The laws that govern the ownership, sale, and collateralization of property are a classic example of rules that are important to economic and human development. The story of property reform in Peru illustrates the harm that can come from bad rules, the benefits that come from improving the rules, and the difficulties reformers face when they try to change the rules.
Like many developing countries in the 1990s, Peru undertook structural adjustment programs (taming hyperinflation, privatizing inefficient government enterprises, opening up to foreign trade and investment) as part of lending agreements with the IMF and World Bank. Unlike most developing countries, Peru also made a meaningful institutional overhaul of its property rights system. This deep institutional reform helps to explain Peru’s development strength in relation to its peers.
Peru’s economy is among the best performers in the developing world. Sustained growth lowered the poverty rate from nearly 50% in 2004 to 36.2% in 2008—a year in which GDPgrowth reached 9.8%. Though growth slowed sharply in 2009, Peru appears set to weather the global recession without entering a recession of its own.
Elena Panaritis helped to redesign Peru’s property system as an economist with the World Bank. At the time, more than half of property owners in Peru were not registered. The goal was to formalize the heretofore informal property and give millions of Peruvians access to the productive potential of their assets. Panaritis’ book, Prosperity Unbound, describes the experience.
In the early 1990s, Peru’s property rights system was a mess—a relic of land redistribution policies of the 1960s and 70s. The policies broke up large haciendas, creating cooperatives or individual holdings but forbidding the sale of land or its use as collateral. Legal registration of redistributed land was rare. The land belonged to whoever worked it, a principle that kept people close to their informal holdings—greatly reducing labor mobility.
Duplicate property claims were rampant, and resolution of claims took seven years or more. According to Panaritis, a Peruvian wanting to register a title or execute a contract for the sale of property had to deal with 14 different government offices and hundreds of steps. Bribery and corruption were the only way to effectively title property or resolve a claim.
Rather than register people under the existing dysfunctional system, the reformers in the Peruvian government and the World Bank decided to create an entirely new system. In the early 1990s, the government rescinded the laws forbidding the ownership or sale of land, and the reformers set about registering property under a new system based in part on a registry developed by the Lima-based Institute for Liberty and Democracy.
Abrupt, nationwide changes in the rules were not feasible. Opposition to property reform was too strong, and reformers needed time to try and revise. An initial pilot program successfully registered 88,000 properties, primarily in urban areas. The pilot convinced property owners that the new system was effective and trustworthy. The demonstrated success of the new rules acted as a catalyst for change across Peru.
As formal property registration expanded through the late 1990s and the early 2000s, collateral-based lending increased. Newly formal property owners felt secure enough to make improvements to their property. With formal rights, people were free to pursue earnings opportunities away from their property without fear of losing it to another claimant. Panaritis also reports lower levels of child labor and higher levels of school enrollment among families with formal property rights compared to their informal counterparts.
The reforms made made property a tradable asset and gave Peruvians the freedom to use their property in ways that best served their interests. The reform effort was not a simple matter handing out titles under the existing system—it required the creation of a new system for registering property. To this end, the pilot program was key. It allowed reformers and property owners to try and revise the new system, the success of which engendered trust in the pilot participants and sparked enthusiasm for the reforms elsewhere in Peru.