Property Rights Revisited
The importance of institutional governance, such as a strong rule of law, a lack of corruption, etc. for growth and development is widely recognised within development economics. Among the different aspects of the quality of governance, the protection of property rights holds a singular place. Its absence prevents people from entering the market economy, thus negatively impacting economic growth.
Over the last two decades, numerous studies have tried to quantify the effect of property rights on a wide range of societal outcomes, including growth, trade, and, to a lesser extent, inequality. However, a major limitation of these studies has been the data measuring property rights. These suffer from a number of shortcomings, including a lack of availability, focus, and objectivity.
A New Approach
In our latest paper, we try to address this gap by composing a new index of property rights that strictly focuses on the protection of these rights. As is common with indicators of governance, there is little to no objective data available that can be used to directly compare the security of property rights across countries. Instead, perception-based indicators such as survey-data or expert assessments are used to capture the opinion of a range of actors. Our approach was to combine a data set of 18 such indicators from 7 different sources. The selection of an indicator depending on whether it directly measured ‘the degree to which a country’s laws protect private property rights and the degree to which its government enforces those laws, including the probability that private property is expropriated’. By focussing on property rights alone, this allows us to disentangle its effect from that of the overall quality of the judicial system and other aspects of the institutional framework. This ensures a better match between theoretical models and empirical tests on the effects of property rights.
We did this for as wide a group of countries and as long a time span as possible, increasing the index coverage by as much as 45% compared to other indexes – our index covers 191 countries cross twenty year period between 1994 – 2014. We subsequently use this index to take another look at the effect of property rights on income inequality.
Fig. 1. Security of property right in 2014 (darker = more secure).
Most importantly, we have found that a strengthening of the security of property rights only reduces inequality in countries with strong democratic institutions. Our results indicate that it is the government’s redistributive effort (through taxes and transfers) that is key to ensuring a more equal society. Conversely, where democracy is under threat, a strengthening of property rights increases inequality, both before and after government intervention. Extrapolating these findings, this study indicates that development outcomes depend as much on the interplay between different aspects of governance as on their individual strength.
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