May 24, 1990

May 24, 1990 | Backgrounder on Trade, Economic Freedom

Private Property: The Basis of Economic Reform in Less DevelopedCountries

(Archived document, may contain errors)

770 May 24,1990 PRIVAm PROPEXTI THE BASIS OF EXONOMIC REFoRlM IN LESS DEvEu3pED CoUNTRlEs INTRODUCTION The problems of economic growth in less developed countries are taking center stage among policy makers in the United States and in its industrial ked a l lies As Eastern European countries and Nicaragua reject communism and as South American countries attempt to protect fragile democracies, the need for a strong economic base is crucial. Equally crucial, the people of these countries must have hope that th e ir hard work and efforts finally will bring them and their families a better life Most policy makers at last seem to realize that only free markets can produce prosperity in these countries. But too many policy makers still pay too little attention to the basis of a free market: the right of individuals to private property.This right means that specific persons can own, use, or dis pose of material goods exclusively as they see fit without the approval or in terference of other indiviilui& or of the govern m ent.This means that all ex changes of property must be based on the mutual consent of the original owner and the prospective buyer. Such a system of free exchange defines the market. fying life. When property rights are denied or their protection is not e nsured there is little incentive for individuals to engage in productive work.

Profit and Loss. Similarly, property rights are essential for business ac tivity. Entrepreneurs must own shops and buildings, stocks of goods, tools machines, and raw materials in order to produce goods and services for the public. Because the promise of profit and the risk of loss fall on specific in Individuals seek material possessions ai a means to a more secure and satisdividuals, owners have a strong incentive to use their property in the most productive manner possible Creating a Middle Class. The economic development of the West is based in large part on the establishment of private property rights and the free market system.This development has allowed, for the first tim e in human his tory, the vast majority of people the opportunity to escape abject poverty and to live a secure, comfortable existence.--And it has created a vast middle class in Western Europe, North America, various Asian countries, and the rest of the wo rld.This should be the model for less developed countries.

Most poorer countries fail to protect the property rights of their people. In the case of communist countries, private owpers~p of businesses is restricted to very small enterprises or banned entir ely. In other less developed countries property rights are threatened or unprotected. Governments some times seize land, business enterprises or banks from private owners, allegedly for the "public good Often the wheels of the legal and judicial system ar e not turned by the rule of law but rather by bribes or political influence. Small businessmen and landowners have little protection against arbitrary govern ment action. Inflation is a means by which governments pay their bills by printing paper currency, and inflation has the effect of cutting the purchasing power of people's savings, robbing them of their property by indirect means.

The right to private property, and especially to productive business assets offers individuals the opportunity to control t heir own lives and to seek their fortunes through entrepreneurial activities.The market system of free ex change is a mere extension of the right of individuals to control property. As policy makers in the West seek to help Eastern European and other less developed countries to climb out of poverty and create growing, prosperous societies, they should promote as the first reform the establishment and protection of private property rights for all citizens Removing Incentives. To promote private property rig h ts, the U.S. and its Western allies first must avoid policies that reward countries that violate such rights. When America's Agency for International Development (AID) or in ternational organizations, such as the World Bank or International Monetary Fund ( IMF give loans and grants to countries that are poor because of their own policies, they simply remove incentives for reform. When America's Overseas Private Investment Corporation of the World Bank's Multilateral Investment Guarantee Agency insures inves tments by foreign businesses against loss due to nationalization by the host governments, they protect cor rupt governments from the economic consequences of their failed policies.

