Why Africans need property rights
When I asked the nomad how much his house cost, he had no idea what I was talking about. He looked at me quizzically and explained, as if to a fool, that he had built it himself, with materials he had at hand. The walls were of sticks, woven together and curved into a dome. For added protection against rain and sandstorms, he had laid animal hides over the top and skillfully lashed them in place. He could not put a price on the place, because it would never have occurred to him to sell it. When he moved away in search of better pasture for his cows, he simply dismantled his house, loaded it on to a camel’s back, and took it with him. I had asked a stupid question, perhaps because I had house prices on the brain. My wife and I were trying to buy a place in London that month, which was such a huge undertaking that it was hard to think of anything else.
In the midst of this domestic maelstrom, I was dispatched to cover a peace conference in Addis Ababa, the Ethiopian capital. None of the important delegates (all parties to Congo’s civil war) showed up, so I abandoned the conference and flew off into the desert to write a story about food shortages instead. I went to Gode, a small town in the Ogaden, the arid space that separates Ethiopia from Somalia. The people there were mainly ethnic Somalis: statuesque nomads in brilliant purple, green, and orange shawls. They were as courteous as they were proud. When Askar Ahmed, the acting provincial governor, and his entourage came to dinner with me and some UN workers, they arrived on the dot at 7 p.m., chatted seriously over the chicken and rice, said “thank you,” and left by 8:30.
For all their dignity, however, the nomads were not doing well. A drought the previous year had killed perhaps 5,000 of them. A swift airlift of food aid saved thousands more. But the governor told me that the crisis was far from over. Most people’s cattle and goats had died during the drought, so they had no way of coping if the rains failed again. With no beasts to herd, the nomads clustered around the town in their portable shacks, hoping to grow enough corn to sell, buy some more cattle, and resume their wandering, pastoral way of life. For this they needed water, of which there was little to be had. Just to get enough to drink people took potentially mortal risks.
Standing on the shore of the murky brown river that flowed past Gode, I saw a young woman throwing stones vigorously into the water. I could not figure out what she was doing until my guide explained that there was a crocodile lurking beneath the ripples. The young woman needed to scare it off before she could fill her plastic jerry can. Then she turned and started to walk home. It was so hot that I could barely stand up, but she seemed unruffled as she put the heavy jerry can on her head and turned her feet towards the horizon. Her home was too far off to be visible. In fact, nothing was visible in the direction she was heading, nothing but miles of searing sand.
The nomadic lifestyle is probably doomed. Itinerant pastoralists need a lot of space to keep their livestock alive. Crop-growing societies can feed a much denser population on the same patch of territory, which is why sedentary folk outnumber nomadic herders everywhere on earth. Sheer weight of numbers has allowed tribes of farmers, over the last few thousand years, to grab the best land from nomads and push them into the driest, least fertile quarters of the planet.1 The process is almost complete. Nomadic hunter-gatherers are almost extinct, and nomadic herders have been squashed into such harsh patches of terrain that they are increasingly forced to mix their traditional livelihood of cattle-rearing with a bit of sowing and reaping. It keeps them alive, but many find the idea of putting down permanent roots repellent. Hence the nomad’s bewilderment when I asked him, in my intrusive journalistic way, how much his house was worth.
Intrusive though it was, the question was important. One of the reasons that Africa is so poor is that most Africans are unable to turn their assets into liquid capital. In the West, the most common way to do this is to borrow money using a house as security. This is how most American entrepreneurs get started, and without such loans America would be much less dynamic and rich than it is. But most Africans cannot do the same thing because even if they own their homes they usually do not have the title deeds to prove it. And since they cannot prove it, banks will not accept their homes as collateral for a loan. Africans are thus deprived of capital – the lifeblood of capitalism.
Somali nomads are an extreme example, but even the most settled people in Africa, as in much of the developing world, do not usually own the land they live on, at least not in the formal, documented way that Emma and I own our home in London. Indeed, most economic activity in Africa is unrecorded. The man selling fruit at the traffic lights in Lusaka is not registered as a grocer. The minibus driver who brakes suddenly in your path and nearly causes you to crash takes his fares in cash and files no tax returns. Subsistence farmers grow most of the starchy food in Africa but eat most of it themselves, barter much of the rest, and make no impression on the continent’s fledgling stock exchanges.
