SPEAKER_00: Amazing, fascinating stories of inventions, ideas and innovations. Yes, this is the podcast about the things that have helped to shape our lives. Podcasts from the BBC World Service are supported by advertising.
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SPEAKER_02: 50 Things That Made The Modern Economy with Tim Harford
SPEAKER_01: Some of the most important parts of our modern economy can't be seen. But they can be heard. That's what one Peruvian economist concluded while walking through the idyllic rice fields of Bali, Indonesia, in the 1990s. As he passed one farm, a dog would bark at his approach. Then quite suddenly, the first animal would stop and a new guardian would begin to yap away. The boundary between one farm and the next was invisible to him. But the dogs knew exactly where it was. The economist's name is Hernando de Soto. He returned to Indonesia's capital, Jakarta, and met with cabinet ministers to discuss setting up a formal register of property rights. They already knew everything they needed to know, he said, cheekily. They merely had to ask the dogs of Bali who owned what. Hernando de Soto is a big name in development economics. His energetic opposition to Peru's Maoist terrorists, the Shining Path, made him enough of a target that they tried to kill him three times. And his big idea is to make sure that the legal system can see as much as the dogs of Bali. But we're getting ahead of ourselves. The Indonesian government was trying to formalise property rights. Others have tried to abolish them altogether. In 1970s China, for example, where the Maoists weren't the rebels, but the government, the very idea that anyone could own anything was seditious, bourgeois thinking. Farmers on collective farms were told by Communist Party officials, you don't own a thing. Everything belongs to the collective. What about the teeth in my head? asked one farmer. No, replied the official, even your teeth are owned by the collective. This approach worked terribly. If you don't own anything, why bother to look after it? Well, avoiding toothache is an incentive to brush your teeth, but collective ownership of land left farmers in desperate, gnawing poverty. And so in Zhaogang in 1978, a group of farmers secretly met and agreed a daring plan. Instead of farming as a collective, they would informally divide up the land and each keep whatever surplus they produced after meeting collective quotas. It was a treasonous agreement in communist eyes. If officials found them out, the farmers risked execution and they were found out. What gave them away? They were suspiciously successful. Their farms had produced more in one year than in the previous five years combined. But luck was on their side. China now had a new leader, Deng Xiaoping, and Deng let it be known that this was the sort of experiment that had his blessing. 1978 was the beginning of China's breakneck transformation from utter poverty to the largest economy on the planet. The experience in China shows that even informal property rights can be incredibly powerful. If you know your neighbours respect your boundaries, you can feel confident investing time in weeding your vegetable plot or building a house. But in one critical way, it doesn't help me that my neighbours agree that I own my house. If I want a loan to improve my house or build a business, lenders will want collateral. And land or buildings make particularly good collateral because they tend to increase in value and it's hard to hide them from creditors. But the lender needs to be confident that they could take the house away from me if I don't repay the loan. So I need to prove that the house really is mine. That requires an invisible web of information that the legal system and the banking system can use. For Hernando de Soto, this invisible web is the difference between my house being an asset, something useful that I own, and being capital, an asset recognised by the financial system. In poor countries, a lot of assets are informally held. De Soto calls them dead capital, useless for securing a loan. His estimate was that at the start of the 21st century, there were almost $10 trillion of dead capital across the developing world, more than $4,000 for every person. Other researchers think that's an overestimate and the true figure is probably $3 or $4 trillion, not $10. But either way, it's a huge amount. How do assets become capital? How does the invisible web get woven? It needs a government. Enforcing property rights is one of the few things pretty much everyone on the political spectrum agrees a government should do, from the libertarian right to, well, maybe not the Maoists. And for governments, it's not just an altruistic measure to make it easier to get a mortgage. When you know who owns land, you can also tax it. Perhaps the first recognisably modern property registry was in Napoleonic France, where Napoleon needed to fund his incessant wars. In the mid-1800s, the idea of the land registry spread quickly through the British Empire too. The government drew up maps and allocated title deeds. Of course, at the time, nobody with any power had much interest in the fact that indigenous people had their own claims on the land. The process doesn't have to be top-down. In the United States, there was a bottom-up approach. After decades of treating squatters as criminals, the state began to think of them as bold pioneers. The US government tried to formalise informal property claims, using the Preemption Act of 1841 and the Homesteading Act of 1862. Again, the rights of the native people who'd been living there for thousands of years were not regarded as of much significance. It was hardly justice, but it was profitable. By turning a land grab into a legally recognised property right, these land registries unlocked decades of investment and improvement. And some economists, most prominently Hernando de Soto himself, argue that a good way to create property registers for developing countries today is to use the same bottom-up process of recognising informal squatters' rights, coupled with modern databases. Do improved property registers really unlock what de Soto calls dead capital? Evidently, they can. In Ghana, for example, farmers with clearer property rights invested more in their land. But the answer, of course, is it depends. It depends on whether there's a banking system capable of lending, and an economy worth borrowing money to invest in. And it depends on how smoothly the property register works. De Soto found that in the Philippines, legally registering property took 168 procedures, 53 agencies, and a third of 13- to 25-year waiting list. Faced with such obstacles, even formally registered properties will soon become informal again. The next time the property is traded, both the buyer and the seller will decide that formalising the deal is just too time-consuming. And it depends on how smoothly the property register works. But get it right, and the results can be impressive. The World Bank has found that after controlling for income and economic growth, the countries with simpler, quicker property registries also had less corruption, less grey market activity, more credit, and more private investment. Meanwhile, the property registry doesn't get much love. It's not a high-speed rail line or a gleaming new airport. It's an unfashionable, invisible piece of infrastructure. But without it, developed economies would go to the dogs.
SPEAKER_02: Hernando de Soto's most famous book is The Mystery of Capital. For a full list of our sources, please see bbcworldservice.com slash 50things.
SPEAKER_01: I hope you enjoyed that. That was the 47th Thing on my list. Yes, just three more to go until we get to number 50. But don't worry, after that there'll be another episode, one more, all about a 51st thing. And up until 12 noon GMT on Friday 6th October 2017, you can vote for what you want that thing to be. Choose your favourite from these six – the credit card, glass, the global positioning system, irrigation, the pencil and the spreadsheet. To vote, go to bbcworldservice.com slash 51things. That's a 5 and a 1. You will find the full terms and conditions there too. If you want to hear a little bit about the fascinating stories of the six on the shortlist before you vote, listen to the episode called Searching for 51. The deadline for voting again, it's 12 noon GMT on Friday 6th October 2017.
