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Is Capitalism Good for the Poor ?

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Title: Is Capitalism Good for the Poor ?


1
Introduction Part 1 What Is Poverty and Who Are
the Poor?
Is Capitalism Good for the Poor ?
2
Introduction What Is Poverty and Who Are the
Poor?
Is Capitalism Good for the Poor ?
3
People Living in Extreme Poverty World Bank
1,300,000,000 1.25/day
World Bank 2010
4
Economic Terminology
  • Income
  • Wealth
  • GDP (Gross Domestic Product)
  • Per capita GDP
  • Why do we use GDP to measure poverty?

5
Economic Terminology
  • Absolute Poverty measured against a designated
    minimum threshold of material well-being. The
    incomes of the poor fall below the minimum
    threshold.
  • Current standard 1/day PPP
  • Relative Poverty - identified by comparing levels
    of material well-being experienced by different
    individuals or groups, rather than by comparing
    the level of well-being to a standard.

6
Poverty Can Be Measured by Either Output (GDP) or
Consumption

Consumption Measure of Number of Poor by World
Region
Regions 20005 20005 2008  
East Asia and the Pacific 332 million 332 million 284 million  
Eastern Europe and Central Asia 6 million 6 million 2 million  
Latin America and the Caribbean 48 million 48 million 37 million  
Middle East and North Africa 11 million 11 million 9 million  
South Asia 598 million 598 million 571 million  
Sub-Saharan Africa 395 million 395 million 386 million  
 
Total 1.39 billion 1.39 billion 1.289 billion  
Reduction Reduction in number of poor, 2005-2008 101 million in number of poor, 2005-2008 101 million  
Sources World Bank Poverty and Inequality http//www.worldbank.org/Data/Views/Reports/TableView.aspx (May 1,2012 Sources World Bank Poverty and Inequality http//www.worldbank.org/Data/Views/Reports/TableView.aspx (May 1,2012 Sources World Bank Poverty and Inequality http//www.worldbank.org/Data/Views/Reports/TableView.aspx (May 1,2012 Sources World Bank Poverty and Inequality http//www.worldbank.org/Data/Views/Reports/TableView.aspx (May 1,2012
7
Countries of the World Low, Middle and High
Income
8
The number of extreme poor has declined by 500
million since 1981
9
Share of World Population in Poverty, 1820 1998
(1/day)
World BankDavid Dollar, Development Research
Group, World Bank. Capitalism, Globalization and
Poverty.  unpublished paper, written for The
Foundation for Teaching Economics, March, 2003,
p. 27
10
Number of People Living on Less Than 1 Per Day,
1820 - 1998
1980
World BankDavid Dollar, Development Research
Group, World Bank. Capitalism, Globalization and
Poverty.  unpublished paper, written for The
Foundation for Teaching Economics, March, 2003,
p. 27
11
(No Transcript)
12
World Bank 2009
13
  • ..\..\..\Videos\RealPlayer Downloads\Hans
    Rosling's 200 Countries, 200 Years, 4 Minutes -
    The Joy of Stats - BBC Four.flv