Economists tend to think of the informal economy as a marginal phenomenon, of interest only to missionaries, aid workers, and the police. But in most African countries, the informal economy is larger than the formal one. Barely one African in ten lives in a formal house with title deeds, and only one African worker in ten holds a formal job. The remaining nine tenths are usually ignored.
This is a mistake. The poor have assets – plenty of them. In towns, houses as flimsy and biodegradable as a nomad’s are the exception, not the rule. Many Africans toil for years to save enough to build brick-and-timber homes in the shanty towns of Nairobi or Cotonou. Since there are so many of them, their houses are collectively worth a great deal of money. But since they do not formally own them, they cannot use them as collateral.
According to Hernando de Soto, a Peruvian economist, the total value of Africans’ informal urban dwellings in 1997 was $580 billion. The value of rural land which African farmers ploughed or grazed their cattle on, but did not formally own, he estimated at $390 billion. This is a phenomenal sum. It adds up to almost a trillion dollars. To put this in perspective, a trillion dollars is roughly three times the continent’s entire annual gross domestic product. In 1998, Africa attracted net foreign direct investment equivalent to less than a hundredth of this.
The failure to extend formal property rights to the bulk of the population is not a uniquely African problem. It is a feature of all poor countries. Include the rest of the developing world, and the total value of dead capital is over $9 trillion, according to de Soto. Third World leaders wander rich-country capitals begging for aid and investment. All the while, they fail to notice a much larger source of potential wealth at home. “In the midst of their own poorest neighborhoods and shanty towns,” writes de Soto, “there are trillions of dollars, all ready to be put to use if only the mystery of how assets are transformed into live capital can be unravelled.”2
To investigate these ideas, I went to Malawi, a country I picked because it is peaceful, stable, off the beaten track, and fearfully poor. The capital, Lilongwe, is leafy and sleepy. By day, sunlight bounces off a million palm fronds. By night, the city is so dark you would not believe you were in a city. I don’t think I saw a single working street lamp, although a couple of restaurants cast a faint light on the crater-ridden sidewalk.
Lilongwe’s grander buildings were largely paid for by the old South African regime, to reward the late Malawian dictator, Hastings Banda, for not supporting sanctions. Banda was unusual among African leaders in that he refused to condemn apartheid. But in other respects he was a typical dictator. He murdered his opponents, grabbed whole industries for himself, and started a youth movement that was somewhere between the Boy Scouts and Mussolini’s Blackshirts. As he entered his nineties, he started to lose control. In 1994, he succumbed to pressure to allow elections. Malawi is now more democratic – but not much richer.
My first destination was a shanty town called Mtandire, not far from the capital. I hired a big Toyota with plenty of clearance, cajoled a civil servant to skip out of work and act as interpreter, and set off bright and early. The roads in Mtandire were unpaved, bumpy, and wet. Corn sprouted in every backyard. Cars were so rare that children waved excitedly as we drove by, and chickens fearlessly blocked our path. A slum in one of the poorest countries on the world’s poorest continent: you would expect the people who live there to be very poor indeed. You certainly would not expect to find a large store of hidden wealth in Mtandire.
Killing two goats with one loan
The meaty scent of goat stew hung in the air. This delicacy, with its rich gravy mopped up with handfuls of nshima (a kind of sticky corn paste), is served at Malawian weddings, or indeed almost any other celebration. The lumps of goat-on-the-bone are chewy but worth the effort. Malawians love goat stew, which is why Grace and John Tarera’s goat-slaughtering business was thriving.
The Tareras bought goats from farmers, chopped them up, and sold chunks at the nearest market. Demand was brisk, and they wanted to expand the business. But they lacked capital. Grace Tarera told me she thought they needed about 20,000 kwacha ($250). This may not sound like much, but in Malawi, where the average annual income is only about $200, it can take years to raise such a sum.
I asked Grace Tarera how much her house was worth. The question meant something: Malawian slum-dwellers do buy and sell houses. The Tareras had bought a piece of land five years before and thrown up a sturdy brick bungalow, fussily furnished with lacy tablecloths and painted a restful shade of light blue. This pleasant structure was worth about 25,000 kwacha, she reckoned – a figure which tallied with what other people in Mtandire told me their places were worth. Since this was more than the sum the Tareras wanted to expand their goat-slaughtering business, surely they could use the house as security to raise the necessary cash? No, they couldn’t, because they had no formal title deed.
