Tuesday, May 15, 2007

Going beyond land: Protecting Property, Securing Economy

Brazil, China and India have all provided glimpses of their potential. Brazil has been talked of as a potential economic super power for over a generation now. China has greatly enhanced its prospect over the past two decades. India’s economic promise is beginning to attract attention in the past decade. While the prospect of economic growth and prosperity look promising, the potential is clouded by fundamental weaknesses regarding the property rights regime that could mar their prospect of fulfilling their own promise. This is an article I wrote after a trip to Brazil to attend a conference, in May 2007.

Going beyond land: The Case for Securing Property Rights in Brazil, China and India

Land is an emotive issue in most societies. But land is also the most basic of economic assets. Therefore, the way land rights, or property rights, are protected provide a good indication of the economic health of the country. On a recent trip to Brazil, I was surprised to see the intensity of feeling among large sections of the population on the question of land rights, and on the issue of access to land for the poor. But I also realised some interesting parallels and contrasts on this issue in three of the most talked about BRIC countries – Brazil, Russia, India and China.

A lot has been said about the BRIC countries over the past few years. (I am leaving aside Russia for the purpose of this article.) Here, I will focus on the issue of property rights, in the context of land rights, as it is developing in Brazil, China and India.

All the three countries have provided glimpses of their potential. Brazil has been talked of as a potential economic super power for over a generation now. China has greatly enhanced its prospect over the past two decades. India’s economic promise is beginning to attract attention in the past decade. But if considered together, these three countries provide a very good road map towards economic growth and prosperity. And if looked upon separately, all the three countries exhibit fundamental weaknesses that could mar their prospect of fulfilling their own promise.

Brazil has established itself as an agricultural superpower. And quite counter intuitively, this has happened because agriculture as a share of Brazilian economy has shrunk to about 8-9% of GDP. Yet, today Brazil is among the top producer and exporter in a number of produces – beef, coffee, cotton, oranges, etc. Brazil is also among the very few countries left in the world, where agricultural and pasture land is expanding. It is estimated that over a million hectares of virgin land are brought under agriculture each year. The rise in productivity is also reflected in the fact that only about 14-16% of workforce is related to agriculture.

Nevertheless, here is an indication of the major problem facing Brazil. The relatively higher proportion of workforce associated with agriculture, coupled with a few million “landless people”, who are being organised to demand access to agricultural land, illustrate not the ills of large scale farms and professional nature of Brazilian agriculture, but the continued bottlenecks that is retarding Brazil’s transition from a developing to a developed economy.

Typical of a large developed economy, is not the irrelevance of agriculture, but the fact that despite its small share as a percentage of the national GDP, agriculture production is high. This situation is sustained by high productivity and access to modern technology, finance and management. Consequently, the demand for agricultural land declines, and the environmental quality in the countryside keeps improving.

For instance, United States is the world’s largest agricultural producer, although about 1% of its GDP comes from agriculture, and about the same percentage of workforce is associated with agriculture. But this story of the US, would not be complete, if one does not considers the wider economic environment which permitted massive transition of labour from agriculture, first to manufacturing, and then to services. It is this ability to sustain the transition that primarily contributed to sustaining the US agriculture.

But it is this process of transition that has been retarded in various degrees in Brazil, China and India.

While Brazil has overcome the macro-economic chaos of the 1970s and 80s, the regulatory environment is not very conducive for sustaining the growth of non-agricultural sectors. The ‘Doing Business’ report reflects some of these key problems. Consequently, the opportunity for non-agricultural entrepreneurship and employment are stagnating. The labour laws haven’t helped either. Never have I witnessed in the past decade, the prospect of federal police going on strike in any major economy in the world, as was the case in Brazil last April.

And it is this relative stagnation imposed on the non-farm sectors, which is forcing many more poor people to try and make a living out of agriculture, depriving them of opportunities to participate in the economic transition. Brazil would have been much more assured of its economic future, if the success of Brazilian agriculture, had been able to bring down the share of labour in agriculture to 8%, in line with its economic share, 8% of GDP.

The political leadership, rather than making the case for facilitating this economic transition away from agriculture, is tying to focus on ways to keep people on land. So on the one hand there are special schemes to help the family farms, on the other hand there is this latent support to seize parts of private land, and distribute these to the “landless”.

Violation of property rights in the form of land seizures, not only undermines the institution of rule of law, one of the fundamental premises of modern and free societies, but also in an economically perverse way traps the hapless poor in a highly competitive agriculture sector.

