Property ownership by the non-rich in developing countries

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Property ownership by the non-rich in developing countries

The West has a highly developed sense of commerce and property.

The British Companies Act of 1862 was the harbinger of things to come. Mutual Companies, where seven or more persons assembled, could draft articles of formation and include the use of the word “Limited” to warn others that the liability of the company was limited to the value of the company, not the worth or assets of its owners.

During this era, property ownership in England was undergoing tremendous transformation. This allowed (in small increments at first) individuals to have recognizable and enforceable titles to their land. This in turn meant organized methods to deal with using land as collateral, thus unlocking the capital contained in these property rights. Over a period of time, the process of formalizing corporations, and applying for permits, became a centralized “not so difficult” process, often involving merely filing an application.

In the United States, miners and farmers settling the lands west of the Mississippi river landed in areas that had not been surveyed, let alone zoned, mapped, and parceled-out as they would be in the future. To cope with the realities of frontier life they developed land associations. Property associations were formed, complete with rules and regulations for settling disputes. These associations held regular meetings at familiar bends in a river, or gathered at recognizable landmarks where claims would be staked and recognized, disputes aired and settled, and enforcement meted out, usually by running the varmint off, or by more, um, permanent means.

The government was not prepared to deal with these “squatters” until it realized most of the constituents who voted for them were squatters. At that point the “social contracts” were slowly codified into formal property law, and the recording and perfecting of deeds was accomplished. Once this was done, it became easy for the former squatters to buy and sell land, and unlock the capital innate in a properly regulated and documented environment.

Not so for the non-rich (the rich always have access to the legal system) in some developing nations. For example, according to the Peruvian economist Hernando de Soto, in the Philippines it takes 13 to 25 years and 168 different steps in order to have a house registered. In Egypt it takes 77 steps involving 31 offices to obtain a license for building, and the ownership of 92% of all property occupied by the non-rich in Cairo is not formally recognized by the government, though that drops to 83% in the rural areas. In Haiti, it takes 112 days of 111 tedious visits to officials to implement a deed of sale.

This does not mean that the ownership of the land in these areas is unclear. DeSoto describes taking a walk one night in the rice fields of Indonesia. As he walked the fields, the owners’ dogs would bark at him. DeSoto noticed that, as he went from one portion of a field to another, one dog would stop barking and another would start. Even the dogs knew the boundaries of their master’s plot of land!

Thus, instead of the illegal versus legal status available to the rich and to corporations, what you have for the non-rich in these areas is “extra legal,” because there is no other realistic option. The significance of this lies in the fact that the non-rich cannot use the land they occupy as capital, because it is outside the legal system.

Thus, in our experience, the exercise of due diligence in many developing nations may uncover a great deal of property and claims (even those of the rich, and of corporations) that cannot be documented in a central registry. In these environments, even more than in the West (where, we race to point out, it is still necessary to get out and kick the tires), we go and meet with the locals, and see what form of social contract may – or may not – exist with the land and the businesses in the area.

Without this kind of local investigation by someone familiar with both Western business practices and local custom, no report has validity in these areas and circumstances.

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