The Tareras’ house, like all the others in Mtandire, is built on “customary” land, which means that the plot’s previous owners had no formal title to it. The land was simply part of a field their family had cultivated for generations. About two thirds of the land in Malawi is owned this way. People usually till the land their parents did. If there is a dispute about boundaries, the village chief adjudicates. If a family offends gravely against the rules of the tribe, the chief can take their land away and give it to someone else. In effect, the chief holds all the land in trust for the tribe, as kings did in feudal Europe.
The system worked well enough when Malawians were all farmers and there was plenty of land to go around. But it is ill-suited to a crowded urban setting. As people flock to Lilongwe in search of jobs, they increasingly settle on the farmland that surrounds the city. Peasants are happy to sell them plots, but informally. Would-be buyers and sellers approach the local chief, who confirms that the seller owns the land he is selling and gives him permission to sell it. The contract may be oral, or it may be written in one of the local languages and signed by the chief. The chief often takes a cut – anything from a modest 5 percent to an exorbitant 40 percent.
This was how John and Grace Tarera bought the land beneath their house. They have a contract signed by the local chief, but no bank will accept it as collateral because it is not enforceable in a court of law. Rather, it is an expression of traditional law, which is usually unwritten, unpredictable, and dependent on the chief’s whim. The chief may be a wise, just, and consistent fellow. But the bank does not know this. So the Tareras’ house is dead capital. They own it, but they cannot make its value work for them.
Tied to the land
Informal ownership hurts rural folk, too. Take Nashon Zimba, a twenty-five-year-old peasant I met in Chiponde, a small village in Kasungu district, north-west of Lilongwe. Zimba is poor even by Malawian standards. He grows corn, beans, cassava, and tobacco on a couple of hectares which he inherited from his parents. He rarely has much left over to sell: he told me that his cash income in 2000 was $40. He lives with his wife and baby daughter in a tiny mud shack with plastic bags for window panes.
We sat on a reed mat under the shade of a mango tree. It was midday and too hot to work, so Zimba was happy to talk. He was barefoot, and his T-shirt was streaked with soil stains. He cradled his baby daughter, who was chewing on a bicycle spoke.
“I’ve got enough land,” said Zimba, “but I can’t afford enough seeds or fertilizer to make good use of it.” Borrowing, he lamented, was out of the question. Loan sharks – “caterpillars,” as they are known in Malawi – charge impossible rates of interest. A few farmers in Zimba’s village raise small loans from a donor-supported microlender called the Malawi Rural Finance Corporation, but only those who are organized into groups to cross-guarantee each other’s borrowings are eligible. Such groups are exclusive: the most productive farmers do not want less able neighbors to spoil their collective credit history. “I wanted to join one of those groups,” said Zimba, “but it was full.” One of his neighbors told me that the village elite did not think Zimba quite made the grade.
For those who cannot join credit circles, there is charity. The government hands out free “starter packs” of seeds and fertilizer, intended for the poorest farmers. Only thirty-two such packs arrived in Zimba’s village the previous year, for a population of about 900. They were not sent directly to the intended recipients; the poor do not have addresses. Instead, the chief doled them out as he saw fit. Zimba did not receive one.
Almost 90 percent of Malawi’s 11 million people live off the land. Their average plot size is tiny: less than a hectare. Productivity is woeful. The population is expected to double by 2020. Unless a lot of people move to the cities, plots will continue to be sliced ever smaller. Smaller plots mean smaller harvests for each family, which is one reason why Malawi suffered deadly food shortages in 2002.
Zimba sensed that there was little future in farming. His ambition, he said, was to be a hawker. He envisaged buying soap and paraffin in the nearest town and selling it in the village. It would be wonderful, he supposed, if he could one day earn enough to buy a bicycle. But, he said: “I haven’t got the money to get started.”
Some people in Zimba’s position move to the city, find jobs, and save to start a small business. But this is hard. A Malawian peasant cannot usually sell his land without agreement from his family and the village chief. If he leaves his property unattended, there is a danger that the chief will give his land to someone else or that a sibling will grab it.
When he arrives in the city, there will be no cheap shelter. Without mortgage lending, there are never enough houses in shanty towns. A landlord in Mtandire cannot borrow money to build and then recoup it from rental income. He has to pay cash in advance and then try to get it back. So a typical slum rent is much higher, relative to the value of the house, than it would be in a more affluent area where landlords have title deeds. In Mtandire, ten months’ rent will buy you the house.
