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Monday, December 03, 2007
Perspectives

Prosperity & Weak Property Rights

Two paths to prosperity when property rights enforcement is weak.
Wireless telephony is a suitable technology for unfriendly business environments, the author argues. (Photo: Nokia)

BY VENETA ANDONOVA ZULETA

Governments are not always the most effective mechanism for guaranteeing private investment. In many countries governments are unable to enforce property rights, whatever the degree of protection promised by the law. (...)

There are at least two alternative private paths to prosperity. Firstly, businesses can adopt production technologies that are less sensitive to institutional voids. These are cheaper, mobile versions of existing technologies, so they can reduce exposure to the hold-up problem. Secondly, entrepreneurs can implement employee ownership, together with other motivational strategies, in order to preserve the ownership itself.
Employees are thus encouraged to support the current allocation of property rights instead of challenging it. (…)

 

TECHNOLOGY


Most efforts by governments and international organizations today focus on changing institutions by direct intervention, transforming the fundamental political and social rules of a society. However, it might be useful to consider changing institutions indirectly by introducing technologies that are less sensitive to an adverse business climate so that, through market dynamics, they can make institutions more market supportive. (…)

 

New mobile forms of technology can transform the future of poor nations. (…) In fact, wireless telephony can afford access to information and telecommunications services in previously isolated and institutionally underdeveloped regions often with scarce government presence. It is built on cheaper, easily re-deployable infrastructure, and may achieve a high degree of connectivity in hostile institutional environments. In addition, mobile networks can be constructed faster than land-line networks, they need fewer subscribers to reach a minimally efficient scale, and their modules are mobile and easily transportable. So, from an institutional perspective, the difference between land-line and wireless telecommunications networks lies in the size of the sunk costs, the asset mobility and the investment risk related to the hold-up problem. (…)  These characteristics make wireless telephony a suitable technology for unfriendly business environments.

 

The success of wireless telecommunications in countries at the bottom of the lists for institutional excellence demonstrates that economic progress is not exclusive to champions in ambitious and often externally-directed institutional reforms, but also to those countries whose production technologies suit their level of institutional development.

 

In Africa, for example, mobile telephony is a functional substitute for ill-developed fixed phone networks and roads, resulting in lower information asymmetry among economic agents and enhanced economic development. Investors who spotted the opportunity of mobile telephony in Africa went against the advice of analysts who emphasized institutional voids as a deterrent. The result is that today telecoms companies in Africa are successfully providing services that are much in demand. (…)

 

HUMAN RESOURCES POLICIES

 

The second mechanism … by which entrepreneurs can enhance economic prosperity in developing nations whose governments frequently fail to provide credible guaranties for investor rights, is the use of inclusive human resources practices.


In hostile environments, the volume of economic activity is limited and exchanges are carried
out in intimidating settings. A precarious business climate directly influences the relationship between employers (owners) and employees. The latter are able not only to enhance the value of capital but also to destroy it without necessarily suffering punishment because enforceability of property rights is lacking. As a result, employee ownership, together with other motivational strategies, can be used to preserve the value of assets for capital owners when these suffer from weak property rights protection. Ultimately, better protection of investors’ interests translate into greater economic activity and enhances growth. (…)

 

The Case of Hacienda Gavilanes, Colombia

 

In the area where Hacienda Gavilanes is located, paramilitary armies are particularly active. Spurred by government plans for a peace process, paramilitary leaders are actively purchasing land from landowners unable to manage their farms as a result of the coffee and sugar cane crises. A recently-imposed local tax on land puts additional strain on landowners who frequently find themselves forced to sell to the leaders of regional armed groups that are notorious for promoting drug trafficking and violence.


Hacienda Gavilanes started as a sugar cane farm located in Risaralda, a mountainous region in Western Colombia. In the 1990s, sugar prices fell sharply and the farm began to incur losses in an economic environment that was unlikely to change. Then the owner of Hacienda Gavilanes decided to restructure the farm’s hiring and incentives policy, and encouraged the foundation
of a labor cooperative, Cofudeco. Almost immediately, this cooperative improved working conditions as well as increasing the farm’s security.

 

Hacienda Gavilanes became a client of the cooperative. The landowner no longer pays daily wages to the workers, but negotiates with Cofudeco on compensation for the completion of certain tasks. This arrangement creates incentives for time-saving innovations, and workers have come up with several proposals for improving the processes. Moreover, workers have the opportunity to attend courses related to their daily tasks. The acquisition of new skills is highly valued by the workers and helps them develop a sense of belonging and psychological

ownership.


In addition, the members of Cofudeco have access to credit because the cooperative guarantees their personal loans. Access to credit has allowed workers and their families to purchase groceries, home appliances and motorcycles. Additionally, they can have a bank account with a credit card. All these benefits increase the cost of leaving the labor cooperative, strengthen workers’ commitment to the farm and guarantee unchallenged ownership over the assets.


Workers are also given considerable freedom to decide and suggest how to perform different tasks. This arrangement stands in sharp contrast to the widespread feudal relationships in the area. Another local innovation is the ongoing process of ownership sharing. Cofudeco is gradually becoming the owner of working tools such as machetes and knives, and its members plan to buy a tractor. Apart from capital accumulation and monetary rewards, Cofudeco members receive fringe benefits in the form of literacy programs and improved housing conditions for themselves and their families.


As the manager of Cofudeco states, “by offering jobs and social security, the farm has improved its security conditions”. In fact, today this is the only farm that does not have a hired guard and one of the few economically sustainable farms in the area.

 

Several challenges in implementing this strategy should be recognized. Ownership and profit sharing might not be necessary for settings with an abundant labor supply and with alternative mechanisms for moral hazard control, such as reputation or monitoring. In general, however, the greater the dependence on specific skills, the more appropriate are ownership and profit sharing. Specific skills are an indispensable part of almost all production technologies including agricultural activities, which is the largest production sector in most developing nations. While ownership and profit sharing might not be strictly necessary, some means of reducing the divergence of interests in the employment relation is required.


One method is to use efficiency wages. If the investment needed for monitoring workers is given to them in the form of efficiency wages, then the opportunity cost of both shirking and illegal activities will rise. As a result, the moral hazard problem will be under control and the employees will be strongly committed to the status quo assignment of property rights. In addition, efficiency wages are class-neutral as they maintain the traditional roles of owners and workers. Finally, improvement of the overall business climate as a result of private organizational and reward policies will take place only if entrepreneurs adopt these massively. Sporadic use of such mechanisms may have a local impact but will make hardly any difference on a national level and will not change the general country-level perception of investors’ rights protection. Entrepreneurs should probably first be made to see that protection of their assets is to a large extent in their own hands.

 

CONCLUSION

 

In spite of receiving relatively little attention in the literature these days, there are private paths for promoting market relations, improving the institutional environment and enhancing economic growth. Such private initiatives have the potential to transform developing nations without generating resistance, as they are free from the perception of imposition.

 

Veneta Andonova Zuleta is a professor at the Universidad de los Andes in Colombia. This column is based on  an excerpt from a longer article in the Journal of Globalization, Competitiveness and Governability published by Georgetown University and Universia. Republished with permission from the journal.

 

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