E-Letter To Forbes Magazine And Steve Hanke Re: Africa And Economics

We thought that your recent column "Africa and Economics" represents an outstanding contribution to a critical subject. It is especially great to see you refocusing your mind and efforts toward Africa - a continent that we think is better suited to the application of many of your ideas and strategies than any other that you have previously directed your attention towards. And unlike many other economists who feign an interest in the continent of 700 million, your ideas on Africa stand out because they are relevant and directly applicable to the people on the ground, as well as to the continent's policy makers.

Your column makes it clear that your emphasis on property rights is free of the typical rhetoric of economists who make blanket judgments and generalizations about economic conditions in African nations in order to make their advice palatable to African leaders. In that sense these economists are no different than the IMF and World Bank who proffer a one-size fits all approach to economic development and growth on the continent.

Like Hernando De Soto makes clear in his book The Mystery Of Capital, we understand that part of Africa's economic problem is not just her monetary and fiscal policies or even her healthcare woes, but her lack of economic A,B,Cs - literally. Her people, far too often, lack the necessary syntax, in terms of the written representation of capital and assets, necessary to develop a viable and efficient marketplace, spur economic growth and reduce transaction costs across the continent.

The widespread availability of property rights is essential to making all of that possible.

While many, due to partisan politics and ideological reasons, equate property rights with the "rule of law", the real value in property rights is that it taps into a scientific principle that exists in communication and mathematics and which actually has the potential to free latent talent and streamline commerce among individuals, communities and nations.

We could almost rest our case on this point by demonstrating how influential the title to land and property is to economic activity in America. Titles to real estate and mortgages, for example, are the basis of trillions of dollars of economic activity in America.

Owning a home, for many, allows an individual the necessary collateral to obtain the financial capital, in loans or equity investments, necessary to jump-start and strengthen entrepreneurial activity.

Certainly, inflation and interest rates are important factors in this process but the actual ability to hold property and then use that title as the basis for future economic activity is the real foundation of much economic growth, as a person uses a loan obtained as a result of holding collateral to start a business or invest in a venture that a lending institution would not fund directly.

It is important to realize that among the many factors that keep people in Africa and the rest of the developing world operating in the underground economy and the informal sector is the system of property rights that maintains in the formal sector. Many entrepreneurs are willing to run the risk of being imprisoned because the economic rewards they reap in the informal sector are worth it, to them. In most cases the biggest factor in the difference in rewards, in operating in the two sectors, is the system of recognizing the ownership and value of property.

Interestingly, overcoming the barriers to property rights that maintain in the formal sector was one of the major contributing factors to America's creation of wealth in the 19th century. It is unfortunate that many Western economists fail to realize this fact when they make their policy prescriptions for Africa.

Even many on the continent of Africa are unwilling to recognize this fact.

Last year, in my dialogue with Eddie Cross the top economist for the MDC, Zimbabwe's political opposition party, I argued that his economic program would fail in Zimbabwe because he was attempting to build Zimbabwe's economy along the lines of how America grew in the 1930s. Instead, I offered that he should think of Zimbabwe in terms of where America was in the 18th and 19th century.

Many of the economic conditions and issues that prevailed in the US at that time, particularly in the South, are in Zimbabwe today.

So many under the influence of Adam Smith and Karl Marx have misunderstood this key consideration - property rights - seeing the concept only in terms of continuing the war between capitalism and communism.

It is great to see that you recognize that the science of what property rights are all about is more important than continuing that epic battle.

We look forward to seeing more of your ideas and thoughts on Africa in the near future, and hopefully their eventual implementation.

Sincerely,

Cedric Muhammad

Wednesday, May 30, 2001