Capitalism needs rules
The advantages of sound property rights are so taken for granted in the West that it is worth spelling them out. First, secure title makes assets fungible. In a country with good property laws, almost anyone can use a house or a piece of land as collateral to raise a loan. It is also easy to divide assets between multiple owners. Ownership of a factory, for example, can be shared out among hundreds of people, any of whom can sell all or part of his share without the need to take the factory physically apart. If a French farmer dies, his children can sell the farm, or retain equal shares in it, or the more agriculturally inclined sibling can buy the others out. The possibilities are legion. African smallholders, by contrast, have much less flexibility: plots tend to be divided into ever-smaller parcels with each generation.
A uniform property system is also a way of sharing knowledge. When information about the ownership and value of houses, companies, and other assets is centrally recorded and freely available, it makes it easier for people to see economic opportunities outside their own neighborhood. In other words, formal property law enables people to do business with strangers. Those who are part of the formal property system have addresses, credit records, and identifiable assets. A Westerner who does not honor his debts is blacklisted. The debt collectors know where to find him and what to seize. So he has a powerful incentive to play by the rules. Millions of Third-World squatters, by contrast, cannot obtain telephone or electricity lines because no one trusts them to pay their bills.
Western property laws protect not merely ownership but transactions, too. People in poor countries can usually prevent their assets from being stolen by forming self-defense groups or hiring the protection of local mobsters. But they cannot confidently buy anything they cannot see. Poor people carry their pigs and tobacco bales physically to market. The prohibitive cost of carrying them back means that they have to sell them right away, whether prices are good or not. American farmers sell paper representations of their crops, which is easier. To smooth their cash flow, they can sell the rights to purchase crops which have not yet been sown. If a Malawian farmer wants cash in advance, he must grow marijuana.
The house that Nashon built
When you cannot do business with strangers, you have to do everything yourself. This is inefficient. Imagine building your own house. Some Westerners do, of course, build their own houses, but not in the way rural Africans do. An American who wants to do it himself buys industrially produced bricks, cement, glass, nails, screws, drills, pipes, window frames, and so on. All these parts have been made cheaply and well by a company that specializes in making them and that has in turn bought its machine tools and accounting services from other specialists.
Compare this with Nashon Zimba’s experiences. He digs up mud, shapes it into cuboids, and dries it in the sun to make bricks. He mixes his own cement, also from mud. He cuts branches to make beams and thatches the roof with sisal or grass. His only industrial input is the metal blade on his axe. Working on his own while at the same time growing food for his family, Zimba has erected a house that is dark, cramped, cold in winter, and steamy in summer and that has running water only when tropical storms come through the roof. He kindly invited me in, and I found that I could not stand up straight inside it. He told me that it would probably fall down within five years.
I thought of my own home, with its sturdy walls and modern kitchen. Zimba is a skilled builder; I barely know which way is up on a brick. Yet he lives in a hovel, while I, like most Westerners, live in a relative palace, built by a network of millions of people I have never met. In all my travels, I have never seen a more poignant illustration of why the world’s poor people need capitalism.
How to be formal
Since the demise of the Soviet Union, few people still argue that property is theft. It is a rare despot – Robert Mugabe springs to mind – who openly urges his followers to grab other people’s land. In theory, property rights are available to all in most poor countries. But in practice, most poor people do not take advantage of these rights.
It is often assumed that informal homes and businesses stay that way because their owners do not wish to pay taxes. This is doubtful. Taxes are of course burdensome, but the costs of extra-legality are often more so. The informal entrepreneur pays gangsters for protection and bribes officials to ignore him. His operations are often geographically dispersed to hide them from the authorities, which stops him from achieving economies of scale. He cannot declare limited liability or obtain insurance or cheap credit. In short, informality is uncomfortable.
The reason that extra-legal businesses and landowners in poor countries do not become legal is that it is absurdly hard to do so. In some parts of Africa, such as Ethiopia and Mozambique, freehold land ownership is simply not allowed. In others, bureaucracy blocks the way to formal ownership. In Egypt, to obtain permission to build a house on land zoned for agriculture takes six to eleven years. If you build first and then try to become legal, you risk having your home demolished and spending up to ten years in jail. In Angola, the deeds registry is so chaotic that even tower blocks in the capital city are sometimes subject to overlapping claims. You can rent an apartment from one ministry and be evicted the next month by another.
