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many of the institutions created in the nineteenth century for formalizing property and businesses have since become outdated, when not captured by private interests.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.