14
Introduction Part 2 What Is Poverty and Who Are
the Poor?
Is Capitalism Good for the Poor ?
15
1750
16
Years of Life Expectancy at Birth
Place Middle Ages Select Years 1950-55 1975-80 1975-80 2005-10
France 30 (1800) 66 74 74 81
UK 20-30 36 (1799-1803) 69 73 73 79
India 25 (1901-11) 39 53 64 64
China 25-35 (1929-31) 41 65 73 73
Africa 38 48 51 51
World 20-30 46 60 67 67
Sources Lee and Feng (1999) Peterson (1995)
Wrigley and Schofield (1981, 529) World
Resources Institute (2011) UNDP (2002)
http//hdr.undp.org/statistics/data/indic/indic_1_
1_1.html
17
Real Gross Domestic Product Per Capita (1990
International PPP)
Area 1000 1500 1700 1820 1952 1995 2001
Europe 400 640 870 1,130 4,370 13,950 19,256
USA 600 1,260 10,650 23,380 27,948
India 530 530 610 1,570 1,957
China 450 600 600 600 540 3,200 3,583
Africa 400 400 400 400 1,220 1,489
World 420 550 600 670 2,270 5,190 6,049
Sources Maddison (1998, 1999) Development
Centre Studies The World Economy Historical
Statistics, Maddison, 2003.
18
Real Gross Domestic Product Per Capita (2005
International PPP)
1995 2001 2007 2010 2012
Europe 24,674 28,364 30,789 29,765 30, 455
USA 33,903 39,602 41,260 40,650 49,965
India 1,452 1,832 2,685 3,240 3,876
China 1,849 2,868 5,239 6,810 9,233
Africa 1,498 1,589 1,914 2,022
World 7,037 7,955 9,535 9,869 10,922
Sources Maddison (1998, 1999) Development
Centre Studies The World Economy Historical
Statistics, Maddison, 2003. University of
Pennsylvania
19
Africa Continues to Lag Behind 1/3 of the
worlds extremely poor
What does recent research tell us about why
Africa continues to lag behind and what we can
do about it?
20
(No Transcript)
21
What does Capitalism have to do with Poverty?
22
(No Transcript)
23
Overall Economic Freedom Index and the Top 10
Source The Fraser Institute.
24
Overall Economic Freedom Index and the Bottom Ten
Source The Fraser Institute.
25
Per Capita Income and Economic Freedom Quartile
Most Free . Least Free
Sources The Fraser Institute The World Bank,
World Development Indicators, 2013
26
Growth in Developing Nations Per Capita and
Economic Freedom Quartile

Most Free . Least Free
Sources The Fraser Institute The World Bank,
World Development Indicators, 2013.
27
Income Share of the Poorest 10 and Economic
Freedom
Most Free . Least Free
Sources The Fraser Institute The World Bank,
World Development Indicators, 2013.
28
Income of the Poorest 10 and Economic Freedom
Most Free . Least Free
Sources The Fraser Institute The World Bank,
World Development Indicators, 2013.
29
Economic Freedom and Political Rights(low scores
indicate high level of rights)
Most Free . Least Free
Sources The Fraser Institute Freedom House,
Freedom in the World Country Ratings, 2011,
available at http//www.freedomhouse.org/.
30
Economic Freedom and Civil RightsLow scores
indicate high level of rights
Most Free . Least Free
Sources The Fraser Institute Freedom House,
Freedom in the World Country Ratings, 2011,
available at http//www.freedomhouse.org/.
31
Economic Freedom and CorruptionHigh scores
indicate low corruption
Most Free . Least Free
Sources The Fraser Institute Transparency
International, Corruption Perceptions Index,
2012 available at http//www.transparency.org.
32
Economic Freedom and Life Satisfaction
Most Free . Least Free
Sources The Fraser Institute Happy Planet Index
2012
33
Economic Growth
improves the lives of the poor by making the pie
bigger
Bigger slices mean higher standards of living
34
Reduced Poverty Since 2000Research on Growth
vs. Safety Net ?
  • 4/5 growth / 1/5 redistribution (Dollar,
    Kraay, Kleineberg study)
  • context matters averages hide wide range of
    variation
  • economic growth is not generally associated with
    increased income inequality
  • the (overall) share of income going to the
    poorest 2 quintiles (40) does not change
    significantly with growth
  • poor governance often increases income inequality
    for specific populations in specific locations
  • 4/5 of the improvements in the lives of the
    poorest 40 of the population over the past
    decade are attributable to economic growth 1/5
    is attributable to redistribution
  • Talking about Is Capitalism Good for the Poor?
  • distinguish between poverty v. poor people
  • distinguish between treating symptoms v.
    underlying causes