In Malawi, the bureaucracy that administers property law is, in the words of an official commission of inquiry into the subject, “riddled with jurisdictional overlaps and internal conflicts” and “often the cause of delays, errors of judgement, lack of coordination, rampant corruption and dereliction of duty.”3
Such obstacles are not a purely African problem. In Peru, Hernando de Soto’s researchers set up a one-man garment workshop and tried to register it. The team worked for six hours a day, filling out forms, traveling by bus into central Lima, and standing in line in front of the relevant bureaucratic desks. It took them 289 days to make their micro-enterprise legal and cost $1,231 – thirty-one times the monthly minimum wage in Peru.4
All rich industrialized countries have secure property rights, accessible to more or less all citizens. No poor country has. Better property laws are not the only reason that some countries are richer than others, but they clearly make a difference. Many poor countries recognize this and are trying to devise ways to make their property systems more inclusive. But the hurdles are high.
Lawyers often oppose attempts to simplify the law. Tribal chiefs resist changes that may reduce their power. And cultures, though they evolve quite rapidly, cannot be changed by fiat. People who live in traditional rural communities are often wary of alien ways of doing things. Stanley Ngwira, for example, chairman of an association of small farmers from Nashon Zimba’s district, finds the idea of selling land abhorrent. “There would be nothing for our children,” he told me with a frown.
Tony Hawkins, a professor of business studies at the University of Zimbabwe, argues that it is relatively simple to institute sound property rules in cities but much harder in rural societies. While he admires de Soto’s work, he thinks the Peruvian has “glossed over” the difficulties of switching from communal to individual ownership in Africa, where most people are peasants, and most peasants are unfamiliar with written contracts.5
Today’s rich countries took hundreds of years to forge uniform property codes. Until the last century (or more recently, in the case of Japan) they were shackled with multiple and contradictory sets of property laws. The early American colonists were mostly squatters. The country was so vast and sparsely populated that the land-hungry simply fenced and ploughed without worrying about title. Big landowners, such as George Washington, tried to evict and prosecute squatters, but they tended to resist violently, and juries seldom convicted them.
Powerless to stop them, some legislators tried instead to bring squatters inside the law. As early as 1642, the state of Virginia passed a law that allowed for squatters to be compensated for improvements they had made to land they occupied. If the rightful owner was unwilling to pay, the squatters were given the right to buy the land from him at a price set by a jury. This helped many squatters to become legal.
In the nineteenth century, when the pioneers rushed west to stake out claims to farms and gold mines, they made their own local rules to determine who owned what. Several states passed laws allowing those who occupied and improved idle land to claim title to it. Federal law followed behind. There was a heroic effort to tie all local property systems together into a single code. The Homestead Act of 1862 and the mining law of 1866 essentially formalized the arrangements that extra-legal farmers and prospectors had already worked out for themselves hundreds of miles from Washington.
For poor countries today, the lesson is not in the details of American history but in the general principles. For property law to be respected, it has to reflect what is actually happening on the ground, and it has to try to include as many people as possible.
Poor countries’ efforts at reforming property law have rarely succeeded. Middle-class reformers have too often assumed that their ideals could be imposed on the poor. In Peru, for example, numerous attempts to give indigenous people title to their land failed because the mechanisms by which they could assert this right were too complex and costly.
In Malawi, laws allowing freehold and leasehold were introduced by the British in colonial times but were never widely trusted because they were the means by which settlers hoodwinked the locals into surrendering their ancestral lands. The despot Banda also tried to encourage formal ownership. But his habit of grabbing large tracts of land for his cronies undermined the rule of law. Banks were forced to lend for political rather than commercial reasons, which prevented the evolution of property-backed lending.
The Malawian government said, in 2001, that it wanted to make it easier for holders of customary land to upgrade to formal leasehold. But it has yet to persuade people that formality offers concrete advantages and that it does not conflict too much with their traditions. All this will take time, especially since not all Malawian politicians are exactly passionate about property rights. In 2002, the government took a retrograde step by declaring that leaseholds held by foreigners, including Malawi’s sizeable Asian minority, would not confer the same rights as those held by native Malawians.
Africa, like Malawi, has a long way to go before its people can unlock the wealth trapped in informal property. But it can be done. In every poor village, anywhere in the world, people know who owns what. De Soto tells a story. On farms in Bali there are few fences to mark the boundaries between properties. But the dogs know. Cross from one farmer’s land to his neighbor’s, and a different dog barks. The challenge for governments in poor countries is to take the information contained in those yelps and fashion from it a clear and enforceable set of laws. The alternative, in Africa and elsewhere, is to stay poor.