The U.S. should develop an Index of Economic Freedom to establish goals for American development assistance. The Index should set out the specifics of policies for developing countries to protect private property rights, for ex ample, by assuring access to an independent judiciary system when rights are violated or assuring that owners can sell their property for whatever price they can obtain through mutual agreement 2 Finally, the U.S. should refuse new funds to any international development organization that fails to place the protection of private property rights as one of it s principle means of promoting economic growth in less developed countries PROPERTY RIGHTS IN WESTERN HISTORY The importance of private property rights his been recognized throughout human history. The Greek philosopher Aristotle (384 322 B.C rejects com m u nism of property, observing: that which is common to thegreatest number has the least care bestowed upon it. Everyone thinks chiefly of his own, hardly at all of the common interest; and only when he is himself concerned as an individual. For besides othe r considerations everybody is more inclined to neglect the duty which he expects another to fulfil Aristotle maintains that since all men pursue their own self-interests, in dividuals will best care for that which they own personally. In the ancient Roman w orld, private property was protected by a sophisticated system of laws, administered and enforced by relatively impartial magistrates a major cause of the rise of Western Europe from the poverty of the Dark Ages following the fall of Rome in the fifth cen t ury AD. to the wealth and prosperity of the industrial revolution. Under the feudal system, armed barons or lords ruled over peasant farmers who worked the land and were re quired to turn over a large proportion of their produce to their masters. Fur ther , the peasants were subject to periodic, arbitrary expropriations and spe cial levies. Peasants had little incentive or opportunity to produce anything beyond what was needed for their own subsistence. As the power of the feudal lords arbitrarily to exprop r iate property was curbed, peasants more and more became subject to a set percentage of taxes rather than to forfei ture of their produce.This meant that peasants had guarantees that they would be allowed to keep most of the fruits of their prodpctive effo rts and could become more prosperous the harder they worked Rewards of Hard Work he reestablishment of private property rights was 1 Politics, Bk. II; Ch. 3,1261 b 33-

36. Translation by Benjamin Jowett. In Richard McKeon, The Bmk Workp of Aristotle (New York Random House, 1941 2 For a good ddon of the development of property

ts during this period, see Nathan Rosenberg and L.E. Budzell, Jr How the WeSr Gm Rich: The Economic Transfomtation of the Inmcsbial Wodd (New York Basic Books, Inc 1986 especially Ch apter 4, The Evolution of Institutions Favorable to Commerce 3 PRIVATE PROPERTY RIGHTS The basis of the free market system, from which all other market principles derive is the right of individuals to own private property.This means that the owner has the exclusive right to use or dispose of certain material goods as he sees fit without the permission or interference of other individuals or of the government.-An individual also might have property in ideas, for example, a patent on an invention. This means that the owner can determine who uses or produces a new product, a production process, or a service. Since owners have the exclusive right to their property all exchanges of property between individuals are based on mutual consent of the owners. No person legitimate ly may use force against another to obtain property.

Property might be acquired for two different, sometimes overlapping reasons First, property might serve directly the personal needs and enjoy ment of individuals. Most societies, even sociali st ones, allow individuals to own clothing, furniture, food, televisions, and other consumer goods. Proper ty for personal use might also include land or a house. When governments restrict access to property, for example, by restricting imports of what th e y deem "luxury" items, they remove a primary incentive for hard work and productivity High salaries in less developed countries mean little if people have nothing to purchase A second reason to acquire property is for productive use and exchange. A carpen t er acquires wood, tools, and a work shop in order to make furniture which he sells for a profit A merchant purchases goods of various sorts from different locations in his countq or in the world and brings them together in one location for sale to custome r s.The customers purchase both products and the convenience and savings of time from securing the goods at one loca tio Prices and Property An owner may dispose of his property as he sees fit. Therefore, if he trans fers his property to another, the exchan g e must be based on the mutual agree ment of both parties. Ownership thus involves the right to part with property only for a price or under terms that suit the owner personally.There is no correct" or "just" price for any good, service or labor. The price is-simply what a buyer and seller agree to in a given exchange. If the owner considers a price too low, he can keep his property.

Government controls over prices rob individuals of the full use and enjoy ment of their property and undermine a free economy . In most African countries, for example, farmers are forced to sell crops to governments for a small fraction of the price they could receive in the free market. Sometimes the government price is below the cost of production. In the African countq of Cam e roon, for example, in 1986 the government paid farmers only $150 per ton for their crops, even though the world market price was between 4 $2,250 and $4,500 per ton3 In such countries farmers thus remain poor and food production is low Competition and Ris k Since in a market system, capital, land, tools, and other factors of produc tion are owed by individuals, individual effort is requbed to commit such property to the production of goods or services. Further, in a free economy in dividuals may enter or le ave the market as they wish.This gives rise to com petition.

Entrepreneurs risk their property to make a profit by providing goods and services to the consumers.The existence of numerous entrepreneurs gives strong incentive for each to work as efficiently as possible.Those who are less efficient will fail to attract customers. Their investment in productive proper ty will not yield a profit. They will lose money and have a strong incentive to take up some other enterprise.

Determinations of what goods or services will best meet public demands and make profits are usually best made by individual local entrepreneurs who are free to risk their own property, to act quickly, and to utilize their knowledge.