35
Reduced Poverty Since 2000Research on Growth
vs. Safety Net ?
  • 75 growth / 25 redistribution (Dollar, Kraay,
    Kleineberg study)
  • context matters averages hide wide range of
    variation

safety net (redistribution) econ
growth demographic comp.
36
Africa Continues to Lag Behind 1/3 of the
worlds extremely poor
What does recent research tell us about why
Africa continues to lag behind and what we can
do about it?
37

Classroom Activity Lesson 1 Defining Terms
Will the Real Capitalism Please Stand Up ?
38
Capitalism is identified by its characteristic
institutions
Institutions the formal and informal rules of
the game that shape incentives and outline
expected and acceptable forms of behavior in
social interaction.
  • Private Property Rights
  • Rule of law
  • Open, competitive markets
  • Entrepreneurship and innovation

39

ECONOMIC ANALYSIS clearly present the component
is present in the economy with few
exceptions generally present the component is
present in the economy, but with many or
significant exceptions generally absent the
component is only present in the economy in some
limited forms clearly absent the component is
almost entirely excluded from the economy not
enough information
Present ? Evidence?
markets
private property
rule of law
entrepreneurship
40
United States
  • The judiciary functions independently and
    predictably although serious constitutional
    questions have arisen regarding the government
    mandated health insurance decision.
  • Corruption and cronyism is on the increase and is
    undermining the institutional integrity of the
    rule of law, resulting in an 86th percentile
    ranking in control of corruption and a corruption
    perception index of 7.1 (out of 10) by
    Transparency International and a decrease of 4
    points in the heritage Foundation score to 71
    from a previous 75 in 2010.
  • Property rights are guaranteed, although affected
    by increasing regulations, ranking the US 19th in
    the world, with a score of 85 out of 100 by the
    Heritage Fndn.

41

Specific Situation Apple Patent Victory
Aug. 25, 2012 SAN JOSE, Calif.Nine jurors
delivered a sweeping victory to Apple Inc. in a
high-stakes court battle against Samsung
Electronics Co., awarding the Silicon Valley
company 1.05 billion in damages and providing
ammunition for more legal attacks on its
mobile-device rivals. Jurors Friday found that
Samsung infringed all but one of the seven
patents at issue in the casea patent covering
the physical design of the iPad. They found all
seven of Apple's patents validdespite Samsung's
attempts to have them thrown out. They also
decided Apple didn't violate any of the five
patents Samsung asserted in the case.
42

ECONOMIC ANALYSIS clearly present the component
is present in the economy with few
exceptions generally present the component is
present in the economy, but with many or
significant exceptions generally absent the
component is only present in the economy in some
limited forms clearly absent the component is
almost entirely excluded from the economy not
enough information
Present ? Evidence?
markets
private property
rule of law
entrepreneurship
Prices and products determined in markets
clearly present
clearly present
Patents upheld
Courts act and decisions are enforced
clearly present
Millions of companies operate in every sector
clearly present
43
2012 Country Scenario Updates
44
Capitalism is best thought of not as a system,
but as a continuum of institutional combinations
. . . .
Less capitalist
More capitalist
45
Capitalism is best thought of not as a system,
but as a continuum of institutional combinations
. . . .
Canada
USA
Less capitalist
More capitalist
46
Capitalism is best thought of not as a system,
but as a continuum of institutional combinations
. . . .
Czech Republic
Peru
Uganda
Indonesia
Egypt
Less capitalist
More capitalist
Some institutional forms confer benefits on the
poor . . . and others do NOT.
47
Heritage www.heritage.org/index/
48
freetheworld.com Index of Economic Freedom
49
  • Ranking Criteria
  • Size of government
  • Legal system Property rts
  • Sound money
  • Freedom to trade internationally
  • Regulation

