Jump-starting the economy with property titling

In The Mystery of Capital, Hernando de Soto argues that a lack of formal property rights results in a drag on economic development. He says that informal rights (or no rights at all) represent “dead capital.” People who possess dead capital cannot use it to secure the financing necessary to build or support a business, to invest in education, or to pursue other ventures. De Soto argues that what needs to be done is to turn this huge amount of dead capital into living, useful capital—primarily via property titling.

Lastyear the Free Market Foundation (FMF) launched a land reform project in South Africa that aims to convert all apartheid-style rental accommodation to full unambiguous freehold title and in the process abolish some of the last remaining vestiges of apartheid. After more than 20 years since apartheid rule ended, many South Africans still do not truly own their own homes.Houses provided by the apartheid government were all owned by the state and the residents were tenants. The majority of the people living in dormitory towns are still tenants to this day.

The FMF’s project is called Khaya Lam (meaning My House). It is a tangible and practical example of real ownership restoration in action and is a blueprint which can be readily taken up and adopted throughout the country where poor families live in generational poverty. When people have secure rights to their property, it provides them with an opportunity to thrive. Parents will invest more in their children’s education because their property provides a foundation for financial security. Farmers will invest in their land and protect the natural resources secure in the knowledge that their land will be passed down to the next generation. The human spirit can only grow and prosper in an environment that is secure. Part of that security lies in knowing that the home where you live cannot be arbitrarily taken away.

Donor aid has focused traditionally on funding inputs such as medicines, water, and roads but very little has gone into changing institutions and securing property rights. This is a concrete step towards creating a more positive, optimistic and freer society and economy. A title deed is a profound game changer for millions of South Africa’s poorest citizens: it is a tangible asset against which they can borrow money, earn rental income and begin to change their family’s socioeconomic circumstances. A critical element of the FMF’s Khaya Lam Land Reform Project is educating the community about the value of their asset and how to maximise the significant opportunity it presents.

Property rights create positive incentives for people to maintain and improve their property. These incentives exist because people who are free to trade their property with others are more likely to be rewarded for these efforts than are people who neglect property. In addition, people who feel secure that others will not expropriate their property will invest more in that property than people who do not have secure property rights.

Secure tenure in the form of title to a house provides a critical asset for the poor. Homeowners have a different set of incentives than do people who rent housing. Among these are incentives to invest in the home and to use it profitably knowing that the homeowner will be in position to realise those benefits. The FMF’s research has demonstrated that one potentially profitable way to use one’s home is to develop a home-based business.

When people are secure in their ability to remain in their home and are able to make appropriate modifications or additions to the house, they will be more likely to invest in a home-based business. For example, considering South Africa’s chronic unemployment problem, we have found that many people who cannot find jobs in the formal sector by necessity create their own work, oftentimes from in their homes.

Strengthening rights to land, natural resources, and other assets empowers people to decide how best to use their assets. Property rights that have the backing of sound legal institutions create the incentives to invest in families, children, farms and businesses. Giving women and girls more secure rights to use property and to buy, sell, and inherit familial, marital and business assets will provide them with these incentives as well and unleash their entrepreneurial spirit.

With the enhanced decision-making authority that comes from controlling assets, women devote resources to feeding and educating their children, which is a huge boon for the country’s future. The policy of transferring title to occupants is a direct attempt to promote economic growth and poverty alleviation by giving occupants a greater stake in society—as homeowners.

When people own what is rightfully theirs, and they can truly call their plot of land their home, we believe that the dynamics of their situation, and the country at large, will change. By freeing the dead capital that has locked people in an economic straitjacket for far too long, we could begin to see the country’s future brighten, as people undertake home improvements, and begin to unleash the full potential of their most valuable asset. The FMFs Khaya Lam land reform project will allow South Africans to escape the long shadow of apartheid and for the first time in their lives feel safe and secure in their homes.

Author: Jasson Urbach is an Economist and director of the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the FMF.

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