There is never a guarantee that the public will purchase enough of an entrepreneur's goods and services to cover his investment or yield a profit.

When individuals own property, the risk as well as the profits are limited to the owners.This creates the strongest incentive for the best use of one's property.Th e results of economic misjudgments by businessmen will be limited to the owners of an enterprise. In a centrally-planned economy, the mistake of one bureaucrat can bring misery on the entire country. In the Soviet Union, for example, the government contro ls the production of nearly all goods, including soap. Last year, central planners cut soap imports at a time when the major soap factories were closed for renovations. Because no alternative sources of supply were permitted, soap shortages resulted.

When governments own productive assets, there is little incentive for the employees to manage assets in the most productive manner. The employees personal possessions are not at risk. And a large profit does not go to the emp1oyee.h the Soviet bloc, theft of materials and goods-by.emp1oyees _from state-owned enterprises is rampant, in large part because no specific in dividual owner suffers directly from such losses.

The market is an economic laboratory. Businesses experiment by offering goods and services to the public, hoping to discover a way to make a profit.

Consumers experiment by purchasing different goods and services, hoping to discover ways to satisfy their needs 3 Melanie S.Tammen, The Fake of State Agriculture b SuMaharan Africa unpublished dra ft, 1988 5 Sharing the Risk Ownership of specified properties, especially businesses, need not be limited to one individual. A number of persons might own shares in property If two persons, for example, each invest in half the cost of an enterprise, each w ould assume half of the risks but also would receive half of the profits. In a normal arrqngement each share in an enterprise itj seyerable. This means that theowner can sell his share to someone else. In stock markets shares in enterprises are bought and sold too large for most individuals. Further, joint ownership spreads the risk of doing business among a number of persons. An individual might invest in various enterprises so that if one fails he will not lose all of his assets.

When joint ownership wit h severable stock is not permitted, production can be discouraged. In Yugoslavia, for example, the workers technically own many factories. But they cannot sell their share of an enterprise if they leave. The Yugoslavian economy therefore has not been able to adjust well to changes in market conditions and currently is in very poor shape Joint ownership allows the creation of enterprises that require investments Legal Protection of Property Private property is a legal as well as an economic concept. A thief , for ex ample, while possessing stolen goods, does not hold it as property. His posses sion and use of it are illegal and he has no right to it.

Key to the working of a productive market system is the protection of private property by the laws, judiciary system, and government executive of a country. The laws, for example, define what constitutes a contract of sale or when an agreement is breached. An independent judiciary decides disputes over contracts objectively, based on the merits of the case in acc o rdance with the 1aw.The executive branch enforces the 1aw.This also implies strict limits on the powers of government. If the government is constituted to protect life liberty and property, it must be forbidden itself from violating the property rights of the citizens.

While most less developed countries outside Eastern Europe officially allow-private property and enterprise, the governments of many do not protect these rights. Conupt politicians control the legal and judicial systems for their own interes ts. Bribery and political influence help a privileged minority at the expense of poorer or less powerful citizens. In Peru, for ex ample, scholars for the Institute for Liberty and Democracy, a private economic research organization, tried to determine ho w long it would take an honest citizen to obtain a business license by setting up a small enterprise with two sewing machines. They received ten requests for bribes. They refused to pay eight of them, but had to pay two or they would not have received the l icense. It took a researcher 289 days of full time activity to ob tain the license, the delay in large part because bribes were not paid 6 A similar effort by the same group found that to obtain title to an aban doned piece of govsrnment land and permissi o n to build would take six years and eleven months SOCIAL BENEFITS OF PROPERTY There ate anumber of important social as well as eibiomic benefits that tend to result from private property rights. Property gives individuals a realm of personal liberty, cont r ol, and autonomy over their own lives, free from direct interference by other individuals or the government. Citizens with secure property rights are less likely to seek special handouts or favors from the government, usually at the expense of otherkitize n s. On the other hand when property rights are limited or less secure, when the economic fates of in- dividuals are in the hands of the government, citizens are more likely to seek political power as a means to secure their prosperity. This will cause soci al conflict and discord.

The material goods of society are best cared for by private owners. Public housing, for example, tends to receive less care from tenants, since the government will take care of damage or problems in the apartments. When housing is privately owned, however, the owners bear the costs of any damage. No one will bail them out.They have a strong incentive to keep up their property.