50
Process Identify quantifiable data that can be
used to rank countries. Consider how these
measures connect to the institutions we ranked in
the Will the Real Capitalism? activity
1. Size of Government A. Government
consumption B. Transfers and subsidies C.
Government enterprises and investment D. Top
marginal tax rate (i) Top marginal income tax
rate (ii) Top marginal income and payroll tax rate
markets, entrepreneurship
51
2. Legal System and Property Rights A. Judicial
independence B. Impartial courts C. Protection of
property rights D. Military interference in rule
of law and politics E. Integrity of the legal
system F. Legal enforcement of contracts G.
Regulatory restrictions on the sale of real
property H. Reliability of police I. Business
costs of crime
rule of law, entrepreneurship, property rights
52
3. Sound Money A. Money growth B. Standard
deviation of inflation C. Inflation most recent
year D. Freedom to own foreign currency bank
accounts
entrepreneurship
53
4. Freedom to Trade Internationally A.
Tariffs (i) Revenue from trade taxes ( of trade
sector) (ii) Mean tariff rate (iii) Standard
deviation of tariff rates B. Regulatory trade
barriers (i) Non-tariff trade barriers (ii)
Compliance costs of importing and exporting C.
Black-market exchange rates D. Controls of the
movement of capital and people (i) Foreign
ownership/investment restrictions (ii) Capital
controls (iii) Freedom of foreigners to visit
markets
54
  • Regulation

A. Credit market regulations (i) Ownership of banks (ii) Private sector credit (iii) Interest rate controls/ negative real interest rates B. Labor market regulations (i) Hiring regulations and minimum wage (ii) Hiring and firing regulations (iii) Centralized collective bargaining (iv) Hours regulations (v) Mandated cost of worker dismissal (vi) Conscription C. Business regulations (i) Administrative requirements (ii) Bureaucracy costs (iii) Starting a business (iv) Extra payments/ bribes/favoritism (v) Licensing restrictions (vi) Cost of tax compliance
Markets, entrepreneurship
55
Fraser Institute Index of Economic Freedom
2013 (Released Sept. 2013)
Hong Kong Finland Canada Chile
Jordan U.S. Ireland Peru Israel
Czech Republic Poland Uganda Malaysia
Indonesia Belize Russia Egypt India
Venezuela
2011 data

10 9 8
7 6
5
Most Free Hong Kong 8.97 Least
Free Venezuela 3.93

56
Fraser Institute Index of Economic Freedom
2012 (Released Sept. 2012)
2010 data
Hong Kong Canada Finland Chile
Ireland U.S. Jordan Peru Poland
Uganda Israel Czech Republic Malaysia
Indonesia Belize Russia Egypt India
Venezuela

10 9 8
7 6
5
Most Free Hong Kong 8.9 Least
Free Venezuela 4.07

57
2013 Rankings (Out of 151)
  • Hong Kong 1
  • Singapore 2
  • NZ 3
  • Switzerland 4
  • UAE 5
  • Mauritius 6
  • Finland 7
  • Bahrain 8 Canada 8
  • Australia 10
  • Chile 11
  • United Kingdom 12
  • Jordan 13 (42 in 2010, 62 2012)
  • U.S. 17 (3 in 2006)
  • Israel 49 (44 in 2007, 83 in 2011)
  • Poland 59 (88 in 1990, 44 in 2012)
  • Uganda 64 (67 in 2010, 51 in 2001, 113/113 in
    1990)
  • Greece 85
  • Kenya 87
  • Mexico 94 (69 in 2010)
  • Russia 101
  • Egypt 108 (from high of 46, 80 in 2010)
  • India 111
  • China 123 (82 in 2010)
  • Iran 127
  • Ethiopia 142
  • Zimbabwe 149
  • Myanmar 151
  • Venezuela 152

2011 data
58
2012 Rankings (Out of 144)
  • Hong Kong 1
  • Singapore 2
  • NZ 3
  • Switzerland 4
  • Australia 5
  • Canada 6
  • Bahrain 7
  • Mauritius 8
  • Finland 9
  • Chile 10
  • United Kingdom 12
  • Ireland 12
  • U.S. 18 (down from 3 in 2006)
  • Japan 20
  • Poland 48 (88 in 1990)
  • Uganda 50 (67 in 2010, 51 in 2001, 113/113 in
    1990)
  • Jordan 62 (42 in 2010)
  • Greece 81
  • Mexico 91 (69 in 2010)
  • Egypt 99 (from high of 46, 80 in 2010)
  • Israel 52 (44 in 2007, 83 in 2011)
  • Russia 95
  • China 107 (82 in 2010)
  • India 111
  • Iran 111
  • Zimbabwe 142
  • Myanmar 143
  • Venezuela 144

