Property rights (partial)

PROPERTY RIGHTS AND CONTRACTS IN

URBAN ENVIRONMENTS.

Hernando de Soto (2000) : prevalence of

the informal sector in developing countries
Businesses not declared
Large part of real estate in developing
countries without title. Huge hidden
wealth.
 Extra-legal dwellings and land in developing countries.
Percentage of Value of Percentage Value of
informal urban informal urban informal rural informal rural
dwellings dwellings area area (trillion
(trillion US$) US$)
Asia 84 1.75 44 .59
Africa 85 .58 50 .39
Middle East 86 .74 40 .25
and North
Africa
South America 86 .89 49 .24
Mexico, 86 .36 53 .09
Central
America and
the Caribbean
China and 85 2.16 47 .8
Eastern Europe
Other 87 .26 47 .24
developing
countries
TOTAL 85 6.74 2.6
Source: De Soto (2000), p.36.
 High transaction costs of being
informal.
Property cannot be used as collateral.
Basic services (utilities, sewage) cannot be obtained
without title.
Absence of legal protection in trading of assets.
Insurance cannot be obtained.
Difficult to attract additional capital. No mechanism for
conflict resolution between partners.
Vulnerability to predatory bureaucrats.
Courts cannot be used.
Business partners restricted (need to rely on trust, not
law)
Economies of scale cannot be exploited.
 Institutional obstacles to entry in
formal sector.
Argument that hiding is related to fiscal evasion
not extremely convincing given the high
transaction costs associated to hiding.
Entry costs are very high due to institutional
inefficiencies.
De Sotos team tested registration costs of
small business (one worker): 298 days and
$1,231 (31 times the minimum wage).
Similarly, building a house on state-owned land
took 207 administrative steps in 52 offices (7
years).
 Institutional obstacles to entry in
formal sector.
In Egypt, in order to acquire and legally register
a lot on state-owned desert land, 77 procedures
at 31 agencies (between 5 and 14 years).
To build a legal dwelling on agricultural takes
from 6 to 11 years.
In Haiti, before settling legally on government
land, a citizen must first lease the land for 5
years but it takes 65 bureaucratic steps requiring
roughly 2 years before obtaining such a lease.
 Erica Field (2005): land titling program in Peru. More
renovation in dwellings with title. Independent of
collateral motive (60% did not ask for credit)
 Demand for credit increased by 100% among
households with titles but credit received
increased only by 50%.
Labor supply and labor market effects:
households without title spend on average 13.4
hours per week to maintain dwelling security and
28% more likely to work at home. Titling
increased household labor supply by 23 hours.
Titling reduced fertility by 20%. Bargaining
power of women increased with titling.
Institutions and property right protection
in transition economies
The evolution of the unofficial economy
as a share of GDP in selected transition countries.
Country 1989 1995
Hungary 27 29
Poland 15.7 12.6
Czech republic 6 11.3
Slovakia 6 5.8
Estonia 12 11.8
Russia 12 41.6
Ukraine 12 44.2
Georgia 12 62.6
Source: Johnson, Kaufmann and Shleifer (1998).
Corruption, the legal system and the size of the unofficial sector.
Poland Slovakia Romania Russia Ukraine
Percentage of sales not reported 5.4 7.4 5.7 28.9 41.2

Percent who think firms make 20 38 20 91 87

extralegal payments for
government services

Percent of firms saying that firms 8 14.9 0.6 92.9 88.8

pay for mafia protection

Percent of firms saying courts can 72.9 67.9 86.9 58.4 54.7
be used to enforce an agreement

Source: Johnson, Kaufmann, Mcmillan and Woodruff (1999).

Development of Property rights and Market infrastructure.
Poland Slovakia Romania Russia Ukraine
Percentage of managers who 22.1 24.6 16.2 98.9 99.3
would not invest 100$ now to
receive 200$ in 2 years
Percentage of a firms sales going 26 19 7 5 4
through a wholesale

Percentage of firms sales going to 64.7 67.6 53.8 23.3 30.5

different cities or countries

Percentage of sales not to SOEs or 61.3 55.5 67.7 38.1 36.3

spinoffs

Source: Johnson, McMillan and Woodruff (1999b,c).

Trust and relational contracting.
Poland Slovakia Romania Russia Ukraine Vietnam
Percentage participating in trade 20.8 23.4 44.2 60 64.1 26
associations providing
information on suppliers and
customers

Percentage having customer 6.4 13.4 30.5 22.2 18.7 14.6

managed by family or friend

Percentage that would buy from 42.5 48.4 62.5 1.4 7.9 29
new supplier at price 10% lower
than current supplier

Source: McMillan and Woodruff (1999), Johnson, McMillan and Woodruff (1999a).