TABLE OF CONTENTS INTRODUCTION I. TYPES OF INFORMALITY AND A FORMALIZATION PROGRAM A. Irregular Settlements B. Formal Titling Programs II. THEORETICAL: BENEFITS AND COSTS A. Benefits of Formalizing Property Ownership B. Cost of Formalizing Property Ownership 1. Preexisting Informal Systems 2. Poorly Functioning Accompanying Markets 3. Preexisting Ownership 4. Insufficient Government Resources III. EMPIRICAL ISSUES IV. OUR ECUADOR CASE STUDY V. TENURE SECURITY A. Evidence from Ecuador B. Evidence from Elsewhere VI. THE ABILITY TO TRANSACT A. Evidence from Ecuador B. Evidence from Elsewhere VII. PRIVATE INVESTMENT VIII. SOCIAL INVESTMENT IX. ACCESS TO FORMAL CREDIT X. PROPERTY TAX TO FINANCE INFRASTRUCTURE XI. TITLING COSTS: EVIDENCE FROM ECUADOR XII. DYNAMIC AND DISTRIBUTIONAL XIII. PROPERTY PRICE REGRESSIONS A. Evidence from Ecuador B. Evidence from Elsewhere CONCLUSION ABSTRACT
In this Article we explore the potential benefits and costs of a program to grant title to individuals who are occupying land informally. Only some of these benefits and costs have received careful empirical consideration in the literature. This Article references existing studies and draws on findings from original surveys of urban households in Ecuador. We consider how a titling program might affect the welfare of landowners and occupants, how it could alter the functioning of real estate markets, and whether it could build a community's social capital. Potential benefits must be weighed against a range of costs, including those accruing to the government for implementation of the program, as well as those perceived by individuals in their efforts to obtain title. There also may be dynamic implications of a titling program. For example, these programs can spur further land invasions and render the role of intermediaries more lucrative. The importance of formal property rights and of formal legal systems in governing transactions and land use is of particular interest given that property rights are frequently assigned the prominent role of a prerequisite to economic growth.
Property rights are commonly regarded as a fundamental underpinning of a capitalist economic system. (2) For individuals to engage in transactions with each other and to undertake investments that spur economic growth, a system must be in place that establishes the range of transactions that individuals are allowed to undertake. This Article addresses the role of property rights in economic systems by considering the transition from an informal system of property rights to a formal one. Specifically, we consider the costs and benefits of formalizing the ownership of land that is informally occupied or has been developed illegally.
Recent studies of economic growth have given a central role to the institutions governing property rights. A study of growth in incomes worldwide since 1500 notes that "a cluster of institutions ensuring secure property rights for a broad cross section of society ... are essential for investment incentives and successful economic performance." (3) In fact, this study argues that it is the propagation of such institutions that has led previously laggard areas of the world to the forefront of the world income distribution. (4) This point emphasizes an important policy question: Are there significant social benefits to be obtained by extending formal systems of property rights into new areas? The well-known Peruvian advocate Hernando de Soto argues that there are in fact significant social benefits gained by such extension. (5) His central thesis is that by clarifying the ownership of property and simplifying the regulations that govern its use, it is possible to unleash the great potential of the developing world. (6)
The extent of informality is impressive. In most urban areas of developing countries "in Asia, Latin America, sub-Saharan Africa and the Arab States, between 25 and 70 per cent of the urban population is living in irregular settlements." (7) De Soto also estimates that as many as 85% of urban parcels of land in the developing world are informal. (8) Of course, it is the least well-off members of society who are most likely to occupy the marginal lots. In almost all cases, in fact, information on urban housing and tenure security indicates that the situation of the poor has worsened over time. (9)
To be concrete about the type of situation under consideration, imagine a parcel of unoccupied urban land in a developing country. The land in question is owned by the state. Now imagine an entrepreneurial organizer gathering up some poor compatriots from the countryside and moving in to occupy this parcel of land. This occupation may be accomplished quite systematically, with the land subdivided among the new occupants and boundaries clearly settled. It may be with either the tacit or direct approval of a local politician and there may be payments made from the new occupants to the organizer and the politician. Thus, the result is a settlement of poor individuals residing and perhaps also working on the property. (10)
Subsequently, these new settlers will face a series of critical decisions. They must decide whether to invest in their own property and whether to participate in communal efforts to address neighborhood concerns. For any investment, they may need to assess how they might obtain credit. They must determine how much effort to exert to protect their land from other claimants. Finally, they may need to decide whether they can safely rent or sell their property.
The resolution of these issues is likely to differ under a formal and an informal system of property ownership. Although the cost-benefit framework we develop in this Article will not provide a final answer to the question of whether moving towards formalization is worthwhile, we will describe the potential gains or losses to different members of the society and discuss empirical evidence regarding the magnitude of these impacts. Assessing the empirical balance between the costs and benefits of property ownership is essential for determining the advisability of undertaking formal titling programs.
Due to their prevalence throughout the developing world, land invasions and informal systems of land tenure have been the focus of considerable research. (11) This growing body of work includes examples from many countries. (12) In this study, we draw extensively on surveys that we fielded in Guayaquil and Quito, Ecuador, (13) as well as discuss these other important studies.
Part I of this Article describes the ways in which landholdings may be informal and describes a formalization program. Part II lays out the theoretical benefits and costs of a land titling program. Part III describes a number of estimation issues that commonly arise when researchers attempt to quantify the benefits and costs of land titling. Part IV discusses our prior surveys drawn from Ecuador. (14) Parts V through XIII each address a potential effect of formalizing property rights. Whenever possible, these Parts begin with evidence drawn from our Ecuadorian study and progress to empirical evidence drawn from other research. Part V begins quantifying the costs and benefits of formal property rights with evidence regarding the tenure security experienced by landholders with different sources of rights. Part VI assesses the extent to which people can undertake property transactions in the presence or absence of formal title. Parts VII and VIII consider the effects of formal land titles on private and social investment, respectively. In Part IX, we review studies concerning the extent to which formalization of property rights facilitates access to formal credit markets. Part X briefly describes the relationship between formalization and property taxes to finance infrastructure. In Part XI, we provide estimates of titling costs. Part XII discusses empirical work relating to some of the dynamic and distributional questions surrounding a titling program. Finally, Part XIII offers regression analyses of the impact of titling on property values.
I. TYPES OF INFORMALITY AND A FORMALIZATION PROGRAM
Settlements may be "irregular" or "informal" for a variety of reasons. Irregular settlements include public or private land settled by squatters, illegal constructions on legal property, and land developments that are unauthorized either because the development would have been legal but permits were not obtained, or because the development does not conform with zoning, minimum infrastructure, or other requirements. (15) Thus, while some forms of irregular settlements may be completely illegal, others have attributes of legality. (16)
The settlements that receive the most public attention are the closely planned and highly organized overnight invasions involving hundreds of families. Many squatter settlements, however, develop gradually, one household at a time, as encroachments on otherwise legally developed neighborhoods. (17) The most common form of these irregular settlements are unauthorized land developments, which are often found on private agricultural land on the periphery of cities. (18)
Formal Titling Programs
In light of these unique phenomena, "formalizing property rights" may have many meanings, and may represent a more or less significant change, depending on the initial circumstances.
The range and complexity of tenure systems ... demonstrates that it is simplistic to think of tenure in black and white terms of legal or illegal, since there is generally a continuum of tenure categories within most land and housing markets. In many countries, there may even be more than one legally acceptable system operating.... The coexistence of these different tenure systems and submarkets within most cities creates a complex series of relationships.... (19) Although the transfer of property to squatters is often referred to casually as "titling," land is...