2010 data
59
Africa Continues to Lag Behind 1/3 of the
worlds extremely poor
What does recent research tell us about why
Africa continues to lag behind and what we can
do about it?
60
Reduced Poverty Since 2000Research on Growth
vs. Safety Net ?
  • 75 growth / 25 redistribution (Dollar, Kraay,
    Kleineberg study)
  • context matters averages hide wide range of
    variation

safety net (redistribution) econ
growth demographic comp.
61
Reduced Poverty Since 2000Research on Growth
vs. Safety Net ?
  • 75 growth / 25 redistribution (Dollar, Kraay,
    Kleineberg study)
  • context matters averages hide wide range of
    variation
  • economic growth is not generally associated with
    increased income inequality
  • the (overall) share of income going to the
    poorest 2 quintiles (40) does not change
    significantly with growth
  • poor governance often increases income inequality
    for specific populations in specific locations
  • 4/5 of the improvements in the lives of the
    poorest 40 of the population over the past
    decade are attributable to economic growth 1/5
    is attributable to redistribution
  • Talking about Is Capitalism Good for the Poor?
  • distinguish between poverty v. poor people
  • distinguish between treating symptoms v.
    underlying causes

62
Income Share of the Poorest 10 and Economic
Freedom
Most Free . Least Free
Sources The Fraser Institute The World Bank,
World Development Indicators, 2013.
63
Income of the Poorest 10 and Economic Freedom
Most Free . Least Free
Sources The Fraser Institute The World Bank,
World Development Indicators, 2013.
64
Growth in Developing Nations Per Capita and
Economic Freedom Quartile

Most Free . Least Free
Sources The Fraser Institute The World Bank,
World Development Indicators, 2013.
65
Institutions Associated with Economic Growth
  • Private Property Rights
  • Rule of law
  • Open, competitive markets
  • Entrepreneurship and innovation

Focus of lessons 2-5 in Is Capitalism Good for
the Poor?
66
(No Transcript)
67
Proposal Selection Form Proposer Identification
Code __________________ Circle a proposal 19/1
18/2 17/3 16/4 15/5 14/6
13/7 12/8 11/9 10/10 9/11
8/12 7/13 6/14 5/15 4/16 3/17
2/18 1/19 If the responder accepts this
proposal, I will receive ________ and the
responder will receive ________ . If the
responder does not accept this proposal, both the
responder and I will receive 0.
XyZpDQ


68
Proposer Identification Code __________________
Circle a proposal 19/1 18/2 17/3
16/4 15/5 14/6 13/7 12/8 11/9
10/10 9/11 8/12 7/13 6/14
5/15 4/16 3/17 2/18 1/19 If the
responder accepts this proposal, I will receive
________ and the responder will receive ________
. If the responder does not accept this
proposal, both the responder and I will receive
0.
XyZpDQ


123LMNO
Responder Identification Code _________________ I
f I accept the proposal circled above, I will
receive ________ and the proposer will receive
________ If I reject this proposal , I will
receive 0 and the proposer will receive 0.
Circle either accept or reject
below. ACCEPT REJECT


69
  • What did the proposers offer?
  • Why?
  • How did they decide how much to offer?

70
  • Which offers did responders
  • accept? / reject?
  • Why?
  • How did responders decide whether to accept or
    reject an offer?

71
  • A fundamental assumption of economics is that
    economic man is a rational decision-maker who
    acts in his self-interest.
  • Are the results of this activity consistent with
    this theory of homo economicus (economic man)?
  • Why or Why not?

