Towards A Competitive Malaysia #60

Chapter 9: Institutions Matter (Cont’d)

Property and Contract Rights

[Note: This installment was initially posted on June 18, 2008 but it was lost, together with the accompanying readers’ comments, when my website was disrupted. I am reposting it here.]

If we plot the pace of economic development over time, the remarkable finding would be that economic progress within the last hundred years far overshadowed all previous developments over human history. Scrutinizing the graph further, we would note the paucity of economic activities during feudal times.11

If we were to plot the pace of development across societies within the last century, we would have an equally interesting finding. Countries that adopted capitalism or market-oriented policies (Western Europe, the Anglo Saxon world, Northeast Asia) made remarkable economic progress, while others (Africa, Latin America, the Soviet empire, Arab world) remained stagnant. The graphs of this second group of countries resemble those of medieval Europe.

Capitalism involves not only the trading of goods and services between people but also freedom and democracy. People are free to pursue trade. Medieval Europe did not progress because there was very little trading among the citizens, only among the lords. When the lords were not engaged in trading, they were preoccupied with trying to get by force what the other lords had, that is engaging in wars, a destructive and economically non-productive pursuit.

There was little trading among the peasants because they had no rights to their property or labor, hence they could not exchange or barter it. Even their bodies belonged to their lords. If there were some enterprising peasants who could engage in raising crops and animals on the side when they were not serving their lords, those peasants risked losing them all to their greedy lords. A definite disincentive!

For society to progress, its citizens must be free to engage in the exchange of goods and services. The farmer must be able to exchange his excess rice for a hoe from the artisan. In this way the farmer gets to cultivate more land and produce more rice, and the artisan now has the energy to produce even more hoes and other implements. Both benefit from the exchange. Multiply such exchanges a thousand times, and you get progress on a societal scale.

Before such exchanges could take place, another condition must exist. The farmer must have confidence that the hoe rightly belongs to the artisan, and the artisan in turn must be certain that the rice is rightly the farmer’s to sell. There must be clearly delineated property rights.

The Peruvian economist Hernando De Soto in his book, The Mystery of Capital, argues that capitalism fails in the Third World precisely because there is no respect for property rights, especially by those in power.12 In the old days it was the sultans who grabbed the peasants’ prized buffaloes; today it is a ruthless dictator seizing a flourishing enterprise. Even educated leaders are not free from this feudal lord mentality. Armed with their Cambridge law degree they would expropriate land belonging to the people without proper compensation under the precept of “eminent domain” or some other arcane legal doctrine, as happened in Singapore to land belonging to the Malay minority. Regardless of mechanism, the results are the same: the trampling of property rights.

We can appreciate property rights when they apply to tangible assets like land and property. Before you buy a piece of land you must be sure that the owner really owns it, and that after paying, the land would then belong to you. There must be reliable institutions to record these transactions to prevent that land from being simultaneously bought and sold by different parties. There would be unending chaos were that to happen. Resources would be consumed untangling the mess instead of devoting to economic activities.

Malaysia’s land office, the agency responsible for recording titles, is a mess. The process of transferring title that would take a few days in California would consume months if not years in Malaysia. There have been cases where the transfers were never recorded, giving rise to unending conflicts.

Property rights extend beyond tangible assets. If I were to discover a new way to plant rice efficiently, I should reap the gains of my discovery. Others who wish to benefit from it should compensate or at least share with me their added bounty. This is not only fair but would also encourage others to partake in new discoveries. If others simply sponge off on my discovery without compensating me, the damage would be as if they had stolen my property.

In the Third World there is rampant stealing of intellectual property. When Sheila Majid records her beautiful songs, and others freely bootleg them, they too are stealing from her.

Intellectual property rights and patent laws are especially important in the K-economy. On one hand are the concerns of innovators and creative talent that their contributions be adequately rewarded; on the other are the scientists and intellectuals who fear that too rigid enforcements would stifle innovation and research. New knowledge and technical innovations do not arise out of the blue; they are incremental, building upon existing knowledge, products and processes. Too restrictive a protection of intellectual rights would inhibit the diffusion and creation of new knowledge, and thus progress. The challenge is in striking a balance.

Property rights should also extend to the rights we have over the fruits of our own labor. Slavery and indentured labor represent the ultimate loss of these rights, and those practices are rightly condemned in civilized societies.

