Land Registration, Economic Development, and Poverty Reduction
One common objective of establishing secure private property rights in land, particularly in developing countries, is to reduce poverty. The World Bank and other international aid agencies have provided tremendous resources to improve land registration systems in many developing countries. As suggested by de Soto (2000), secure land tenure reduces unproductive spending on protection of land rights and lowers the risks of expropriation by the government. Both factors encourage investment in land improvements, thereby increasing the net worth of the property. Property owners can use land as collateral for credit. Reliable information on ownership provided by the registration system reduces the risks of lending, thus expanding the scope of bank loans to facilitate property owners’ entrepreneurial activities and create new wealth. Klaus Deininger and Gershon Feder review the existing evidence on the validity of this logic.
The authors argue that strong tenure security appears to be connected with positive investment effects when other favorable conditions are also present. They cite such examples as the doubling of likelihood of soil conservation in Uganda, increased house renovations in urban Peru and Argentina, and higher investment in Ethiopia shortly after the issuance of land certifications. Land registration also seems to facilitate the development of land rental markets, although its impacts on off-farm employment remain uncertain. In Guatemala, for example, it is estimated that improving tenure security would increase total rental areas by 63 percent. In Vietnam, holders of registered long-term use rights have a higher tendency to rent their land to unrelated people than do land users who possess other tenure forms.
In terms of the impact on credit access, Deininger and Feder found that the expected benefits of increased tenure security are limited, especially among the poor. In Paraguay observable effects in the supply of credit were limited to medium and large landowners. Land registration in Peru increased the possibility of obtaining loans from state banks only. No effect of land registration on credit access was found in Buenos Aires.
Why did credit-related benefits of titling fail to live up to expectations? Deininger and Feder suggest deficient institutional designs for private property protection and credit markets as one reason. In some developing countries, government institutions for enforcing registered land rights are weak or even absent. Credible commitment from the state to desist from expropriation does not exist. Even if there is such commitment, it can be displaced overnight due to changes in political regime. Corruption and bad governance of the land registry also lead to asymmetric access to information, thus facilitating land grabs by elites and undermining the credibility of the entire system.
In terms of credit markets, imperfections and lack of liquidity are prevalent. In rural areas where farmers are subject to such risks as weather, flooding, and other natural phenomena, collateral does not protect lenders from default by many borrowers at once. Farmers mostly need short-term loans, which are often provided by informal credit markets in most developing countries. Because collateral is normally not required for short-term credit, the benefits of registration do not justify its costs. In some cases high registration costs due to inefficiency or inappropriate standards have led to the expansion of semiformal credit systems or reversion to informality. Risk rationing and fear of losing real assets also dampen the willingness of potential borrowers to use titles as collateral.
This paper was presented at the Lincoln Institute’s annual Land Policy Conference in 2008 and is Chapter 11 of the book Property Rights and Land Policies.