The other path

     The Peruvian economist Hernando de Soto has been praised by Francis Fukuyama, Margaret Thatcher, Milton Friedman, and Bill Clinton, and travels the world spreading his central idea: that governments in developing and transitional countries should provide titles and property rights to those in informal settlements, to unlock the power of land ownership as a path to economic development. The de Soto formula, applied from Peru and Vietnam to El Salvador to Egypt, and more recently considered in places such as Afghanistan and Pakistan in part as an economic answer to terrorism, suggests there is $9 trillion in "dead capital" in the world's slums and shantytowns, and many aid agencies including the World Bank and USAID have supported programs in legalization and formalization. But, Lincoln Institute visiting fellow Edesio Fernandes asks, is the de Soto solution overly simplistic? Does it deliver what it promises?
     Research suggests that many of those awarded titles fail to gain significant access to credit, Fernandes says. Title registration and legalization do not automatically lead to regularization, the consolidation and sustainability of settlements, or to reduced poverty, unless governments follow through with infrastructure, education, and support services. Giving titles to the poor may not be a silver bullet after all, according to a 2006 story in The Economist. One additional troubling issue is what Fernandes calls "eviction by the market," as when soon-to-be-titled properties in Rio favelas are turned into condos – or a view-rich hilltop hotel complex, as one German developer has proposed. Informal land prices shoot up at the mere mention of a legalization program, and there is some speculation that the promise of titling is actually spurring increased squatting.
     "Titling is crucial, but alone it's not enough," Fernandes said at a Lincoln Lecture March 25 at Lincoln House (a video of the lecture will also be posted shortly at the Lincoln Institute Web site Lectures page). He suggests the combination of titling programs and preventive policies enabling legal access to land and housing; a more calibrated socio-spatial integration of consolidated informal settlements; and different kinds of titling such as lease-hold, special zones, or rental contracts, and a distinction between private and public land, that allows governments to better support the permanence of the communities. Also not to be overlooked: the self-organizing systems, predicted by Jane Jacobs, that emerge in informal settlements that are left informal, from building codes to rights of way – even the presence in some cases of an unofficial notary, as noted by Martim Smolka, director of the Program on Latin America and the Carribbean at the Lincoln Institute. De Soto in effect overlooks the fact that the consolidation of informal settlements are often associated to the emergence of a vigorous and quite stable property market supported by a surrogate titling system. While it may be too early to tell whether legalization and land ownership leads to more stability and wealth, Fernandes said, the question is whether the advantages of the de Soto approach outweigh the problems.

Connecticut dreaming

     As David Owen in The New Yorker notes, the challenges just keep piling up in advance of the climate summit to replace the Kyoto treaty in Copenhagen at year’s end. The global recession is providing a pause of sorts, as slowing economic activity translates to reductions in fossil fuel use and greenhouse gas emissions. But it remains unclear how solar, wind, and nuclear energy are ever going to increase beyond the current fraction share of energy sources, much less replace coal and oil. Green jobs will be competing with the carbon-based economy’s recovery. Canada has deemed that its greenhouse gas emissions targets are impossible. More fuel-efficient and hybrid cars aren’t much help if they incentivize greater levels of driving.
      Still, as Owen, author of the forthcoming book “Green Metropolis,” is well aware, there is one area that continues to hold out promise: better land use planning, coupled with transportation policy, for energy-efficient metropolitan regions and reduced emissions. Earlier this month at a Lincoln Lecture (full video here), Heather Tremain, the Lincoln-Loeb Fellow for 2008-2009, examined three case studies in how climate policy is being implemented on a regional basis. The state of California leads the way with its pioneering climate legislation and a relatively top-down structure, empowering metropolitan planning organizations, encouraging collaboration, setting targets, and providing incentives for smart growth. Next she looked at the experience of British Columbia, where major cities such as Vancouver and its Metro Vancouver 2040 plan, meet in the middle with regional governments to build capacity and collaborate.
      Another promising initiative, Tremain said, is a voluntary cooperation among municipalities in southwestern Connecticut. The Greater Bridgeport Emissions Reduction process, an initiative of the Regional Plan Association in partnership with the Lincoln Institute of Land Policy, was initiated to identify the least carbon-intensive land development and mobility strategy to accommodate the projected growth over the coming decades for Connecticut’s largest city and the surrounding towns of Easton, Fairfield, Monroe, Stratford, and Trumbull. An initial report provides the first comprehensive build-out of the region and a carbon analysis of a series of growth alternatives. The goal is to assess the types of land development and transportation infrastructure decisions necessary to achieve the land use and transportation segments of the state’s carbon emissions reduction goals. On the regional scale, the key questions are where to drive future development and build on current assets, and whether a system of transfer of development rights and revenue sharing might be possible.
      The Greater Bridgeport initiative is among several projects at the intersection of climate change and land use under the Department of Planning and Urban Form, chaired by Armando Carbonell. Another is an advisory role in planning carbon-neutral development of Superstition Vistas, a large area of transitional state trust lands outside Phoenix.

Slums, order and titling

     The film Slumdog Millionaire has brought new attention to the world's slums, where the UN says 1 billion people currently live, with the potential to double by 2030.The Lincoln Institute has had a longstanding interest in informal settlement. Fellow Ciro Biderman is quoted in this Boston Globe Ideas section piece, "Learning from Slums," noting the relative advantages to creating new settlement compared with upgrading shantytowns and the like. And last month, the first spring Lincoln Lecture, by Benito Arruñada, professor of Business Organization at Pompeu Fabra University, had as a focus one critical legal framework for formalizing institutions: the titling of property.
     Arruñada presented part of his new book Building Market Institutions: Property Rights, Business Formalization and Economic Development, to be published this year by University of Chicago Press, in which he develops a theory of formalization institutions, proposes an analytical framework to improve their design and regulation, and reviews common policy failures committed when they are introduced in the developing world.
     Formalization has been playing an important role in economic development. In the last few decades, both theoretical discussions and policy have focused on the role of institutions, following the works of Ronald H. Coase and Douglass North. In particular, the influential writer Hernando de Soto made popular the idea that development would benefit from making access to legality easier. It was thought that, if small owners of land had good titles, they would enjoy better incentives to invest and could use their land as collateral for credit. Similarly, if entrepreneurs were able to formalize their businesses easily, they would benefit from operating them as legal entities. For instance, they would have access to the courts for enforcing contracts and settling disputes. They would also be able to get credit and invest more, and firms would grow faster and be more productive.
     These ideas, reminiscent of widespread arguments in nineteenth-century Europe, have motivated thousands of reform and aid programs in developing countries, where the state of legal institutions is often inadequate. They have also influenced policy in developed countries, where many of the institutions created in the nineteenth century for formalizing property and businesses have since become outdated, when not captured by private interests. Outcomes from these efforts have often been disappointing, however, failing to fulfill their promise of economic growth and even that of improving the institutional environment.
     Arruñada attributes these failures to both inflated promises and poor understanding of the role of formalization institutions, which has often led to bad policy. As de Soto himself suggests, developed societies may have forgotten the blueprints of their basic institutions. By reviewing the structure of titling systems, he explored the rationale for both real property and business registers, with these questions in mind: when is formalization valuable, and how should it be organized. Failure to respond adequately to these two questions is behind common mistakes in institutional development, he argues, such as building universal property titling systems where there is little demand for titling, disregarding the minimum quality that formalization institutions must provide in order to be socially valuable, and confusing cause and consequence when assuming that informality is causing poverty instead of being well adapted to the low value of assets and the fixed costs of formalization processes.