, on the relationship between middle classes and property rights, on China, and a host of other issues. Excerpts: India has fuzzy property rights, but so does China. So, why does so much foreign investment go into China?
I don't have a view about India but it is not possible to have a market economy without fungible property rights. At the end of the day, a market economy is nothing but the exchange of property rights. Lots of countries have sections where these rights don't exist, but they know how big this section is "" I don't think you know how big this section is in India.
In the case of China, 250 to 300 million people on the east coast do have property rights and that's why they're doing well. In the western and northern parts, a billion people don't have such rights and that is why there is much less economic activity there, and that's why the Gini coefficient is so high there, that's where the revolts were (there were 75,000 revolts in China last year). Where you don't have formal property rights, people tend to encroach upon your rights. Marx's diagnoses and policies were all wrong, but his predictions were right!
Much of what you call property rights in China exist in only the special economic zones.
You have 70-year leases in China, lots of Chinese firms are listed in Hong Kong and they wouldn't be allowed to list there without property rights. Basically property rights have to be standardised, institutionalised and tradeable for them to be recognised as such. If property rights are not tradeable, they are not really rights in the strict sense of the term. Foreigners are investing so much in China "" they would not invest if their rights were not secure, if the authorities could simply dispossess them overnight.
The World Bank's "Doing Business" is based on your work. But is it correct to add up the costs they way they do, the way you do? Say, for instance, 'if India had property rights, GDP would rise 10 per cent' is the kind of statement you hear being made all the time. But when you fix the property rights, you find growth isn't happening because something else also needs to be fixed alongside! If you add up all the 'extra' growth you get by fixing different things, you get a total that is so fantastic and clearly not possible.
It's not correct but what do you do "" if you tell the head of state that he must institute property rights, he wants to know how much the country will benefit, so you have to give a figure! It's very hard to pin down numbers. Someone asked Alan Greenspan if IT had helped improve productivity, and he said, "yes it had." But when he was asked by how much, he didn't know. Doctors know antibiotics help, but they don't know by how much, it differs from one patient to the other.
These costs have to be put in perspective. It may cost a company $10 million a year in bribes and stationing top officers in China, but if they lower production costs by $100 million, it's a win-win for everyone. But measures such as yours don't do this cost-benefit analysis.
That's right. But the rule of law still matters. If you get a contract by bribing an official, that contract is worth it only till the official is in place "" so it's worth less than a contract in a country with the rule of law, where the rules are standardised.
Isn't it true that once you have a sizeable middle class, the rule of law comes in automatically? The middle classes want the rule of law to protect them and so, politicians have to comply.
The middle classes themselves are a product of the rule of law! Louis XIV gave land to a select few and created a middle class, but France still had a revolution because the number that didn't have land was much greater than those that did! Russia had the biggest middle class but this didn't stop the revolution; we've had pretty large middle classes in Latin America for the longest time. In fact, you shouldn't necessarily take comfort from a rising middle class because it is usually satisfied with property rights as they are.
In how many countries is ILD working and what do you do in each place?
We'll be in 21 countries next year from Latin America to Africa and Asia. We try to train people in how to measure if they have property rights, to structure them in such a way that they're uniform, to look at the cost of access and transfer. In Tanzania, we had a team of 975 Tanzanians going from village to village "" interestingly, they found that while most believed the tribals owned most of the land, just 12 per cent of the land was owned by them. So many political decisions are based on myths! While we haven't worked in Thailand, many of our principles were used by Shinawatra in Thailand! Similarly, I met President Putin and found that much of our work was being used in Russia. We're doing work in Afghanistan as well. In all the countries we go to, we go at the invitation of the head of state.
In India, Karnataka's Bhoomi aims at giving the kind of property rights you're talking of. Yet, it hasn't spread to other states. Why does this work in some areas and not in others?
I don't know India, so I can't say. But in Bhoomi, the important thing is not to stop at just giving peasants the title papers to their land. What's important is to see the costs involved in transferring such rights "" if the farmers want to sell their land, can they do it easily based on these title deeds or does it take long and a lot of bribes? It's important that the records be updated all the time. Basically, the system will work only if the cost of being legal is a lot less than the cost of being illegal.
