0.8 Institutions (intangible capital)  (Page 3/3)

We will return time and again to the property rights issue when we discuss sustainable development. For now, it suffices to say that in developing nations the evolution of property rights, especially in land, since 1945 can be divided into two distinct periods.

First Period : 1945-1982: A period of centralization of property rights in the hands of government, beginning in the years noted below.

Second Period : Since 1980: A gradual move away from centralized property rights in land, with governments reluctantly relinquishing rights to either local groups or individuals.

Consider China. Beginning in 1982 the situation on property rights have been evolving. General statements about this evolution are difficult to make, but China is clearly moving away from Marxist principles regarding property rates, wherein land rights were owned only by the government.

For example in four Western Hemisphere nations, there has been a process of return of property rights of land to indigenous people. These are:

• Columbia (1982)
• Peru (1998)
• Brazil (2008)
• Even in Canada, since 2006,

In British Columbia, the first nation people (Amerindians) have traditionally held their land in common. Now several tribes, such as the Nisga’a and Tsawwassen are granting private property rights in land to their members. Leaders of their tribes say that lack of well defined, tradable property rights has been the biggest obstacle to economic development. Now , with individual rights has been land, it can be used as collateral on loans, to get mortgages etc., to startup businesses.

While many sub-Saharan African nations are now growing faster, African nations are still among the poorest in world because they have had weak, ineffective institutions. They have ineffective institutions largely, but not wholly, because of the legacy of colonialism.

How did this happen? Studies by Daron Acemoglu at Harvard explain part of it as the legacy of malaria and yellow fever in earlier colonial times (1600-1900). Malaria and yellow fever meant high mortality rates for the colonial imperialists: British, French, Dutch and Belgian settlers in Africa and Asia. To illustrate, the largest graveyard in Accra, Ghana contains many examples of colonial governors who died within 4 or 5 years after arrival in Ghana.

The high mortality rate affected the institutions the European imposed on their colonies. High death rates caused the imperialists to prefer institutions that favored easy extraction of such natural resources as tin, gold, diamonds, and cocoa. These are called extractive societies.

Another example: Indonesia 1700-1940. Young men from Holland went there from Holland in pursuit of their fortunes. After a few years there, they returned to Holland to build sumptuous houses. Under these conditions settlers opted for weak protection of property rights and very limited checks on government power.

Where the death rates for colonists were very low as in Jamaica, Aruba, Bahamas, Bermuda and South Africa the imperialists opted for stronger protection for property rights and more stable institutions.

Institutions have interacted with economic development in countless interesting ways throughout history. Consider an example from East Asia.

The Minangkabau of West Sumatra in Indonesia are a proud, industrious people.

For centuries, the Minangs were fully matriarchal. This was also a society featuring the rare marriage institution called Polyandry. Under Polyandry wives had multiple husbands. This institution had a major impact on Indonesian development under Dutch colonial rule (1609-1946). Minang men were called the Lebanese of Indonesia (overseas Lebanese are famous for their entrepreneurship all over Africa and Asia). Minang males could be found in all parts of Indonesia – Java, Borneo as well as Sumatra, starting businesses, importing foreign technology. What made Minang males so prominent in entrepreneurship all over Indonesia? Consider what do husbands do in a Polyandrous society? A male who is one of three men married to a Minang women has plenty of time on his hands, and little to keep him at home. So, Minang males would be absent from West Sumatra for long periods. The wife’s other husbands were there to handle husbandly duties.

Many Minang husbands in their wanderings seized opportunities for business: in trade, agricultures, commerce and fishing all over the country. There was in fact the strongest native entrepreneurial group in Indonesia until very recent times. (But Minangs were never as dominant in trade as were the Chinese minority in Indonesia).

Many informal institutions have evolved over centuries and are very important to society. A good example is Gotong-royong in Indonesia, especially East Java. The phrase means literally, “we work together”. This institution defines rules for social collaboration, literally cooperation, on such vital matters as irrigation where the entire adult community participates. The ease of operating local irrigation system in Java contrasts sharply with those in much of rural India, where irrigation questions were very difficult to resolve.

Economic freedom clearly depends on institutional arrangements.

[M.G. Note that several pages seem to be missing]

Institutions ultimately determine the degree of freedom or of oppression in any given nation.

For several years, an index of economic freedom covering 179 countries has been published by The Heritage Foundation and The Wall Street Journal (See Figure 8-2).

Two East Asian nation-states top the list (see Figure 8-2). Australia and New Zealand rank third and fourth. The United States, surprisingly to many stands, at number 10 on the list. The lowest ranked developed nation is Greece at 119. The far nations with the lowest indices of economic freedom are Libya, Cuba, Zimbabwe and at position 179 North Korea.