One would think that if we use slaves—free labor—costs would be lowered and profits correspondingly increased. Not so! China seems determined to resurrect the economics of slavery by using forced prison labor. Thus far none of the Chinese enterprises are world leaders either in quality or price. Companies like Microsoft and IBM that pay their workers handsomely produce premium products.

There is another economic aspect to paying workers well. Henry Ford intuitively knew this when he set about to lower the prices of his cars and simultaneously raise the pay of his workers so they could be among his best customers.

One aspect of property rights often overlooked is what ecologist Garrett Hardins termed the “tragedy of the commons.”13 He used the example of the free grazing of cattle on public land, a common practice in western United States. If every rancher were to think only of maximizing his own profit, he or she would simply increase the number of cows. That would not involve much additional cost, as the land is communally owned. However, if every rancher were to do likewise, soon the whole land would be overgrazed to the point of ecological disaster. Everyone would then lose—hence the tragedy of the commons. As the land belonged to everyone (publicly owned), it did not belong to anyone, and no one took responsibility caring for it.

The fallacy of socialism is exactly this. With the state owning everything, no one bothers to take care of anything. If something does not belong to you, you do not have the sense of pride of ownership, and behave accordingly. This is encapsulated in the pithy wisdom that no one ever washes a rented car. The wisdom of capitalism is this recognition of private property.

I recently visited a senior civil servant living in one of the old-style palatial government bungalows in a secluded area of Kuala Lumpur. He had been there for decades, yet in all that time he did not plant a single flower, fruit tree, or in any way tried to enhance the landscaping. The reason? The property was not his, even though he would get to enjoy the fruits of his labor. As for cutting the lawn, he depended on the Public Works Department even if that meant enduring overgrown weeds!

That civil servant’s behavior is no different from the tenant dwellers of the Council flats of Liverpool or public housing projects of Southside Chicago. They have no pride of ownership. Margaret Thatcher tried to eradicate this destructive mentality with her policy of selling those units to their dwellers, that is, encouraging private property ownership.

Related to and an integral part of property rights are contract rights, the freedom of individuals to enter into a contract with one another.14 This does not mean anyone can enter into any contract with anyone to do anything. There are issues of ethics, religious norms, and public good to observe. The freedom to enter into a contractual agreement with my fellow citizen does not extend to allowing my selling my kidney to him. It is for society, and thus the political institutions, to set such limits. In India such contracts are apparently quite legitimate.

Regardless, when people trade goods and services, such exchanges are often transacted over days if not months or years. There is the element of promise and trust. A homeowner may enter into contract with a builder over constructing a new house. The contract may specify terms and conditions that have to be executed by each party. If there is no mechanism to enforce and honor such contracts, there will be chaos. No meaningful trade could take place under such circumstances. Even under the best of conditions, disagreements do arise; hence the importance of having a fair, honest and inexpensive system to resolve them.

The K-economy, with its global and instantaneous connectivity, have changed the dynamics of intellectual property rights and put a new twist to the tragedy of the commons. ICT has transformed markets with the democratization and decentralization of information. In the medieval era, information was the exclusive preserve of the clergy; that was also the way the clergy effectively controlled the flock. The printing press upended all that. With the masses now literate and reading materials readily available, the controls wielded by the clergy soon gave way. That did more to end feudalism and brought in democracy and capitalism.

Capitalism’s success brings its own problems. With news and information now increasingly controlled by big media corporations, we are reverting to medieval times with corporate chieftains replacing the clergy. Their stranglehold seems unassailable, as the economic barriers for new players are prohibitive. While it would take only a few thousand dollars to start a newspaper a hundred years ago, today that figure would be in the hundreds of millions.

The good news is that ICT, specifically the Internet, is again upending the status quo. Today I am reaching more readers through my website and other Internet outlets like Malaysiakini and Malaysia-Today than when I was writing for the mainstream papers.

ICT is challenging traditional economics and business models with its decentralization, diffusion (thus lack of control), open platform, and open-source software. Linux, started by volunteers spontaneously collaborating via the Internet, is fast challenging Microsoft Explorer. Google is offering its most important and most widely used product, its search engine, for free. Wikipedia, again free with its contents contributed voluntarily by millions worldwide, is more widely used than the venerable Encyclopedia Britannica. And the latter is a subscription service! Wikipedia is as reliable as the Britannica at least with respect to its science entries, according to the journal, Nature.15

Whether such successes would herald a new way of doing business to challenge or even complement the traditional capitalist model remains to be seen.16

Next: Judicial System