Property Rights and Investment: Vague Correlation?

A review of the article "Property Rights and Investment Incentives: Theory and Evidence from Ghana" by Timothy Besley

Evolution of property rights is a cornerstone to development as it encourages long term investment decisions in an economy not just in infrastructure and technology, but more so in a humbler aspect such as that of farming. This is basically due to three reasons as given in the paper:

1. Security: If one is afraid of his/her land being expropriated by the land mafia or the government itself, then there is no use of investing in any factory, farm or even residential property. In Cuba for example, when a oil field was discovered, it hardly attracted any investment because it was feared that as soon as the government smelled the air of heightened profits, it would expropriate the land.

2. Collateral: It is believed that easier it is for a property to be held up as a collateral against a loan, the more investment it will receive. The intuition is that in a competitive land market locale, banks would easily take any property as a collateral to a loan because of high supply of properties. This would mean that the interest rate on the loan would also be low because of high supply of properties and thus, a low interest rate would foster investment into the land - essentially a multiplier effect.

3. Trade: If it is easy for a land to be sold, bought, leased, rented, mortgaged, bequeathed etc, then an investor would invest in the property thinking that if the investment fails, atleast he can easily sell the property to get a part of his investment back.

Besley uses these three approaches to determine the effect of land rights on investment decisions by farmers in two agricultural districts of Ghana: Anloga and Wassa. He also tests the endogenity of rights wherein if higher land rights increase investment, maybe there is a reverse causation as well and thus an increased investment strengthens property rights. This would give an upward bias in the coeffecient of the affect of rights on investment. Furthermore he tests whether farmers themselves make such investments into their lands to increase their land rights.

Since the entire Ghanian region would be affected by the same geo-political and natural disaster occurences, chosing two regions within a same country is more robust than testing across two different countries with different socio-cultural and political climates.

Wassa and Anloga also have different agriculutural priorities with trees grown on privately owned lands in the former and small shallots (a small type of onion) grown on communal lands in Anloga. While plantation of trees itself leads to a higher sense of property rights because of a long term investment, it also makes way towards "individualization of rights" much noticeable in developed economies. On the other hand, most of the land in Angola is passed on through inheritance but majority of rights do not require lineage approval.

Results: Besley finds significant correlation in investment and property rights in Wassa but not so obvious in Anloga, despite controlling for endogenity and omitted variables in both. He can also not conclude as to which theoretical argument out of the security, trade and collateral viewsmost closely explains property rights and investment decisions. All in all, the paper hints that though increased property rights do affect investment, "the analysis of this paper warns against viewing it as a panacea for problems of low growth and investment before the process determining the evolution of rights is properly understood."

Education and GDP growth: Some figures from a natural experiment

Review: "Schooling and Labor Market Consequences of School Construction in Indonesia: Evidence from an Unusual Policy Experiment" - Esther Duflo

In 1973 Indonesia under the INPRES (Indonesia Presidential Instructions) program, 61,000 primary schools were constructed - on average of two schools per 1000 children aged 5 to 14. What interested me in this article were two things:

1. While traditionally effects of education on GDP are biased by Ommitted Variables such as family and education, the OLS (Ordinary Least Squares Regression) and SLS (sum of Least Squares) results in this regression matched, showing no bias. Thus, estimates of returns to education in developing countries are not necessarily biased upwards as a result of ommitted family and community background variables

2. The number of schools constructed in a district was inversely proportional to the enrollment rate in schools, to encourage higher enrollment. Therefore, the "average educational attainment and wages in regions that received fewer schools are higher than in regions that received more schools." Traditionally it is considered that underpriviliged and racial minority area schools do not meet standardized testing and education enrollment standards. Hence it is believed that there should not be any investment therein because the returns would be low over the coming years because of negligible use of the initial investment. This article however shows that just the opposite is true -more schools should be built in low-enrollment areas for an overall increase in education. This is more equitable and thus would give higher returns to education because education would be diversified than being concentrated in one area or a locality.

The results of the research done by Duflo show that on average, the program lead to increase of .25 to .40 yrs of education and increased by 12% that an affected child would complete primary school. The program also lead to an increase of 3 to 5.4 % in wages.

Furthermore, this article shows that large scale government intervention focussing on quantity of schools was as important as raising quality of education since this program raised not only education levels but also wages. Therefore fears that large scale improvement in quantity might deteriorate quality of education are unfounded.

Though this article was generally about an increase in education enrollment and not the intake type of these Indonesian schools, more schools created on the concept similar to Sikhya would work doublefold - increase education and increase it amongst the poorest of the poor. Governments such as those of developing countries like India should thus focus on education for the slums on a massive scale. Free education not only for more engineers, doctors and lawyers but for overall developed personalities of a developed India.

(I found an exemplary school (Sikhya - "learning" in Hindi) in my hometown today which schools more than 800 slum kids, providing them vocational training, hygenic living, reading, writing, and on top of it, exceptional school education, all for free. So as I read this article by Duflo, Sikhya came to my mind as a practical example of improvement in education and its returns in developing economies.)