Most economists acknowledge that specialization, exchange, economic growth, and poverty alleviation depend on the two conditions set out in The Coase Theorem:
- If there are well-defined and well-enforced property rights, and
- If transaction costs are low, then
- scarce resources would tend to move toward their most highly valued use (i.e be allocated efficiently).
Without these conditions being met, people are reluctant to sign contracts, make deals, and invest for the future. And without investment for the future, the economy is unlikely to grow and people are likely to remain poor.
In a column for the National Post, Lorne Gunter points out that these conditions for exchange, investment, and growth are far from being met in Haiti, and have been for decades:
Because Haiti was then (and remains) without an impartial court system for defending property rights and had no means of registering title in land or buildings, banks were unable to lend money using property and possessions as collateral. By de Soto’s calculations, Haitians owned, in real estate alone, more than 150 times the value of all direct investment made by foreigners in the country’s history, but it was what he termed “dead capital.” Because they could not be used to acquire loans to open new businesses, build new buildings, buy new machinery, all these assets were “dead” to the people who owned them.
It’s easy to see how this lack of a functioning banking and land titles system has crippled Haiti’s recovery. While as many as 150,000 homes were destroyed in and around the capital, Port-au-Prince, alone — and 250,000 nationwide — only about 5% of Haitians had clear enough title their homes to obtain insurance. If you put everything you have into building a house that is then wiped out, but you lack insurance to rebuild it, it might take years to save up enough cash to start over — and years longer, still, if you have no work and have to pay to clean up the rubble of the old house, too.
If there were well-defined and well-enforced property rights (vs. the kleptocracies of so many developing countries), then people would have more of an incentive to invest for the future. This is a necessary condition for economic growth and the alleviation of such horrible poverty in Haiti.
But I despair about how long it might take for such conditions to evolve. Meanwhile, we try to help, we send resources (capital, skilled labour, food, clothing), and while our doing so helps keep many people from starving or dying of diseases, our doing so also does nothing to help promote economic growth and development.
Addendum: Ronald Coase recently turned 100 years old. His writing and his thinking have had big impacts on the economics profession. He was a deserved winner of the Nobel Prize in Economics.