Land titling for inclusive growth

Promoting inclusive growth is the cornerstone of P-Noy’s development plan. Here’s a simple way to summarize the over-all effort. The “growth” part of the strategy is linked to the effort to boost infrastructure, improve economic competitiveness and drum-up private sector investments (e.g., PPPs or Public-Private Partnerships). On the other hand, the “inclusiveness” part is linked to the effort to strengthen the country’s social protection system (e.g., the 4Ps or Pantawid Pamilyang Pilipino Program and PhilHealth), as well as ensure that the investments and economic activities are not just concentrated in urban areas (and in particular, Luzon and Manila) and involve industries where the bulk of the population could engage (e.g., agriculture and tourism). As noted by Secretary Arsi Balisacan of NEDA, PPPs need to be leveraged in the countryside to meet the infrastructure gaps there, too. Anticorruption efforts then underpin both the “growth” and “inclusiveness” strategies by helping to ensure that the public gets the most “bang for its buck” on both these fronts.

Less ballyhooed, an important additional ingredient—the full roll-out of the Residential Free Patent Act—could also help promote inclusive growth. Republic Act 10023 (an Act Authorizing the Issuance of Free Patents to Residential Lands) aims to simplify and speed-up the titling of unregistered residential lands in the Philippines. You may have already read in the papers that no less than the Vice President and Housing and Urban Development Coordinating Council (HUDCC) Chair Jojo Binay is among those spearheading this effort. By facilitating the issuance of free patents on residential lands to qualified claimants, they no longer need to go through the protracted and costly process to gain legal rights to their properties.

Rough “guesstimates” suggest that only about half of the estimated 22 million parcels of land in the country are titled. Most of these untitled properties are located in urban and low income settings, and approximately 39 million Filipinos stand to benefit from the government’s land titling program. In 2012, some 10,000 titles are set to be distributed. This is expected to increase in the next years as the program gains momentum.

Property rights and development

Lack of clear property rights could undermine inclusive growth in various ways. Unclear and unenforceable rights to property could lead to underinvestment, as the returns from any improvements and investments could be seized by others. For low-income households, lack of access to secure property rights compounds their lack of access to credit by depriving them of potential collateral. This, in turn, further adds to their poverty and insecurity. Lack of property rights could also contribute to conflict within families and communities due to competing land claims. Poorer families which don’t have clear property rights are also much more vulnerable to land-grabbing and corruption in property acquisition.

There are also broader social and economic downsides to a business environment characterized by fragile property rights. Underinvestment in communities could contribute to a stagnant economic environment, crime and urban decline. Lack of (or unenforced) urban planning, due in part to poor property rights enforcement and over-crowding, contributes to urban decay, fire and health hazards and other threats to public safety.

Finally, untitled property is not just underutilized at the household level, it may also be underutilized at the level of the local government unit (LGU). LGUs also have claims to some of this untitled property. Vast tracts of untitled property, coupled with underinvestment, also represent a weaker tax base. Hernando de Soto, an economist from Peru who did extensive work in this area, called all of these untitled lands “dead capital” (i.e., capital that does not fuel investments and growth).

Social and economic impact

While more robust impact evaluation studies on the Philippine land titling effort are still forthcoming, international evidence on land titling for low income communities does suggest possible positive gains. For instance, a study of the 1993 Land Law of Vietnam which gave households the power to exchange, transfer, lease, inherit and mortgage their land-use rights, revealed that these additional land rights increased the share of total area for long term crops and boosted the amount of labor for nonfarm activities. Essentially, the security of property rights incentivized investments and economic activity of a longer term nature. This is good news for sustaining growth, by encouraging investments that have long and stable pay-offs into the future.

Similar results were observed in a study of poor urban communities in Buenos Aires, Argentina. Low-income families that received more secure property rights increased housing investment and enhanced the education of their children compared to those families that did not receive more secure property rights.

Land titling may also have an impact on gender equality and fertility. One study in Peru examined intra-household allocation of ownership rights and fertility focusing on a nationwide titling program in that country. The Peruvian land titling program sought to improve gender equality by promoting the inclusion of female names on land titles. Land titling in that country was associated with a significant and sharp reduction in annual birth rates among program beneficiaries. The researchers noted that this was likely due to the improved bargaining power of women in the household, in turn due to their inclusion in the land title.

Nevertheless, international evidence on using land for collateral to obtain credit is less clear. Even in the Philippines, focus group discussions with beneficiaries suggest that they would rather hold on to their newly titled lands rather than risk losing it to the bank. International experience on land titling, from slums in Ahmedabad, India, to those in Lima, Peru, reveal signs of enhanced social status among land title recipients who could press for their rights to their property.

A reform LGUs would love to support

Possibly the best thing about this reform is that it’s aligned with LGUs’ goals of increasing tax revenues. (You might add that it also doesn’t hurt that distributing land titles is a surefire way to drum up votes.) Lack of clarity in property rights translates to weaker tax revenues for LGUs due to weaker economic activity and diminished property tax revenues.

If we very conservatively “guesstimate” that the average property value for the estimated 11 million untitled parcels is about P50,000, and if we apply a 1 percent property tax on this value, that already translates to about P5.5 billion pesos in tax revenues for LGUs. This amounts to about 10 percent of total internal revenue allotment (IRA) to all Philippine cities. This figure is likely to be a gross underestimate of the potential increase in tax revenues, and it does not yet consider possible social and economic gains and spillover effects from increased investments at the national and regional levels, lower crime, conflict and hazards at the community level, and more financially empowered property owners at the household level.

Of course, land titling alone cannot solve all the challenges of rapid urbanization, and careful phasing and additional support for this reform could help ensure that land titles are effectively enforced and some risks, like gentrification, are mitigated. However, any way you look at it, there’s a lot of dead capital that could be resurrected to promote growth of a much more inclusive kind. These asset-related reforms tackle some of the roots of poverty, inequality, and anemic and unsustained economic growth in our country.

Note from MAP: “Inclusive Growth” will be extensively discussed at the 10th MAP International CEO Conference 2012 to be held this coming September 11, Tuesday, from 8 a.m. to 5 p.m. at the Makati Shangri-La. The theme will be “Transformative Change: The Imperative of Inclusive Growth.” For reservations or inquiries, please email [email protected] or call 751-1149 to 52 or visit www.mapceoconference.ph.

(The article reflects the personal opinion of the author and it does not reflect the official stand of the Management Association of the Philippines. The author is associate professor of economics at the Asian Institute of Management, and executive director of the AIM Policy Center. He is a recipient of the 2012 Ten Outstanding Young Scientists Award of the National Academy of Science and Technology. Feedback at [email protected]. For previous articles, please visit map.org.ph.)