Part 2

The Economic Consequences of Secure Property Rights

The quality of property rights and the economic freedom to use them differs greatly from one society to the other, as do the levels of productivity and living standards. In recent decades, much theoretical and empirical research has gone into showing that the connection between economic freedom and prosperity is systematic.

The Economic Freedom of the World Index covering 130 countries, which one astute observer recently called 'the Rosetta Stone of development economics' illustrates the distinct and now well established correlations between economic freedom and the level of productivity and income, as well as the rate of economic growth. It further illustrates that simply it is not true that the rich are growing richer and the poor poorer, as a standard Marxist refrain alleges. Rather, the free are getting richer, and the unfree and corruptly ruled are made poorer.

The long-term economic history around the world tells a similar story, which those who want to 'make African poverty history’ must not ignore.Two thousand years ago, most people on earth had equally poor living standards and scarcity imposed a harsh rule. Average per-capita incomes throughout the world were roughly as low as they are now in the poorest countries on earth (for example Niger, Chad, Afghanistan, Haiti, East Timor) ­­–– notwithstanding the splendour of some small enclaves enjoyed by ruling elites.By ca. 1500 AD, West Europeans had begun to achieve a modest, but sustained rise in per-capita incomes. The process accelerated with the industrial revolution and then again after the second world war. The overseas economies created by west European colonisers (US, Canada, Australia and New Zealand) advanced on average even faster and further. Economic historians have tied the growth and its continuation to the emergence of widely respected and enforced private property rights, free markets and the role of government in protecting life, liberty and property. This insight is of course not new:  Classical liberal philosophers, such as John Locke (1632-1704), Charles de Montesquieu (1639-1755), David Hume (1711-76), Adam Smith (1723-1790) and Alexander von Humboldt (1769-1859) made this fundamental point long ago.

Japan took off into accelerated economic growth in the wake of the Meiji revolution in the late 19^th century, when political changes allowed the Japanese to draw on pre-existing institutions of enterprise and private property ownership, according to Powelson in Centuries of Economic Endeavour, Parallel Paths in Japan and Europe and their Contrast with the Third World. With the further modernisation of property ownership and markets after the second world war, growth accelerated and Japan caught up with the West.

The take-off into economic growth in the remainder of East Asia came later. When it happened after the 1950s, it was spectacular. The mostly autocratic regimes of East and Southeast Asia, who felt threatened by communist China, opened to foreign trade and investment. They also made themselves attractive by economic liberalisation, controlling corruption to some extent and ensuring greater respect for individual property rights. This allowed people to mobilise resources and to learn by competing in open world markets. China's more recent and breathtaking acceleration of economic growth began with the de facto return of private property rights to 400 million peasants and the privatisation of numerous state enterprises. More recently, India has begun to follow – so far somewhat unevenly – the East Asian example.

By contrast, Africa south of the Sahara, as well as North Africa and the Mideast has lagged disastrously behind. Over the past generation, they have, on average, experienced near-stagnation or even decline in living standards. This goes along with very poor economic freedom ratings and insecure private property throughout these two regions. With only few exceptions, no country in these laggard parts of the world ranks among the top half of the economic freedom league, according to  Gwartney-Lawson in the 2006 Economic Freedom of the World. Most African nations indeed rank near the bottom, not only on economic freedom as a whole, but even more so on 'Legal Structure and Property Rights' (idem, 45-174) and corruption.

Any foreign investor or potential international customer, who envisages dealing with corrupt African regimes, such as Kenya, Zimbabwe, the Congo or Nigeria, will only engage in business if extremely high profits can be expected and extracted, because the risks are so high. Consequently, local workers and landowners must accept extremely low incomes to remain even marginally competitive in world markets. According to Institute of International Finance, only a paltry 8.3% of net private capital going to emerging economies in 2006 was invested in Africa and the Middle East. Most of that was in extractive industries with little local productive participation and skills training. As a result, most benefits of globalisation have eluded Africa's population.

Property rights and their legal protection are woefully neglected throughout most of Africa. Little wonder poverty, unemployment and civil strife are rife and most entrepreneurs in the dynamic core of the world economy (North America-Western Europe-East Asia) show hardly any real interest in – and even growing indifference to – the self-inflicted woes of Africa.

