Power, Property Rights, and Economic Development

The Case of Bangladesh

Mohammad Dulal Miah, Yasushi Suzuki

• Publisher: Palgrave Macmillan
• Year: 2018
• ISBN:
  9789811327636
• Topic: Business
• Subtopic: Business General
• Index: Business

This book presents a critical reassessment of theories of property rights, in response to conflicts and competition between different groups, and the state. It does so by taking an institutional political perspective to analyse the structures of property rights, with a focus on a series of case studies from Bangladesh. In doing so, the book highlights the importance of property rights for economic growth, why developing countries often fail to design property rights conducive for economic development, and the strategies required for designing an efficient structure of rights. Since property rights falls within the domain of Law and Economics, the book ventures to explain legal issues from an economic perspective, resulting in empirical analysis that comprises both legal and non-legal cases.

© The Author(s) 2018

Mohammad Dulal Miah and Yasushi SuzukiPower, Property Rights, and Economic Developmenthttps://doi.org/10.1007/978-981-13-2763-6_1

Begin Abstract

1. Introduction

Mohammad Dulal Miah¹ and Yasushi Suzuki²

(1)

University of Nizwa, Birkat Al Mawz, Oman

(2)

Ritsumeikan Asia Pacific University, Beppu, Japan

Mohammad Dulal Miah (Corresponding author)

Yasushi Suzuki

The right to life is the source of all rights—and the right to property is their only implementation. Without property rights , no other rights are possible. Since man has to sustain his life by his own effort, the man who has no right to the product of his effort has no means to sustain his life.

(Ayan Rand 1964, p. 90)

End Abstract

1.1 Development Issues for Developing Countries

The debate as to ‘why some countries are rich and others poor’ is not new but as old as the history of human civilization. Even though the debate has generated an extensive curiosity among scholars and policymakers since the time of Adam Smith, owing to the invention of new ways and methods of explaining economic problems and possibilities, the mystery is yet to be resolved. This is manifested by the fact that some countries have progressed economically well while others have either retrogressed or not advanced in commensuration with their potentials. Maddison (2001) reports historical growth account, which shows that in 1500, the per capita GDP of Asia, Africa, and Western offshoots amounted to 572, 414, and 400, respectively.¹ While Africa and Asia have failed miserably to maintain the pace of their economic growth in the subsequent period, Western offshoots have grown rapidly. The per capita GDP of Western offshoots amounted to 9,268 in 1950, whereas the per capita GDP of Asia and Africa grew by a meager amount—to 634 and 894, respectively. According to the recent GDP estimations, Asia is ahead of Africa by a good margin, but lagging far behind the Western offshoots.

Not all countries in a specific geographic area are uniformly developed. Sharp differences in economic growth between two neighboring countries are apparent. For instance, some newly industrialized economies (NIEs) in Asia, such as Hong Kong, Singapore, Taiwan, and South Korea, have been able to accelerate the pace of their respective economic growth. The per capita income of those NIEs increased rapidly over the past few decades. Despite South and North Korea being neighbors, the per capita income of the former is 18 times that of the latter. Not so long ago, as late as the 1930s, the Finns and Estonians enjoyed a similar standard of living (O’Driscoll and Hoskins 2003). Despite the two countries being neighbors, the average Finn earned two and a half times the average salary of an Estonian (in 2016). Moreover, the nominal per capita GDP of the United States is more than seven times the per capita GDP of Mexico. Before unification, substantial differences in economic performance as well as standards of living prevailed between East and West Germany. Hong Kong and Singapore border their much larger and mighty neighbor, China. The real per capita GDP of Hong Kong, which was a colony of the United Kingdom, now exceeds the per capita real GDP of its mother country. Albeit its economic miracle, China’s real per capita income is about one-third of Taiwan’s. This disparity in economic performance has led development economists such as Richard Easterlin (1981) to ask, “Why isn’t the whole world developed?”

Several schools of thoughts have emerged to answer the question. Undoubtedly, the development of the neoclassical growth theory in the mid-twentieth century is considered a major breakthrough in the field of economics. Neoclassical economists believe that the laissez-faire competition in the market would facilitate the ‘division of work’ and ‘specialization’, leading to the optimal allocation of resources. The school identifies ‘technology’ as the only force that leads to sustained and continuous increase in living standards. Despite its attempt to systematically analyze the causes and consequences of growth across countries, the theory is far from the reality.

