra which was very successful in setting up industrial zones (despite being very corrupt). Another variant involves significant financial compensations to reduce contestation costs but requires strong alignments of political interests with projects and the exclusion of outside political organizers.

Donor and partner governments therefore need a different approach for promoting growth-enhancing governance capabilities for managing the property rights transitions in developing countries.

Citation

Khan, M.H. Governance Capabilities and the Property Rights Transition in Developing Countries. (2009) 105 pp.

Governance Capabilities and the Property Rights Transition in Developing Countries.

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