On the one hand, most of these supposed beneficiaries may not be able to sustain themselves in agriculture, as higher productivity further reduces agriculture share of the economy in the coming decade. So many of these people who really needed help in terms of education and skills to facilitate their transition out of agriculture could only fall further back economically.

On the other hand, because of insecure property rights, the investment that might have further promoted Brazil’s agriculture may falter.

This need not be the case. Of the three countries, Brazil has the best potential to build on the strength of its agriculture, and ensure its economic transition to manufacturing and services, and join the ranks of developed countries. But this would not happen if Brazil opts to hobble its agriculture, and compounds the problem by perpetuating regulatory bottlenecks retarding the non-farm sectors.

The situation in Brazil is quite a contrast to that in China. China’s reforms started in the agriculture sector, but because of very weak private property rights, farmers have been increasingly left stranded. The insecure land rights have meant that farmers have not really been able to capitalise on their land assets, and try to join the economic transition away from agriculture. So you have almost a crisis situation in China, with agriculture share of GDP down to 13%, but the labour force in agriculture at over 60%. It is not surprising that there are reports of 70-80,000 instances of protests annually in rural China, mostly related to land rights. This also explains the enormous and growing inequality between the large population stuck in agriculture, and those in China’s large and gleaming new cities.

But China has been able to manage the situation to an extent, because of its phenomenal growth in manufacturing sector. If Brazil is the bread basket of the world today, China has become the shop floor of the world. It is perhaps this transition to manufacturing, which opened up new economic opportunities to a few hundred million young Chinese from the countryside, that provides the key to understanding China’s ability to manage this rural – urban dichotomy, so far.
Whether this situation is sustainable, is an open question. But what is quite clear is that a more secure property rights in rural land in China would help many Chinese peasants to capitalise on their only asset, and prepare themselves for life beyond agriculture.

The experience of India provides yet another twist to this story. Among the three countries, India is the poorest. Over the past 60 years, the share of agriculture in GDP has fallen from a high of 75% to about 20% today, but the labour force associated with agriculture is hovering just under 60%. No wonder, agriculture in India is almost synonymous with poverty. Among the three countries, the transition to the manufacturing sector has been the slowest in India. But what is worse is that the regulatory environment has stifled not just entrepreneurship, but has sustained barely 10% of the workforce in the formal sector employment.

With agriculture in a ditch, and manufacturing hobbled by regulations, an elite band of Indian entrepreneurs, joined hands with an equally elite educated and skilled workforce found a new opening in the service sector. The IT and the communication revolution greatly facilitated access to global markets, and before the political establishment could realise, India marked its arrival on the world stage as the world’s back office.

While the potential in IT and outsourcing has raised India’s profile on the world stage, at home it is becoming increasingly clear that without a new revolution in agriculture and manufacturing, India may never be able to live up to its potential. Because without these twin engines, the economic transition from largely rural and low skilled workforce to manufacturing will not be possible.

But to achieve this, transition, what India needs is a much greater protection to property rights, and reforming the highly restrictive land market. India is one of the unique countries where the political demand for land distribution to the landless in the 50s and 60s, has now moved in to a new form of protest against attempt by government to take over private land of small farmers in the name of promoting industrialisation. In recent months, there has been a growing revolt against ‘takings’ by government using ‘eminent domain’ powers. Not unexpectedly, this is leading to renewed charges of crony industrialisation.

Although Brazil, China and India have had very different history, and have travelled down different economic paths, there is a strong common thread running right through these apparently divergent experiences. That thread is property rights. Respect for property rights, and reforms of the land market, hold the key to smooth transition from agriculture to industry, and to services. Only then can these countries lift the burden of poverty from the shoulders of millions of their citizens.

Property right is not a luxury of the rich. The rich in almost any kind of society can figure out ways of protecting their property, either using the law, or even buying protection outside the law. Property right is sacrosanct particularly for the poor, because without it, they have no means left to protect their meagre assets, capitalise those assets, and put those assets to optimum use.

Over bearing regulations that strangle enterprise, restrict access to markets, curtail freedom to trade and exchange, all constitute violation of property rights in one form or the other. Brazil, China and India, are the best examples of distortions created by different forms of violations of property rights. To achieve their potential, all the three countries will have to seriously reconsider the diverse nature of property rights violations, and adopt a secure rule of law environment. Today, these three countries epitomises their success in their respective areas, and the world has taken note of their potential. But by the same token, the enormous disparities between different sectors of their economies also illustrate the enormous pitfalls that lie ahead of them.

But the road from potential to performance can only be paved by recognising and securing property rights, going much beyond land.