Secure property rights are the key to economic growth

John Stuart Mill (1806-1873) once said something that was profoundly important yet relatively simple to understand. ‘Give a man the secure possession of a bleak rock, and he will turn it into a garden; give him nine year’s lease of a garden and he will convert it into a desert.’ What Mill was writing about, simply put, is the concept of property rights and the economic incentives those rights create.

A bleak rock with property rights becoming a garden may seem to be hyperbole. But Hong Kong was precisely such a bleak rock. It was a colony of Britain but it was a colony where property rights and free markets prevailed. And it quickly became one of the most prosperous places on the planet. It has no natural resources to speak of and even the drinking water has to be imported. But with property rights the people prospered.

I have always marvelled when walking the streets of Hong Kong. The massive skyscrapers and the hundreds of thousands of thriving shops and businesses are enticing. It’s a shoppers paradise.

Of course at one time the people of Hong Kong were poor. But they were free to trade their labour and they were, most importantly, free to keep what they produced. The average GDP per capita is now at R180,335. Government only consumes about 10.3% of GDP and the highest tax rate for individuals is 18.5%. There are few regulations, no minimum wage and secure property rights.

According to the Wall Street Journal’s economic freedom index Hong Kong is the world’s freest economy.

But Mill also wrote of a garden without property rights that turns into a desert. I can’t think of a better description for Zimbabwe. There the average per capita GDP is a mere R4,050, so the people of Hong Kong are forty-five times wealthier in spite of both starting out as poor colonies. Hong Kong had no natural resources while Zimbabwe had an abundance of them. However, Zimbabwe government spending equals about 38% of the entire GDP and the highest individual tax rate is a whopping 45%. As a result of its policies Zimbabwe today is listed near the very bottom of the economic freedom index.

Just a few years ago Zimbabwe was a major food exporter but Mugabe’s infamous land confiscation made that history. Within a few short years the breadbasket of Southern Africa became the desert that was predicted by Mill over a century ago. People produce goods and services, including food, when they feel that their effort will not go to waste. They won’t improve property they don’t own or which they feel may be taken from them at the whim of a government bureaucracy. There is security of property in Hong Kong and the bleak rock has become a garden. In Zimbabwe the garden has been transformed into a desert because property rights are no longer respected.

A farmer who fears losing his property won’t invest the same time, labour or money into the farm as one who believes he’ll be allowed to reap the fruits of his labour. A business owner who knows that government will tax the bulk of his profit away is not as likely to put in the effort required to expand his business. And what is never considered is the insecurity of the people who have moved onto the Zimbabwean farms. When will their turn come to be thrown off the farms by politicians wanting the farms for themselves, as has happened, or wishing to grant political patronage to someone other than the current occupants? In an environment where property rights are not respected, lawlessness prevails, and anyone can be dispossessed at any time, including ‘war veterans’. So even they do not have positive incentives to put energy into developing the farms they have invaded.

Production is not something that people plan on Monday and do on Tuesday. It’s a long term process. Even talk of appropriating property from people, either through the process of land confiscation or higher taxes affects the way people behave. If they are insecure their thinking is short term and they do less.

A farmer fearing land confiscation may not put in the new irrigation system that is needed. He won’t build the new barn or bother clearing that extra land of rocks so he can plant there. He’s not just farming for tomorrow. He’s farming for next year, for ten years from now, even for the next generation.

Talk about involuntary land exchanges (where property is taken from an unwilling seller who is compensated) immediately impedes investment in land. The results of that lack of investment won’t show up immediately. It takes time but the results eventually do appear and they aren’t good.

South Africa is not Zimbabwe. But it’s not Hong Kong either. And the numbers prove the point – the SA per capita GDP is R29,473 –. somewhere in-between the two. It’s highest tax rate is now 40% and government expenditure as a share of GDP is 27%.

The question is not, ‘Where is South Africa today?’ The question is, ‘Where is South Africa going?’ Will it become more like Hong Kong or more like Zimbabwe? The direction of policy change regarding property rights in South Africa is a good indicator of which way the nation is heading.

Author: Jim Peron is the executive director of the Institute for Liberal Studies (Auckland, New Zealand). This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Free Market Foundation.

FMF Feature Article / 3 February 2004