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PROPERTY RIGHTS IN LAND: Key to the processes of urbanisation and growth in developing countries

Land policies that reduce the cost of establishing formal ownership or protect informal dwellers against evictions can stimulate productivity in cities in developing countries. That is one of the findings of research by Yongyang Cai, Harris Selod and Jevgenijs Steinbuks, to be presented at the Royal Economic Society''s annual conference in Brighton in March 2016.

Their study analyses the interrelated development processes of urbanisation and the evolution of land property rights. As countries grow and develop, cities become more and more important. By making it easier for new industries to move to the city, property rights are responsible for a wave of urbanisation. But many developing countries still do not have formal property rights set up in their cities, with 60-80% of residences in African cities being ''informal''.

This study looks at when households move from the countryside to cities and the decisions they make on whether and when to purchase land property rights. Although the land will become more valuable as the city grows, some households will be unable to buy the rights to it from the get-go and have to live there informally – this makes it more likely that somebody else can ''grab'' it and evict them.

This study finds that instead of disappearing in the long run, this informal ownership may continue to be the norm indefinitely. The authors conclude that some informality is good, because it helps low-income workers move to the city in the first place. But land policies that make ownership easier or protect informal dwellers against evictions can actually have long-term welfare improving effects.

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The industrial revolution in Western Europe and North America soon triggered both increased urbanisation and accelerated economic development, placing countries in these regions onto paths of sustained income growth over the following three centuries.

Economists have long pointed to the crucial role that favourable institutions played in triggering and supporting these historic changes. Surprisingly, however, very little attention has been given to the role played by property rights in land in the interrelated processes of urbanisation and growth.

Looking back in more detail at the long process of urbanisation in the now developed countries, it is notable that formal land property rights were only gradually phased-in. This progressively stimulated the development of manufacturing activities by lowering transaction costs for the transfer of land to the emerging industries that were locating in cities, and made investments more secure and thus more productive. The strengthening of institutions defining and facilitating the enforcement of land property rights seems to have had a very considerable positive effect on economic efficiency.

A key question is thus the extent to which the dynamics of urbanisation in developing countries will follow or will diverge from the experience of North America and Western Europe. Although the prevalence of land informality has largely decreased in most developing countries over the recent decades, a phenomenon of ''urbanisation without formalisation'' seems to remain an important feature of some urbanising low-income countries.

In African cities especially, it is broadly estimated that informality remains high, at 60-80% of residential housing. This could relate to a number of institutional factors ranging from underdeveloped legal frameworks and enforcement mechanisms governing land transactions, to the lack of political will to reform land rights systems that are only accessible to the rich and benefit only a small rent-seeking elite.

Will informal city growth turn out to be a transitory feature (as the slum data seem to suggest) or could it remain a persistent feature, at least of some developing economies? This research proposes the first theory that explicitly accounts for the joint dynamics of urbanisation and the evolution of land property rights.

The researchers model urbanisation through the migration of heterogeneous households from a rural area to a city. The prevalence of land tenure informality is determined by urban dwellers'' decisions as to whether and when to purchase a land property right.

As land prices increase with in-migration of industry and with influxes of people into the urban area that generate productivity and income growth, securing a land title becomes more desirable. But formalising land plots may be unaffordable for less productive workers who then choose to postpone their decision to formalise, although this makes them vulnerable to land grabbers who can displace them and seize their plot.

The theory can account for a variety of urbanisation scenarios depending on institutional quality (the cost and enforcement strength of land property rights), the potential for urban agglomeration effects and macroeconomic uncertainty.

Contrary to the optimistic view of slum resorption, and in line with the observation that ''informality may be here to stay'', the theory indicates plausible contexts in which land tenure informality remains common in the long run. The theory also can be used to explore the dynamic impacts on urbanisation and economic growth of policies affecting the cost of land tenure formalisation and the level of protection against evictions.

The analysis sheds lights on situations where some level of informality is actually socially desirable. This is because, under certain conditions, informality may provide access to the city to low income workers who would not be able to contribute to the urban economy if they had to purchase formal property rights in order to live in the city.

In this context, eviction of informal dwellers would reduce economic efficiency by removing their contributions to the urban economy. Land policies that reduce the cost of land tenure formalisation, or protect informal dwellers against evictions can actually stimulate productivity and have long-term welfare improving effects.

How land rights institutions affect the path to productive urbanization – Yongyang Cai, Harris Selod, and Jevgenijs Steinbuks

http://documents.worldbank.org/curated/en/2015/11/25260752/urbanization-property-rights