Contributions legal scholars can make to development economics: examples from China.

AuthorPalomar, Joyce

TABLE OF CONTENTS

INTRODUCTION I. BENEFITS TO EMERGING ECONOMIES FROM LAND TENURE SECURITY A. Contribution of Land Tenure Security to Credit Enhancement and a Sustainable Market Economy B. Necessity of Land Tenure Security to Stimulate Foreign Investment C. Necessity of Land Tenure Security to Create a Market for Mortgage-Backed Debt and New Capital for Mortgage Loans II. IDENTIFYING RISKS TO OWNERS' LAND TENURE SECURITY AND INVESTORS' SECURITY INTERESTS IN LAND A. Risks Within a Nation's Property Rights Institution B. Conflicts Between Goals of the Property Rights Institution and Other Institutions and Norms 1. Risks Within a Nation's Financing and Credit Institutions 2. Risks Within the Political Institution 3. Risks from Conflicts with Other Institutions' Goals CONCLUSION INTRODUCTION

Significant economic research of recent years has posited, debated, and attempted to prove empirically the hypothesis that land tenure security can promote sustainable economic growth in emerging economies. (1) For land tenure security to subsist, in turn, economists have theorized and empirically shown that emerging economies should maintain institutions that recognize and enforce property rights.

Development experts and legislators need more than broad economic theory, however, if they are to guide an emerging nation to land tenure security and the economic benefits that are believed to ensue. The next steps in this effort require legal analysts (2) to advise regarding (a) where risks lie to land tenure security and (b) means by which an emerging nation may reduce those risks.

Developing a property rights institution--a set of laws or rules recognizing and defining private property rights along with enforcement mechanisms and supporting organizations (3)--does not alone ensure land tenure security. One reason is that risks to land tenure security exist when the goals of an emerging economy's property rights institution are thwarted by that new institution's own vagaries and failures of process, by the nation's other institutions, and by inconsistent local norms.

This Article identifies some of the unexpected sources of risk to owners' and investors' land tenure security. The Article also illustrates means of reducing risks to land tenure security in order to enhance availability of credit, stimulate foreign investment, and create a market for mortgage-backed debt. The goal of this Article is to give development specialists a beginning point for assessing, and then increasing, compatibility of an emerging country's institutions with its land tenure security and economic development goals.

Illustrations will be drawn from the People's Republic of China of types of unapparent risks that can result in loss of rights to land or frustrate investors' expectations. Illustrations also will be drawn from China's efforts to create new institutions and to strengthen existing legal institutions in order to enhance land tenure security and access to credit.

  1. BENEFITS TO EMERGING ECONOMIES FROM LAND TENURE SECURITY (4)

    1. Contribution of Land Tenure Security to Credit Enhancement and a Sustainable Market Economy

      Land tenure security is essential to stimulate the development of land. (5) If land tenure is not secure, both local and foreign investors will be hesitant to invest in land development. Economists and international development specialists posit further that land tenure security not only stimulates a market for land and its development, (6) but that this security is the very foundation of a market economy (7) and sustainable economic growth. (8) Economists and development experts agree that "[m]odern capital markets generate economic growth in part because formalized property rights remove uncertainty, which lowers transaction costs.... Without formal property [relationships], ... a modern social market economy cannot exist.'" (9)

      When property rights become secure, citizens can depend upon these rights in participating in private transactions. Economic historians cite the late eighteenth century experience in Western economies as an illustration of the relationship between property rights and the emergence of the modern market: "the boom in technological innovation in the West, and the massive investment that made it possible, began only at the end of the eighteenth century, when property rights were perfected and made independent of politics." (10)

      When land titles and land tenure are secure, landholders may utilize their property rights as collateral for loans. When lenders are confident that their titles or liens against real property collateral will be enforceable, they will accept interests in land as security for loans in amounts up to the fair market value of the property interest. Thus, secure land titles and enforceable mortgage rights together create access to significant amounts of capital. (11) In the United States, for example, seventy percent of the credit extended to new businesses stems from mortgaging real property titles as collateral for loans. (12)

      With access to credit, individuals may improve their land, grow crops, establish businesses, hire employees, pay wages, and generate profits. (13) The standard of living of landowners, business owners, and their employees consequently will improve. (14) From their increased profits and incomes, these individuals will have capital to buy services and products from vendors whose incomes and businesses also will improve. From all these increased incomes, profits, and property values, taxes will be paid, thereby increasing the nation's income. Empirical studies in Thailand, (15) Costa Rica, (16) Peru, (17) and other countries comparing the level of investment and productivity on titled and untitled farms support this hypothesis. (18)

      Conversely, when land titles are not secured by law, people cannot transfer their property easily. (19) They cannot develop it for more valuable purposes or utilize it as collateral for credit. (20) This limits the productivity of the property and its value as a factor of production. (21) Effects on the general economy may include the inability to increase productivity or investments, more expensive capital, an inefficient tax system, and perhaps other negative effects on a nation's development. (22) According to Hernando de Soto:

      If [occupiers of land who do not have legal title] cannot enforce their rights to land, housing, and equipment, their incentives for investing in them are considerably reduced. People build less if they think there is a risk that the state or another person might take away or occupy what they have built.... The effect of all this is to reduce aggregate investment. Secure property rights, on the other hand, encourage holders to invest in their property because of their certainty that the property will not be usurped. From a strictly economic standpoint, therefore, the true purpose of property rights is not to benefit the individuals or entities holding those rights, but to give them the incentive to increase the value of their assets by investing, innovating, or combining them advantageously with other resources, something which would have beneficial results for society. (23) B. Necessity of Land Tenure Security to Stimulate Foreign Investment

      As the previous section described, secure land titles may give landowners access to credit and capital. The land tenure security provided by a nation's public land title registration system may be sufficient to encourage mortgage loans from local banks and mortgage lenders. Emerging economies may benefit in additional ways, however, if land titles are sufficiently secure to attract foreign investors. Foreign investors willing to build factories and conduct business in developing countries bring new capital into the emerging economy and provide employment and tax revenue that will further economic growth. In order for investors to be willing either to invest money in land development in emerging economies or to accept borrowers' land as collateral for loans, investors must believe that their investments are secure. (24) When investing in projects that involve land development or land use, foreign investors must be certain that the land can be developed and utilized according to their plans. Further, when accepting real property interests as collateral for loans, foreign investors must be confident that the right to the real property will be available to satisfy the debt.

    2. Necessity of Land Tenure Security to Create a Market for a Nation's Mortgage-Backed Debt and New Capital for Mortgage Loans

      An additional benefit when land titles are sufficiently secure to attract investors is that a secondary market for mortgage-backed debt may develop. Enabling local banks to sell their residential mortgage-backed debt can help to make capital available for middle-income housing. In the United States, debt backed by mortgages is "securitized," that is, interests in the repayment of large mortgage-backed loans or large pools of smaller mortgage-backed loans are sold as securities both directly to large institutional investors and indirectly to individuals who invest in mutual funds that hold shares in real estate investment trusts. (25) This secondary market for mortgage-backed loans is important because local development and housing construction need not depend solely on the availability of funds in that locality. (26) Local lenders may trade their long-term mortgage loans in the securities market for new capital that then can be lent to new borrowers. The local lender, in turn, can sell those mortgage loans in the securities market for new capital that they subsequently can lend to new borrowers, yielding a steady source of funding for home purchases and property development. (27) The trillions of dollars that investors have poured into the American secondary mortgage market has been credited with, first, creating a consistent flow of funds for home loans in the United...

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