72
Classroom Activity Lesson 5 Institutions That
Promote Social Cooperation
73

Classroom Activity Lesson 5 Character Values
and Capitalism
The Ultimatum Game
74
Experimental Economics - History
  • John Nash 1994 Nobel Prize in Economics for his
    work in game theory
  • Game Theory the study of interactions in which
    the results of one persons choices depend not
    only on his own behavior, but also on the choices
    made by another person.
  • Vernon Smith 2002 Nobel Prize in Economics for
    experimental economics, which builds on game
    theory.

75
Purpose of Ultimatum Game Experiments
  • These experiments create an empirical challenge
    to what we call the
  • selfishness axiom
  • the assumption that individuals seek to maximize
    their own material gains in these interactions
    and expect others to do the same.
  • (Joseph Henrich, Emory University
  • recently completed a 4-continent research
  • project in which the Ultimatum Game
  • was played in 15 indigenous societies)

76
  • If individuals seek to maximize their own
    material gains, and assume that other people do,
    too, what will proposers do?
  • Why?
  • (explain their thinking)

77
  • If individuals seek to maximize their own
    material gains, and assume that other people do,
    too, how will responders react to proposals?
  • Why?

78
Results of Large Numbers of Ultimatum Game
Experiments
  • the modal (most common) split is
  • 50 - 50
  • the mean (average) split is about
  • 60 - 40
  • about 20 of low offers are rejected

Games conducted with college students in the
U.S. and other developed countries. Students
were paid to participate. Stake was the
equivalent of 10 U.S. Results are considered to
be robust.
79
Conclusions
The results of ultimatum games are inconsistent
with the model of economic man that predicts
material self-interest (selfishness).
Note, especially, the rejection rate.
80
Proposed Explanations
  • Other-regarding behavior is one of our
    preferences we gain satisfaction not only from
    our lives (as the homo economicus model
    predicts), but also from the lives of others.
  • Players demand fairness, and punish unfair
    behavior on the part of proposers.
  • Responders take into account not just the amount
    of money offered but also the percent of the
    total.

81
Proposed Explanations (cont.)
  • More equal splits may be less the result of
    fearing punishment for being unfair than they are
    the result of individuals concern for their
    reputations
  • This is consistent with the results of
    experiments comparing the behavior of people in
    market and non-market economies.
  • (also consistent with Adam Smiths observations)

82
Conclusions based on continued research
  • Behavior in none of the 15 less-developed
    societies was consistent with the selfishness
    axiom.
  • Individual differences do not explain ultimatum
    game outcomes
  • age,
  • gender,
  • socio-economic status,
  • risk-aversiveness,
  • size of the stake (up to 3 months income)

However . . .
83
Group Differences
  • in the routine degree of economic cooperation in
    everyday life
  • and
  • in the degree to which markets are an integral
    part of society

are significant in explaining
experimental outcomes
84
  • Thus, we return to institutions
  • The way people play the ultimatum game reflects
    the way they interact in everyday life.
  • Splits are more equal in cultures where people
    commonly exchange products and labor in markets.
  • Markets are institutions through which societies
    develop distinctive patterns of interaction,
    which may be internalized and reflected in
    ultimatum game behavior.

85
Food for Thought (or assessment)
Suppose that someone argued that capitalism is
not good for the poor because it makes people
greedy and selfish and encourages them to ignore
others and think only of themselves. How could
you use the results of ultimatum game experiments
to counter that argument?
86
Classroom Activity Lesson 2 Property Rights
and the Rule of Law
Youre the Economist
87
Property Rights ARE Human Rights
  • People
  • Not
  • Property
  • Property rights are the rights of human beings to
    freely use and transfer their possessions,
    including themselves.

