Conversations about economic development often gravitate toward such topics as monetary policy, trade regulation, tax structures, infrastructure, etc. These are critical pieces of the puzzle indeed, but there exist even more primary components of prosperity that are often skipped over.
Rule of law is essential if you want to have a functioning economy. You cannot have a functioning economy without secure property rights. You cannot have a functioning economy unless contracts are enforced. You cannot have a functioning economy if government officials can act in an arbitrary fashion.
The Property Rights Alliance, a Washington D.C.-based think tank, publishes research concerning private property and rule of law. Earlier this month, the organization released its annual 2013 International Property Rights Index (IPRI), which measures the intellectual and physical property rights of 131 nations from around the world, representing 98% of world GDP.
The 2013 IPRI represents the seventh edition of the index and focuses on three core components:
- Legal and Political Environment
- Physical Property Rights
- Intellectual Property Rights
Countries received a score (on a scale of 0 – 10, where 10 is the highest value for a property rights system and 0 is the lowest value) in each of these areas; those scores were then averaged to calculate the “IPRI score.” The countries receiving the top five IPRI scores were Finland, New Zealand, Sweden, Norway, and the Netherlands. The United States claimed the 17th spot.
Francesco Di Lorenzo, the study’s author, believes the IPRI analysis suggests that “the most developed countries are characterized by high levels of IPRI” and that “there is a positive correlation between economic development and strength of property rights regimes.”
But even when a legal framework is present, accessibility can be in question. In some cases, elite levels of society may benefit from the law, but the poor and middle class, who lack political and economic connections, are excluded from its protection. Under such conditions, the poor need more than personal ambition to flourish and maintain stability; they require equal access to secure property rights and land title.
This yearning for equal treatment under the law was, in fact, the very spark that ignited the “Arab Spring” revolutions that began in 2011.
What happened in Tunisia? A closer look at the origins of the “Arab Spring”
Development economist Hernando de Soto and his team at the Institute for Liberty and Democracy (ILD) conducted research on the economic, legal, and political environments in the Middle East and North Africa (MENA), and found the lack of sound legal protection and property rights to be among the main causes of the 2011 uprising. A portion of their research points to Tunisia specifically and is documented in the 2013 IPRI by Ana Lucía Camaiora.
The country witnessed firsthand the beginning of the Arab Spring, when on December 17, 2010, fruit vendor Mohamed Bouazizi lit himself on fire in the Tunisian city of Sidi Bouzid. Earlier in the day, town inspectors had accused him of failing to pay a fine for an arbitrary infraction. They proceeded to seize his produce and electronic scale, the entire capital of his business. A municipal police officer slapped him across the face in front of the crowd that had gathered, and when Bouazizi appealed to authorities that his property be returned he got nowhere.
Bouazizi’s tragic act was precipitated by deep-seated corruption and a prevailing legal vacuum. Entrepreneurs like Bouazizi can work day and night, but get nowhere because they continually face property rights infringements and harassment by local officials. Unable to establish collateral, they are often denied access to credit and loans, and remain blocked off from the basic legal frameworks which enable development. They are left in a vulnerable position, unable to access the market and at the mercy of local officials’ often unconscionable subversion of Tunisian law.
In effect, Bouazizi began a revolution against institutional barriers to business operation and property rights access. Within two months of his self-immolation, “63 others across the MENA region also set themselves afire, every one of them a small business entrepreneur, like Bouazizi,” reports Camaiora.
The ILD interviewed 20% of the protestors that survived their self-immolations and their families and learned that “the primary reason these protestors gave for this drastic action was ‘expropriation.’” According to Camaiora, “Bouazizi might be representative of an emerging Arab underclass that runs businesses and occupies property but without having the legal tools to generate capital, guarantee credit, and create additional value.”
Business development and the extralegal sector
In the West, private property is often taken for granted. The right to own and use property is protected by law. In MENA, entrepreneurs’ ability to operate business relies on accommodating relations with local authorities, many of whom are corrupt, not a broad legal standard.
The ILD research team believes there are three legal principles essential for everyone, particularly the poor:
- formal and fungible property rights
- legal mechanisms that increase productivity through the creation of business organizational forms
- legal mechanisms for enterprises to operate in expanded markets, i.e. circles of exchange beyond family members and close community
Though many of these legal mechanisms exist within Tunisia, they are not accessible to all Tunisians, forcing most people to step outside the legal sphere in order to make a living. Businesses and property within this category are referred to as “extralegal assets,” which cannot be used optimally (for example to buy, sell, lease, or transfer title), because their holders cannot comply with the legal provisions governing their use. The ILD team estimates that 85% of all enterprises in the country are extralegal, and 83% of the total population resides in extralegal dwellings.
A main reason why the vast majority of Tunisian entrepreneurs remain extralegal: they simply “cannot deal with the complexities and high costs of the legal system,” states Camaiora. Even entrepreneurs capable of traversing the bureaucratic maze are often stifled by the arbitrary power of corrupt officials, who subvert the legal process with special privileges and unauthorized action.
Those who attempt to adhere to legal standards face a long, drawn-out business start-up process. To establish a small sole proprietorship in Tunisia takes “55 administrative steps during 142 days and requires spending some US $3,233 (not including maintenance and exit costs),” reports Camaiora. Similar obstacles exist in other parts of MENA. In Algeria for example, the team found that “to establish and operate a fast food restaurant in the Rouiba, an entrepreneur has to go through a procedure that involves 86 administrative steps that take 222 days to complete and costs US $11,592.” Even once the business is established, there is often no clear land title. It is not uncommon that the parcel on which the business stands is registered in the name of several owners.
De Soto maintains that in many cases, legal systems are “simply unfriendly to poor people,” especially in the developing world. Private property and rule of law, which many Tunisians have fought for and made sacrifices for, are essential aspects of development, and some would argue, fundamental rights.
Unfortunately, the humble origins of the Arab Spring revolutions sparked by small businessmen and women have largely been lost amidst the chaotic geopolitical wrestling matches that followed. Property rights, rule of law, and the success of small fruit stands don’t make for flashy headlines.
A frequent assertion is that “income inequality” or “an unfair distribution of wealth” was the motive for the uprising. But the personal stories of the entrepreneurs who self-immolated in MENA present a very different narrative. They were not demanding financial assistance or lamenting the fact that some people are compensated more handsomely than others. Rather, they were crying out for access to the basic foundations which enable them to create wealth for themselves and their communities.
In a Foreign Policy article, de Soto shares the powerful message he and the ILD team received from Bouazizi’s family after his death:
We asked Salem, one of Bouazizi’s brothers, what his brother in heaven might have hoped his sacrifice would bring to the Arab world. Salem did not hesitate: ‘That the poor also have the right to buy and sell.’
For more from Hernando de Soto, visit his PovertyCure Voice page: Hernando de Soto — Property Rights & Rule of Law.
This article is cross-posted from the PovertyCure Blog.