Stability and Peace. Private property tends to create self-discipline in the owners. A merchant, for examp le, must open his store on time, keep up his in ventory, make his facilities attractive to his customers. Aud seeing the results of their efforts, property owners will tend to have a sense of personal efficacy and control over their lives and their fates. They will have a higher sense of self-esteem and pride in their homes or their businesses. A society of citizens who take personal responsibility for their own lives will be more stable and peaceful, with individuals respecting the rights of others.

Final ly, citizens with private property rights protected by the government will have a stake in a stable society.They will likely take care to see that the powers of government are enough to constitute a threat to their freedom. An orderly yet free society wil l be in their self-interest VIOLATIONS OF PROPERTY RIGHTS In communist countries, private ownership of businesses usually is limited to very small enterprises or banned altogether. In other less developed 4 Hernando De Soto, Thc Other Path: The Invisible R evohtion in the Third World (New York Harper Row 1989 7 countries, property rights, while nominally recognized, are often violated This creates uncertainty and severe disruption of the economy.

The most destructive violation is the nationalization or expro priation of private property by the government. In such cases, the government seizes enterprises or industries, sometimes giving usually inadequate compensation to owners, sometimes giving nothing. Often such takeovers are literal armed robberies committe d by the government. When the government of Peru tried unsuccessfully to nationalize private banks in 1987, troops had to be sent in to eject owners and workers. When the government of Mexico nationalized private banks in 1982, it seized all foreign curren c y deposits, giving the bank customers, the owners of the currency, Mexico pesos in exchange at a small fraction of the real market rate. As a result of this action, Mexicans smuggled tens of billions of dollars out of their country to prevent them from fa l ling into the hands of the government This added to Mexicos economic crisis at that time Last month, Mexican President Carlos Salinas de Gortari, as part of his economic reform efforts, announced his intention to reprivatize these banks Inflationary Theft . Governments, especially in less developed countries often use their control over economies to deprive people of their property through inflation of the currency. In nearly all countries governments control the printing of currency. Most salaries, public and private are paid in money.

Money serves as the medium of exchange in most economic transactions.

And much of peoples savings is held in the form of money deposits in banks.

When governments cannot raise enough revenue to meet budget needs they someti mes simply print up enough currency to meet their expenses. But when the amount of currency in circulation increases, there is greater demand for scarce goods and services, forcing prices to rise Thus, if a govern ment inflates the money supply by 100 per cent in a year and prices rise at a similar rate, the saving and purchasing power of the people are cut in half.

The government has in effect stolen half of its peoples money.

When the currency of a country is so de based, the economy usually grinds to a halt since people avoid holding currency. During the last four years Ar gentina has seen idation rates at times exceeding 2,OOO percent. In 1985 Bolivian inflation hit 50,OOO percent A variation of this form of prope rty rights violation is found-in-the tax codes of many countries. Most codes levy higher rates on people with higher incomes.Thus, a worker making the equivalent of $1,OOO per year might pay 10 percent tax, or $1

00. A worker making $1J00 might pay a higher rate, say 20 percent, or $3

00. Aside from the questionable wisdom of penalizing people for being productive this form of taxation is opened to serious abuse If the government inflates the currency by, say, 75 percent, and the $1,0oO wage earners salary goes up by the same percentage, to $1,750, his tax bur den is now 20 percent. He is forced to pay $3

50. His real purchasing power goes down 8 CASES OF PROPERTY RIGHTS AND DEVELOPMENT As researchers look closer at less developed countries, examples of th e benefits of private property rights become apparent Peru In Peru, two housing settlements, the Mariscal Castilla and the Daniel Al cides Carrion, were built adjacent to one another during the same period of time. Both were founded by people of the same socio-economic background.

Yet the value of land in the former settlement is twelve times higher than in the latter; the value of the dwellings is 41 times higher in the first.The reason is owing to a legal difference in the classification of each settleme nt. Mariscal Castilla is legally a permanent settlement. This means that the government more or less respects the rights of the inhabitants to their property. The Daniel Alcides Carrion settlement is classified as a movable settlement This means that the rights of the inhabitants are f? less secure. The govern ment might move in and take the land at any time.