Sen (1970: 9) argues, “[W]ith this immensely practical motivation it would have been natural for growth theory to take a fairly practical-oriented shape. This, however, has not happened and much of modern growth theory is concerned with rather esoteric issues. Its link with public policy is often very remote.”

This can be attributed to many assumptions that underlie the neoclassical growth model. The critical one among them is whether or not the cost of running an economic system is zero or insignificant. In addition, the model assumes that property rights are perfect or not relevant to economic growth. In reality, as long as resources are scarce, the question of ‘who owns what’ or of ‘how property rights are assigned and enforced’ affects people’s choice of savings, investment, innovation, and thereby, economic consequence of a country. Property rights bestow on owners certain attributes in relation to an asset. Essential attributes comprise the right to consume or benefit from the use of the asset, exclude others from uncompensated use of property, right to sale, dispose, or transfer of the asset, and also the right to derive income from the asset. The value of any property, therefore, depends on the degree to which owners of an asset can enjoy these attributes. Apparently, the neoclassical growth theory has failed to recognize the importance of the structure of ‘property rights’ (De-Alessi 1983; Furubotn and Richter 2000; Nelson and Sampat 2001). Weimer (1997: 4) clarifies, “[N]eoclassically based welfare economics assumes a clear and precise allocation of private property rights to all commodities and productive assets as a precondition for the Pareto efficiency of competitive equilibriums within a market economy.”

It was North and Thomas (1973: 91) who sketched a historical account of The Rise of the Western World and attributed the rise to an efficient economic organization that requires an individual’s “exclusive rights to use as he sees fit his land, labor capital and other possessions… the right to transfer his resources to another, and that property rights are so defined that no one else is either benefited or harmed by his use of his property”. They insist that economies that have been able to uphold the basic principles of market for exchange of goods and services with appropriately defined property rights are developed today. Similarly, de-Soto (2000) investigates why capitalism triumphs in the West and fails everywhere else. He argues that legal structures of property rights give the West the tools to save and invest the surplus in a productive way. However, we should ask: how can their claim be generalized?

There is plenty of historical evidence which shows that the suppression of property rights is associated with lower market transaction and property value. For instance, several of the postcommunist countries placed restrictions on the sale of assets to foreign investors, which reduced not only the exchangeability of assets but also their intrinsic value (Weimer 1997). Likewise, restricting the use right of an asset attenuates the right, which is accompanied by a lower value of that property. Richardson (2005) reports that when the Zimbabwean government initiated land reforms during 2001–2003 which involved forcibly taking over white-owned land, commercial banks stopped accepting land as collateral. The combined effect of land grabbing and the attenuated use of land led to such a sharp fall in land prices that “the net loss in one year was nearly three and a half times larger than all the World Bank aid ever given to Zimbabwe” (Richardson 2005: 542–543). Similarly, any restriction on income derived from the property drives its value down. One simple mechanism of such a restriction is price control (Barzel 1997; Cheung 1979; Mills 1975). Navissi et al. (1999) show that the equity price of New Zealand’s listed public companies was strongly negatively correlated with price controls imposed on equity values. Other such institutional barriers, including high rate of taxes on sale and costly transfer of ownership, are most likely to attenuate the right to property, and thereby, reduce property value.

The institutional setting of property rights is clearly linked with ‘incentive’. Delineation of property rights and their enforcement characteristics define and specify the ways in which players (political, social, and economic organizations) will behave in a society. Institutions that do not guarantee actors about the fruits of their hard work encourage them to shirk or seek unproductive and illegal means of doing things. In contrast, an efficient set of property rights works as an incentive for individuals to put in their efforts toward a productive purpose. This postulates that the success and failure of an economy can be attributed in large part to the nature and structure of property rights.

We should accumulate case studies to endorse this claim. This book aims to contribute to this postulation analyzing the nature of property rights in Bangladesh and linking it to the country’s economic performance. Bangladesh is at a crucial development stage and is considered one of the next 11 (N-11) emerging countries after BRICS. According to the projection of PricewaterhouseCoopers (PWC 2015), Bangladesh has the...

Table of contents

• Cover
• Front Matter
• 1. Introduction
• 2. Theories of Property Rights: Transaction Cost and Beyond
• 3. The Development Discourse in the Context of Bangladesh: An Analytical View
• 4. Political Origin of State Weakness
• 5. Patron-Client Politics and the Rise of the Business Class
• 6. Non-market Allocation and Rent Seeking
• 7. Property Rights and Price Control
• 8. Toward an Appropriate Structure of Right
• 9. Conclusion
• Back Matter