88
Property Rights New in Human History
89
Benefits to the Poor
Under the rule of law, the poor can be secure in
their property rights, which gives them the
opportunity to use property to improve their
well-being.
part 2 How property rights encourage growth by
providing incentives for the creation of capital.
90
Capital dead or alive?
Property Rights benefit the poor by making owned
capital secure and productive.
Lesson 2 Property Rights and the Rule of Law
91
Property Rights and Growth
  • Property Right holders have an incentive to
    preserve their property.
  • Owners consider the future.
  • Owners more likely to improve property
  • because they retain the value of the improvements

92
Investment
  • Secure property rights make investment more
    likely.
  • Property Rights allow people to obtain debt.
  • Use of past and future incomes.
  • Collateralization is of greatest benefit to the
    poor.

93
Greater Security Greater Productivity
  • Property rights benefit the poor more than the
    rich (who can defend their own property rights)
  • definition and enforcement of Property Rights
    gives the poor the same rights enjoyed by the
    rich.
  • Secure property rights contribute to economic
    growth by enabling the poor to shift effort from
    protective to productive activities.

94
Secure Property Rights
  • Defined
  • Defensible
  • Divestible

95
Indias Dalits Untouchable
Informal restrictions on property rights
96
Defined but not Enforced
  • A right that is defined but not enforced is
    useless.

Property Rights . . . AND the Rule of Law
97
Securing Property Rights
  • Rule of physical force (anarchy)
  • Rule of men
  • Rule of law

98
Rule of Physical Force
Characteristics of Property Rights Under Anarchy
Defined Seldom and then not clearly
Defended Only for those with the physical force to do so or the money to pay someone else
Peaceful divestiture Peaceful transfer uncommon even through inheritance
99
Rule of Man
Characteristics of Property Rights Under Rule of
Man
Defined Sometimes but often irrelevant or ignored
Defended Only for those who have the favor of those in charge
Peaceful divestiture Subject to the wishes of those in power
Formal laws may exist, but enforcement is subject
to the whim of those in power
100
Rule of Law
Characteristics of Property Rights Under Rule of
Law
Definition clear
Defendable Yes both publicly and privately
Divestible Peaceful transfer routine
Both the governed and the governors are subject
to the law.
101
Big Picture
  • Rights to property promote economic growth by
    encouraging preservation, improvement and
    investment in owned resources.
  • In societies without clearly defined property
    rights the poor are disadvantaged because they
    lack the resources to enforce their rights.
  • To effectively stimulate economic growth property
    rights must exist within a society characterized
    by stable and predictable rules of law.

102
Classroom Activity Lesson 2 Property Rights
and the Rule of Law
Youre the Economist
103
Importance of Property Rights to Economic Growth
and to the Well-being of the Poor
Para, Brazil Amazon Basin
104
Focusing the Research The Role of Property
Rights in Reducing Poverty
  • We KNOW
  • Economic growth is the key to reducing absolute
    poverty and raising standards of living.
  • One source of economic growth is increased
    productivity, the ability to increase output per
    unit of resource input.
  • Productivity is increased through investment in
    human and physical capital
  • People invest in their human capital by getting
    education, training, or experience.
  • Investment in physical capital includes
    developing and/or purchasing the buildings,
    machines, and equipment that make human labor
    more productive.
  • People take better care of things they own.
    Property rights act as an incentive for people to
    protect the value of their possessions.

105
  • We WANT to know
  • Are property rights a tool in fighting poverty?
  • Does the existence of strong property rights
    promote economic growth?
  • Does clear title to land encourage (act as an
    incentive for) capital investment?

Generally
Specifically

Research Question On the Amazonian frontier of
Brazil, are landholders with title more or less
likely than landholders without clear title to
invest in capital improvements to their land?
106
Ricardos Journal
  • June 01, 1993 1149 a.m. Fax to Dr. Lee Alston
    and Dr. Gary Libecap
  • The travel to São Felix was not too bad as I
    expected. We went on the back of a pick-up
    truck, and although crowded (13 people, 2 kids
    and two chickens on the truck and 4 people on the
    cabin) it was better than a bus. . . .

