The Unreal Estate

The unreal estate

For many people around the world, property rights are not well defined, enforced or monitored; resulting in over half of the world’s population living and working on ‘unreal estate’, that is, without the security of property ownership.

Basic economic principles outline that secure Panaritis draws on her experience since the early property rights are important for efficiency, 1990s in Latin America. As a World Bank economist, investment and growth; people living and working Panaritis was shocked to find out that in much of the on land with the constant uncertainty of losing their continent, formal bureaucratic processes meant that lands or properties are unlikely to make the long- it could take years, sometimes even decades to term investments that can help create economic establish and register property rights. Much of the growth and eradicate poverty. Farmers, for existing rule of law defining rights in countries such example, are likely to continue farming low-return, as Peru, Columbia, Ecuador, Venezuela and Mexico single period crops, instead of investing in higher- dated back to the mercantilist period of colonisation. return cash crops such as coffee. The reality check

Panaritis uses what she calls ‘reality check analysis’ an analytical method to better understand why we have informality and why institutions break down, in order to design effective reform. She used this method in the case of Peru where, with World Bank funding, she helped create a new legal structure from the bottom up where trust and understanding In her book Prosperity Unbound: among local leaders and government officials Building Property Markets With Trust, INSEAD developed. alumna Elena Panaritis presents a holistic Informal property rights (in terms of ownership on approach to combating this lack of formal rights, land and buildings) were fully transformed in just arguing that a new thinking process, combined with three years. They could be registered in just one successful diagnosis and determination for change, day for a processing fee a fraction of previous costs, could transform society. She says informality has and they would be included in a formal system for arisen because of the mismatch between institutions, ever. More than six million people became part of organisations and society’s demands. the formal property market with security of ownership. Shortly after the World Bank left, major Visit INSEAD Knowledge http://knowledge.insead.edu 01

Copyright © INSEAD 2021. All rights reserved. This article first appeared on INSEAD Knowledge (http://knowledge.insead.edu). financial institutions entered the market in Peru of governance but one that keeps many developing offering construction and consumer loans, as well as country leaders in power. Such government a whole new set of formal credit. decision-making elites are content with the situation and the status quo. They personally don’t suffer from Countries with property rights systems which the lack of choice regarding ownership and they are functioned well – such as Canada, Australia and the certainly not economically distressed.” UK – have also adjusted these systems to reflect a bottom-up rather than top-down approach. Panaritis The role of microfinance explains a successful methodology for bottom-up success in her new book. She is currently a social Panaritis sees microfinance as playing an important entrepreneur and is the director of Panel Group, a complementary role to secure property rights, but small investment advisory, that seeks to reform notes that it is not a solution in itself. “[Microfinance] property rights worldwide. is not supposed to suggest major regulatory reforms or establishment of property rights for those who do Speaking to INSEAD Knowledge from her home in not have [any]. So it is not correct to confuse Washington DC, Panaritis addresses the issue of microfinance with regulatory reform at the core of how to bring the nine trillion dollars that are locked governance (which property rights reform would into ‘unreal estate’ into the formal economy. be).”

“No one has so far attacked the issue with the Formal property markets are relevant in all practical aim to incorporate this wealth pool of nine societies, says Panaritis, disagreeing with trillion dollars and its owners. Instead, for years and arguments that informality may be a cultural trait. years, we notice ‘solutions’ that only serve as mere “In my experience working in 36 countries, I have palliatives. These solutions result in segmenting the not met people that are unaware of how to trade or problem and many times rendering it worst. More operate in an open market. I have met a lot of often we notice a lot of solutions that are people that are frustrated and feel that they have to philanthropic, feel-good approaches or massive follow some government regulations and are hand-outs with again no deep and sustainable confused by bureaucracy … We need to understand change. The proof is that informality increases the impacts of having the choice of ownership and dramatically and now it starts to permeate even identify the role of institutions, organisations, consolidated developed markets.” history, incentives of the private sector, government and citizens. Solutions have to take into account the Crucial to the process, says Panaritis, is for all interest of all key players and align them. It is only players – entrepreneurs, government and citizens – then wealth and empowerment is generated and to understand the central role of property rights in prosperity can start to (be) unbound.” sustainable economic growth and building alliances between these key groups. “It requires focus, Prosperity Unbound: Building Property Markets With vision, conviction and a strong stomach to handle Trust is published by Palgrave Macmillan. breaking through the old modus operandi. In order for this to happen, key players from the government, communities and private sector must Find article at come together.” https://knowledge.insead.edu/economics-politics/the- unreal-estate-2100 The easiest parties to bring into the dialogue are those people living and working on ‘unreal estate’ and the private sector. Convincing policymakers Download the Knowledge app for free and the government is not as simple. “That’s why you need important champions and visionaries among both private investors and in government and policymaking,” says Panaritis.

“The reason why some government decision- makers may feel threatened about building secure property rights for everyone and provide a choice of secure ownership across the board, is because empowerment is spread out to citizens. The middle class is becoming wider and stronger as citizens now control their wealth and savings as they wish best. It is this exact fact that makes citizens less controllable by government hand-outs and special programmes. This is of course a short-sighted vision Visit INSEAD Knowledge http://knowledge.insead.edu 02