WORLD ECONOMIC FORUM SAO PAULO, BRAZIL October 2004 PROPOSAL TO IMPROVE BANKABLE PROPERTY RIGHTS THE PROBLEM: In developing countries, and particularly in Latin American, the link between owning property and access to credit is broken. The affects of this are difficult to overstate. Lending risks are higher. Small and medium-sized companies do not have access to credit. The structure of interest rates is higher and therefore so is the cost of capital. And investors, both domestic and international, are hesitant to invest when interest rates are high and bankable property rights are weak. The causes of this problem occur across the chain of laws and institutions that are supposed to give life to property rights and enable these rights to play their normal role in a market economy. The chain includes the cadastre, or mapping system of the country; the property registry office; the courts; and the laws that determine how these institutions interact. To the extent that there is a pattern to the problems, it is that the administration of justice in property matters is uniformly weak in developing countries. Little progress has been made in reforming property rights in developing countries. There are many different reasons for this. They range from opposition from lawyers and notaries who fear that simplifying procedures will result in a loss of business, to the crowding out of the reform agenda by banking reform in recent years. There has been progress in land reform, which increases the number of properties with legitimate titles. However, this only adds to the problems if the new titles cannot easily be registered or if they don’t provide the new owners with at least some access to credit. THE PROPOSAL—To Develop a Set of Standards to Measure the Quality of Property Rights in a Given Country The absence of standards or principles regarding the secured transactions framework makes reform difficult. Since so many things can go wrong, there tends to be a lot of finger pointing, with property owners blaming the notaries, notaries blaming the registry office, the registry office blaming the courts, etc. Problems can occur in any of the links in the chain, so objective standards are required to assess the functioning of the secured transactions framework. These standards would serve as a guide to assess the quality of the country’s cadastre, its registry office, the law that determines how information from the cadastre is reflected in the records of the registry office, the effectiveness of the enforcement process, etc. Once standards are in place, one important barrier to reform is removed. The debate moves from differences of opinion on what is broken to how to fix it. This is precisely what happened in bank supervision. In the pre-Basle principles days, the debate between
developmental experts, who were keen to eliminate the scourge of banking crises that was washing across the developing world, and local banks and authorities, who were not anxious to admit how undercapitalized their banking systems were, was unfocused. The development experts promoted higher provisioning and capitalization ratios, without being able to point to standards in this area and the local authorities denied anything was wrong with their systems. After the Basle standards became available, it became easy to assess what was wrong and the debate had no where to go but to focus on fixing the problems that the application of the principles revealed. Principles serve many purposes. They can be used to measure how each part of the chain is functioning, therefore informing officials and development agencies on the priorities for reform. The results of diagnostic studies applying the principles provide valuable information to potential investors. And the principles can easily be transformed into a numerical scoring system to measure one country against another, thereby creating a pressure in favor of reform. THE BENEFITS Better access to credit. If homes and factories can be easily and effectively pledged to support the granting of credit, more homeowners and businesses will have access to credit. Lower cost of capital. A loan backed by the security of a house, factory or building is a more secure loan. Since most loans require collateral (this is true even in countries where the framework for secured transactions does not work well), making the collateral system work reduces the whole structure of interest rates. Safer, sounder banking systems. When banks can collect their loans, there are fewer bank failures. Greater home ownership. Obviously. Improved mobility of labor. If there is certainty of ownership, people are confident to buy a house from the owner. It breaks the chain of being born, raised and dieing in the same house that is prevalent in many under-developed countries. Lower transactions costs. Simplified, automated registry systems cost less to administer. Increased property tax revenues. The same records that are required to demonstrate who owns what serve as an indication of where to send the property tax bill. Property taxes are arguably superior to sales based taxes, which tend to be regressive, and to income taxes, which are difficult to collect. Better urban and regional planning. If you know where the homes are and where the factories are, you know where to run the electricity wires and where to put the water and sewerage pipes.
COMMON OBSTACLES
Notaries and lawyers fear simplified procedures. It is more difficult to charge high fees for services that the public perceives as simple. However, the fear of lower revenues for professional services is probably overstated because the increase in the number of transactions would balance the lower transaction costs. Acceptance of the status quo. If you live with something long enough, you begin to regard it as normal. In many developing countries, secured transactions have never worked well, so there is not a lot of pressure for change. The reform agenda was occupied with banking reform. When banking crisis threatened in the 1990s, most countries substantially reformed their central bank and bank supervision legislation. This was always a difficult process, because the old legislation had usually existed for many years and reforming it revealed solvency problems in many traditional economic groups. These reforms crowded out secured transactions reform during the 1990s. Procedural law is hard to change. Legal procedures in many countries make it difficult to enforce mortgage guarantees. These procedures often permit the filing of repeated frivolous challenges to a legitimate foreclosure. Lack of effective lobbying by stakeholders. Although both lenders and borrowers stand to gain substantially from secured transaction reform, they have not lobbied hard to get it.
RECOMMENDED NEXT STEPS Create a principles or standards-setting group. Creating the right group is crucial. The group must be considered to be knowledgeable and impartial and representative of different points of view and countries. It also needs to be able to work expeditiously. (It took ten years for BIS to develop the first bank supervision principles and it is taking even longer to produce Basle II.) The group would draft the principles, put them on a web page along with detailed instructions about how to apply them, and possibly apply them to selected countries that show an early interest in reform. Candidates for inclusion in the group include: Development banks, commercial banks, finance ministries, think tanks, the Institute for Liberty and Democracy, the Center for the Economic Analysis of Law, the Group of 30, the Institute for International Finance, registrar authorities, legal scholars, realtors’ associations, title insurance companies, property developers, Where to start: Several institutions maintain checklists that they use to assess, for example, the quality of services in a registry office. Developmental agencies have some, so do title insurance companies. These checklists could help guide the process of developing principles.