Commentary

China’s New Property Rights

By Peter F. Schaefer
This article appeared in Apple Daily (Hong Kong), April 14, 2004.
Recent political tensions between Hong Kong and Beijing are interesting but have had the unfortunate outcome of overshadowing the truly revolutionary actions just taken the taken by the National Peoples Congress (NPC) in Beijing. The political issues are an internal matter, but China’s rapid, broad-based modernization is of global interest. After this action by the NPC, the way to China’s modernization is now quite clear, if not straight and smooth.

There is a piece missing from every developing country that has been the foundation of every developed country’s economic modernization, and this is individual property rights. Hong Kong, itself, has benefited from having a modern system of property rights. The history of those rights is a continuous line extending the 16th Century — when Henry VIII sold off a half-million prime acres of England to raise money — to today’s Basic Law.

Henry changed forever the basic relationship of state and land. Previously, he owned every square inch of England. He granted his lords and the princes of the Catholic Church user — rights not titles — and, so, when he dissolved the 400 Catholic monasteries, their land reverted to Henry, the true owner. However, when he sold that land to individuals, he gave them clear title and, so, changed the relationship between the state and private property forever.

Because the process of instituting property rights was nearly completed in Europe and the U.S. over a century ago, it is not a part of daily life there. Nevertheless, this history is important because there are still four or five billion people — a quarter of those Chinese — who have not benefited from such systems. Even Chinese with stable occupancy rights often have even fewer rights than squatters in, say, Peru or Ghana or the Philippines. And, like squatters, the effect of this situation is that this keeps them mired in poverty with little chance to escape, save migrating to the West, because their untitled homes are their savings and so their capital is “dead.”

In one week last month, it was announced that my colleague, Peruvian economist Hernando de Soto, would receive the Sir John Templeton Prize, the Milton Friedman Prize and a royal order from the King of Thailand. What de Soto has done to earn this acclaim is to reconstruct the process for the creation of modern property rights, a process used by all modern countries. Further, he has developed a way to condense and then methodically apply these techniques to developing countries. Presently, our Institute for Liberty and Democracy has produced implementation plans for four countries — Peru, El Salvador, Haiti and Egypt — and is in various stages of work in another 26 countries. In Peru, the first country de Soto tackled, the World Bank rates the project as one of the most successful it has ever financed and it is really unfinished only because of the Toledo government.

De Soto calls the systems of legal property rights the “hidden architecture” of modern economies. The reason it is hidden is that today in all modern countries, the “architect’s” job is long finished. Their systems now run smoothly with the process broken into pieces and each piece handled by specialists who no longer see the overview of the process.

Alas, there is no Little Red Book of capitalism. No blueprint. It is, rather, a system of laws that set the rules of the economy, which then grows by means of the individual acts of millions of entrepreneurs who follow those rules and take their capital into the marketplace to create more capital.

To maintain its furious pace of growth, China’s need for capital is enormous. Many believe China will not be able to import enough capital in the coming decades and will be forced to slow its economic expansion and modernization. However, China took an enormous step on March 14. Vowing to “put people first,” the NPC passed a constitutional amendment stating that “private property obtained legally shall not be violated.” If this step is done properly, it will, indeed, be of enormous value to the people of China. Property is, as noted, people’s savings, and now, for the first time, these savings will be liquid. It represents capital that people can use to improve their lives.

But these individual savings will be a part of an enormous pool of savings that will benefit China as a nation and the Chinese people collectively. Our institute estimates this pool in China to have a value of several trillion dollars. This capital can and will play an important role in the rise of the Chinese economy and will give enormous secondary benefits to Hong Kong.

But, again, the key issue for China is that the granting of property rights be done properly. This is the key to the successful economic utilization of this potential new capital. What de Soto has learned is that titles are not enough. In fact, in his home country of Peru each piece of property has on average of over 20 titles. The problem is that none of them is respected by the law and that is the key. It is good property law that validates titles, not the reverse.

There are two pieces to making this historic transformation work for China. First, drafting the laws and, second, determining what property has been “obtained legally.” The history of past success offers China an unambiguous roadmap to effect these changes, and the good news is that history shows that this can be done in a uniquely Chinese way, not through ideas or methods imported from outside the country.

  • Writing the Laws: Throughout history, in every part of the world, people have arranged rules among themselves to gain mutual respect and protection for their property. It does not always create a perfect system but the basic elements of this “people’s law” is similar in country after country. People are more alike than they realize. And what every modern country has done is take all these customary rules and reconcile them in a way that allows the government to write a single national law. This is what the U.S. did in the 18th century, as well as what Japan did in the 20th century, and the similarities are such that Japanese and Americans can easily invest in one another’s property.
  • Recognizing the Owners: No country has ever instituted modern property law by moving people off the land they live on. In fact, the history of the U.S. — the first country to institute universal property rights — is one of accommodating squatters’ property claims. Preemption — the legal principle of letting people claim ownership by improving any land on which they are able to live — was legally established within a few decades of the first settlers coming to the U.S. from England in the early 17th century.

If China manages this transition in a way that respects current Chinese practices and patterns of ownership, their new economic miracle will dwarf what has happened so far.

Peter Schaefer, senior fellow at the Institute for Liberty and Democracy, has been an adviser to Hernando de Soto since 1984.