By not recognizing the rights of the people to their property, the govern ment robs the people of the full value of their land and homes. And it is p ar ticularly harmful that citizens with no clear title to their property cannot use such property as collateral to secure bank loans The African Sahel Desert A photograph taken in the early 1970s from the Landsat satellite of the African Sahel desert show s a 20-mile-wide dark green pentagon-shaped area standing out clearly against the lighter surrounding sand and shrub. The sharp, geometric boundaries of this 400-square-mile area show that it is not the result of additional rainfall in the region. The expl anation is not climatic.

It is 1egal.The green area is fenced-in private property.The owner grazes his animals on one part of the land while grass grows back in the others. By rotat ing the grazing from one area to another, the owner always has enough food for his animals.

The barren, surrounding area is common tribal land. It belongs to no one grazing to certain areas while grass grtws back in others.The grass in the com mon area has long since disappeared and to everyone. No individual has the -incentive or the authority to restrict 5 De Soto, op. cit p. 2A 6 Cited in AccessTo Energy newsletter (Boulder, Colorado January 1990, p. 2 9 Mexico Land reform in Mexico, beginning in the 193Os, usually involved confiscat ing property from owners of large tracts o f land for redistribution. In most cases the land was not given to individuals but converted into large ej which tended to be collective farms. Individuals were not allowed to sell the land use it. as they saw fit Many ejido farmers are forced to gr o w crops specified by the government and to sell these crops to the state for less than the market price.The govern ment then exports the crops and pockets the profit. For example, in Modes province farmers in the 1970s were forced by the government to gro w sugar which earned them between 7 and $11 per hectare per month, and rice, for which they received 26 per hectare. If farmers had been free to use their property as they saw fit, most would have grown tomatoes and hay, which would have fetched 40 per hec tare.

Between 1929 and 1959 the average compounded annual production growth in agriculture output was 2.8 percent in the south Pacific region of the country, which is dominated by private farms. In the ejido-dominated north the growth rate was only 0.8 per cent Tanzania With the Arusha Declaration of 1967, then-Tanzanian President Julius Nyerere announced his intention to convert his country into a model of African socialism. It became a model indeed, of the economic destruction wrought by socialist violati o ns of private property rights. For two decades Nyerere's government collectivized farming and nationalized nearly all private industry. Central planners, aided by the military, uprooted much of the population and resettled them in 7500 "ujamaa" or "family hood" collec tive villages. All crops had to be sold to government monopolies for a state determined price.

The result: By 1984, government prices for most crops were only half of their 1970 levels, even though world market prices for the country's major c rops had increased by 17 percent during that period. Because farmers could not freely own and dispose of property, production dropped.Tanzania went frombeing a food-exporter to a-country that-could not feed its-own people Nationalized industries fared no better. It is estimated that during the 1980s government-owned factories operated at only 10 to 30 percent of capacity.

Socialist policies inTanzania created as an unintended consequence a huge black market for all manner of products. Farmers, for example, would sell crops to illegal private merchants. Because the government distribution system was so inefficient, without a private outlet, crops would literally rot in the fields waiting for state transportation to collect them El Salvador During the early 1 98Os, El Salvador nationalized the marketing of its main export crop, coffee. Farmers were forced to sell to a government monopoly for 38 per 100 pounds at a time when the world price for coffee was around 135 per 100 pounds.The result: Coffee production d ropped by 50 percent Estonia A visitor toTallinn, the capital of Estonia, one of the Baltic Republics oc cupied by the Soviet Union, notices upon arrival at the airport six or eight planes sitting unused in fields beside the runways, covered with snow. A m oderate size commercial plane costs some $15 million to $20 million.This constitutes a capital investment. In the West, most planes are in use for an average of fifteen hours per day. Mhtenance is done during the rest of the day A company that allows its p lanes to lie unused for days or weeks loses money.The capital invested in such aircraft is idle. In Estonia, the Soviet state-owned airline, Aeroflot has no market incentive to make certain that its planes are put to the best use. No shareholders in the c ompany lose money The state bureaucrats running the airline, who do not own the planes themsel ves, do not profit directly from the most efficient use of these craft.There is a severe shortage of flights in the entire Soviet Union and occupied countries.