107
Ricardos Journal
  • To get a better sample, I choose to survey the
    colony in the two opposite extremes. One 4
    minutes down river from town (Santa Rosa) and
    other 5 hours upriver (Chadazinho). About half
    people I surveyd had definitive land tittle, but
    only a few are registered . . . and only few are
    in the name of landholder. Usually, the tittle
    is on name of the previous holder (i.e. when the
    previous owner sold the land, he gave as well the
    tittle). Sometimes the farmers got also a power
    of attorney paper, sometimes not. Registering
    the tittle and transferring is very expensive and
    this is the reason people usually do not do it.

108
Survey Data
Current Land-holders Name Has Clear Title to Land ? Hect cleared Hect perman-ent crops added Chick-ens Cattle Pigs Horses Hect pasture added Meters fenced
Almezino Yes 12.5 27.5 40 50 10 0 30 1600
Fco. No 20 22 200 2 4 3 20 2600
Raimundo Yes 17 25 80 11 1 3 14 240
Raul Yes 2 26 30 12 0 1 20 1000
Marcelo (1) Yes 0 0 10 0 2 0 0 0
Julia Yes 0 12.5 25 3 0 0 4 1500
Ant. Evang Yes 2 12.5 100 20 4 0 4 3300
Anor. Yes 0 15 70 0 12 0 1 2000
Geraldo Yes 8 35 70 100 35 10 20 8,000
109
The number of hectares the farmer cleared since
he became the landholder. (Land cleared by a
previous owner is not included.) 1 hectare
2.5 acres, or 2.5 football fields.
Yes The settler has a clear and legally
recognized title to the land and the title would
be upheld in a court of law.
Converting land to pasture required logging out
the trees, and/or removing stumps and rocks,
and/or seeding to create suitable grazing for
cattle.
Current Land-holders Name Has Clear Title to Land ? Hect cleared Hect Perman-ent crops added Chickens Cattle Pigs Horses Hect pasture added Meters fenced
Jose Cirilio Yes 20 4 30 50 5 3 20 800
Vicente No 12.5 14 100 27 3 3 12.5 1000
Landholders could maintain livestock for their
own use without much fencing. Raising cattle for
market required fencing.
NO - The settler has no claim to the land other
than occupancy (squatter), or his claim is
uncertain. For example, the settler holds a
signed receipt from a previous owner, or the
settler has a provisional title which hasnt been
registered.
Permanent crops are usually tree crops such as
bananas, coffee, and cocoa. Several years
growth is required before they bear a significant
crop. However, in the long run, they tend to be
more valuable than annual crops (which are
planted each year).
110
Identifying Investment
Activity Investment in Land? Yes / No Explanation
Clearing land
Planting permanent crops
Buying chickens
Buying cattle
Buying pigs
Buying horses
Adding pasture .
Fencing .
Yes
Yes
No
No
No
???
Yes
Yes
111
Calculating the Impact of Title
Average investment in meters fenced Average investment in meters fenced Average investment in hect pasture added Average investment in hect pasture added Average investment in hect perm crops added Average investment in hect perm crops added Average investment in hect land cleared Average investment in hect land cleared
Title No title Title No title Title No title Title No title

112
Calculating the Impact of Title
Average investment in meters fenced Average investment in meters fenced Average investment in hect pasture added Average investment in hect pasture added Average investment in hect perm crops added Average investment in hect perm crops added Average investment in hect land cleared Average investment in hect land cleared
Title No title Title No title Title No title Title No title
1551.5 788.89 17.88 5.5 20.31 16.56 15.31 10.5
113
Predict Who Has Title ?
Name Title to Land Hect cleared Hect Permanent crops added Hect Pasture added Meters fenced
Osdete 0 ? ?
Joao Golano 35 85 30 5500
Jose Carlos 25 1 25 0
Germano 18.5 44 0 0
No
Yes
Yes
No
114
Conclusions of the Pará Study
  • Farmers were aware that having title increased
    the value of their property
  • Farmers assessed the costs and benefits of
    obtaining title (distance, etc.)
  • Farmers with title made significantly greater
    levels of investment in the productivity of their
    land
  • Securing and enforcing the property rights of the
    poor is an important step in improving their
    well-being
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