Other Consequences of Secure Property Rights

Admittedly, economic welfare is not everything, but economic freedom has a favourable influence on other important indicators of human well being. One criterion is the incidence of absolute poverty. It is systematically lower in free economies than in unfree ones. This is not surprising because open competition allows people to get ahead materially. Government interventions in free markets – even when justified with some purported redistributional objective – all too often distort income distribution and hinder upward mobility. Besides, welfare states that confiscate the private property of some in order to hand it to others cannot at the same time be good protectors of private property and individual freedom.

People in the 25% of nations with the freest economies live on average 22.8 years longer than those in the least free quartile, their health is much better, and infant mortality drops from 72.4 per one-thousand inhabitants to 5.9 among the freest (Gwartney-Lawson, 2006). As the average African mother has to face a 70% chance that  one or more of her children will die before reaching the age of 5 (Easterly-Levine, 1997), this is an important consideration. 

Access to nutrition, clean water and education tends to be much better in free economies than in unfree ones, as is the case with corruption control and environmental performance. It has long been recognised that property owners act as more careful and more far-sighted stewards of land and other natural resources than bureaucrats and potentates. Consider at the environmental devastation throughout the former Soviet empire, where most land was state-owned. That exclusive, individual property rights make for better resource use became, for example, clear when the first LandSat images of Africa's Sahel region were analysed. Well-defined areas had retained good grass cover amidst general drought. On-the-ground investigations revealed that most land was communally owned, overgrazed and in distress, whereas the few privately owned, fenced-in plots were carefully managed to maintain some grass cover and avoid erosion. The 'tragedy of the commons' was avoided by private ownership.  

On a continent, which has not seen a single year of complete peace for the past fifty years, it is relevant that nations with a high degree of economic freedom do not fight wars with each other. While the correlation between democracy and peace is fuzzy and unclear, the correlation between economic freedom and peace is high, even though capitalism alone will of course not guarantee world peace.

Economic freedom, competing and self-responsibility create a climate of can-do optimism, in particular among the young. By contrast, economic repression leads on the road to serfdom, dejection and fear of the future.

In heavily controlled economies, political rights and civil liberties tend to be violated much more than in free economies. The poor in regulated economies simply lack the material means to confront the thugs and the rulers. What can a penniless shantytown dweller on the fringes of Nairobi or a Darfur peasant do against thugs and corrupt policemen? Moreover, people, who have developed a habit of managing their economic affairs freely, demand more political and civil liberties and resent political blunders that stymie their economic potential.

This last point is critically important for the future of African freedom. In the history of the West, liberty began typically with affluent merchants and producers claiming economic freedom. Rulers offered to provide property protection and the rule of law in order to retain and attract mobile capital and enterprise from elsewhere. They often allowed merchants to make and adjudicate their own laws (Law Merchant). Most of the time, the rulers did not limit their own arbitrary powers out of the kindness of their hearts, but out of sheer self-interest: They needed thriving enterprises to pay taxes and wanted legitimacy from prosperity. The same interaction between economic openness and political competition by political innovators took place in East Asia after 1960.

Economic liberalisation has always had unintended consequences. Economic growth creates a new middle class, which demands – a generation later – political probity and democracy, as well as better civil rights. We observe this throughout East Asia from the 1980s onwards, when the newly affluent young began to demand (and get) a greater democratic say in how public affairs are run. By contrast, Africans have dedicated much effort to political independence and the creation of (pseudo) democracies, but allowed powerful elites to strangle economic freedom, often justifying this by socialist rhetoric. Traditional tribal property rights were all too often replaced by state ownership or tight controls of property uses. All too frequently, licensing systems, state trading monopolies, import substitution, and capital controls have taken valuable economic freedoms from the people.

Milton Friedman was right to stress that political and civil freedom grows from economic liberalisation, not the other way round. He also made the point that communities confronted with choices between freedom and equality, those that opt for freedom first, tend to obtain a good measure both of prosperity and equality, whereas socialist 'equality-firsters' end up with poverty and inequality. Africa seems to offer plenty of empirical evidence that gives substance to Milton's point.

Without fundamental improvements in economic freedom, most Africans will remain unfree and poor.