B ecause there are no private property rights, capital is underutilized Capital Goods In the Sowlet Union In a recent book on the economy of the Soviet Union, nte Tm*ngPoint authors Nikolai Shmelev, a Soviet economist, and Vladimir Popov, senior economist a t the institute of the USA and Canada of the U.S.S.R. Academy of Sciences, find that "the average service life of tractors and combines is twice as short as it wz+s thirty years ago and is now 1.5-2 times less than the United States rates Since no one owns Soviet farm equipment, there is no incentive to produce high quality capital products or for the laborers on state farms to demand such products.The authors note that equipment "is in the repair shop almost as often as it is in the field" and that the "fl eet of tractors is used less than any other country's: of almost 3 million tractors, W0,OOO are ment could not tolerate such a situation.

Shmelev and Popov found that "at Mechanical Factory No. 1 in the city of Gorky, perfectly good zinc is tu ed into scrap metal simply to fulfill the plan for non-ferrous metal waste n ere are no private owners of this factory out of service because they are in0perative.n Private owners of farm equip 7 Niolai Shmelev and Vladimir Popov, llhe Turning Point: Revitalizingthe Soviet Ewnomy (New York Doubleday, 1989) p. 120 8 hid, p. 113 11 and thus no one to be concerned about literally destroying valuable and cost ly raw materials. Central planners calculate how much waste should result from the product ion process. Failure to end up with such waste might hdi cate to planners that the factory is not doing its job, not that the factory is effi cient.

Shmelev and Popov also found that "at the Kurgan Bus Factory workers tear apart with sledgehammers the 'ext ra' parts of the GAZ 53' trucks that come partially assembled from the Gorky Automotive Factory, and then as semble buses Central planners require the Gorky factory to add these "ex tras There are no owners of the bus factory who can refuse to purchase ch a s sis that must be partially destroyed to be used.There are no owners of the Gorky factory that can change the orders Agriculture in the Soviet Union In the late 1920s and early 1930s Soviet dictator Joseph Stalin forced most farmers to surrender their la n d and become einployees of collective farms Today many farmers are allowed to work small, private plots, to sell the produce and'keep the profit themse1ves.These private plots constitute around 1 percent of the total farm land in the Soviet Unionget they account for some 25 percent of the total value of agricultural output Agriculture In the People's Republfc of Chin8 China began reform of its collectivized farming system in 19

79. First, the limit on the size of the small private plots was raised. Second, farmers were al lowed more freedom to choose what they would grow. Third, farmers were al lowed to sell much of their private plot output on the free market.The gross value of agricultural output grew from 197 billion yuan in 1978 to 330 billion yuan in 1 984 an average annual growth rate of 9 percent after a decade of Id stagnation New fertilizers and machinery were not the cause of this agricultural expan sion Nor were "miracle" seeds and fertilizers. Huge investments of govern ment funds were not necess a ry. All that was necessary was a change of policy a law allowing Chinese farmers the right to use their property as they saw fit and to-benefit from the sale of its product, thus providing an incentive to be productive 9 Hedrick Smith, TIce Russians (New York Times Books, l976 Chapter WI 10 Carl Riskin, China's PoiWcal Economy: me Quest for Development Since IW9 Oxford Oxford University.

Press, 1987 Chapter 12 12 PRIVATE PROPERTYAND THE ENVIRONMENT Private property rights help a society deal with what are called negative ex ternalities, that is, the indirect material harm to one persons property by anothers action. For example, pollution and environmental degradation, an extremely serious problem in Eastern Europe and many less developed countries,-can go u nchecked in a country in which all property is owned by society. After all, how can society act to harm itself? But when property is owned by individuals, pollution often involves harm by one individual or busi ness to the property of another. Individuals can sue in court for damages or have the government order violators to cease and desist.

The function of private property rights can be illustrated in the problem of expanding deserts. One estimate finds that as much as 15 million acres of land each year become desert.This is especially true in Africa and India. Part of this process is manmade. For example, some 90 percent of wood consumed in less-developed countries is burned for fuel while industrialized countries rely primarity on oil, coal and nuclear fuel. In most of the heavily harvested regions the land is owned by no one. This results in the tragedy of the com mons, a term referring to overuse and destruction of pasture land in England in the centuries before the Industrial Revolution. Everyone had an incentive to graze as many animals on the land as possible since there were no direct costs to owners of flocks. No individual had an incentive to conserve common resources. All had an incentive not to abstain from using resources while others made ful l use of them. In the case of expanding deserts in Africa for example, if individuals had had to pay for wood, they would have had an incentive to seek more efficient ways of using this fuel, perhaps by using small furnaces, rather than open burning, which causes most of the heat to be wasted Flammable Water. In the wake of the revolutions in Eastern Europe and the openings in the Soviet Union, the scope of environmental damage is be coming clear. In the Republic of Estonia in the Soviet Union, for example the ground water in places is flammable.This is because jet fuel at Soviet military airbases is routinely dumped into the ground, and over the decades the ground water has become so contaminated that it burns.

If individuals had had property rights in land and the water under it, they could hsliie sued for d-gs or to-stop such pollution 11 Robert J. Smith, privatibng the Envhonment, Polity Review No. 20 (Spring 1982) p. 39 13 WESTERN SUPPORT FOR PROPERTY RIGHTS As the U.S. and its Western allies face the n e ed for economic growth in Eastern Europe Latin America and Africa, they must pursue policies that first and foremost protect private property rights. Initially, this means denying assistance to countries that violate the rights of their own people. When A m ericas Agency for International Development AID) and such interna tional organizations as the World Bank and International Monetary Fund IMF) give grants and loans to such countries, they simply protect those countries from the consequences of their ill-c o nceived policies, bailing them out and leaving them with little incentive to change. Lectures from foreign development officers to leaders of less developed countries on how this time a country must reform its policies fall on deaf ears as long as the mon e y from overseas keeps flowing in The U.S. government and the World Bank in one sense both recognize that political threats to private property by governments in less developed countries result in lost foreign investments and slower economic growth. Yet th e U.S. governments Overseas Private Investment Corporation (OPIC) and the World Banks Multilateral Investment Guarantee (MIGA) shield less developed country governments from their self-destructive policies. Both OPIC and MIGA provide insurance for foreign investors against the danger of nationalization by the host government or other forms of political abuse.

Governments thus can avoid the adverse economic consequences of their violations of property rights. Such insurance in fact is available privately, bu t at high market rates that reflect the true risk of such investments Setting Goals. To promote the protection of private property rights in less developed countries, the US. should develop an index of Economic Freedom to set specific goals for foreign as s istance and to gauge the effectiveness of as sistance programs. Among the goals for such an Index:The legal rights of all citizens to own property, protected by the government and an independent judicial system; freedom of individuals from undue regulatio n s of their busi nesses; the right of owners to dispose of their property for a price set by the mutual consent of the buyer and seller; a low, flat tax rate that does not penal ize productive economic activity. Such an index was introduced in the Senate i n 1989 (S-1347) and included a rewriting of the Foreign Assistance Act of 1961 that passed the Senate that same year Such an index should be used to guide development programs at AID. For example, to help protect these rights the U.S. could assist countrie s in developing or choosing a uniform commercial code which would define when a contract has been made, what obligations are implied by a contract and when a breach of contract occurs. Further, the U.S. government should use such an index to guide the poli cies they promote through the IMF, World Bank, and other international development organizations.

The U.S. also should refuse to make new contributions to the IMF, whichis seeking additional lending authority of $60 billion, or to join the new European Ban k for Reconstruction and Development to aid Eastern Europe 14 unless it receives assurances that those organizations will guide their policies by an Index of Economic Freedom meant to protect private property rights CONCLUSION Ultimately, personal and pol i tical freedom cannot be sustained without eciinoihic freedow'that is, the right to private property. Material possessions are necessary for the achievement of any goal in human life. If a person is de pendent on the government for his material needs, if h e is forbidden to own personal property such as a house, or productive assets such as land, tools or factories, he will not be free in any meaningEd sense of the word.

The free market is merely an extension of the right of individuals to own use and dispos e of private property as they see fit. Protection of property rights is what separates free, prosperous societies from impoverished, repres sive ones.The empowerment of individuals with private property rights gives each person the opportunity to create t h e material means for his own well being and to control his own life and destiny Fundamental Step. Policy makers today in the wealthy, industrialized countries have a historic opportunity to promote in less developed countries the policies that will do awa y with the distinctions between "rich" and "poor."

The statist policies in communist countries in Eastern Europe and socialist countries in Latin America and Africa have produced seemingly intractable poverty that is resulting in political revolutions and the establishment of democracy. But this is not enough.The establishment of secure private property rights, protected by law from abuse by other individuals or by governments, is the most fundamental step a country can take to ensure liber ty, democracy a nd prosperity.

Edward L Hudgins, PhD.

Director Center for International Economic Growth 15

About the Author