Roosevelt Institute | Cornell University

The Effect of Secure Property Rights on Economic Growth

By Malavika MadgavkarPublished May 1, 2013

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Economist Douglass North argues that the key to sustained economic growth is efficient economic institutions. By efficient, he means that they provide incentives for individuals to engage in economic activity that is socially beneficial. Until recent times, according to North, governments mainly hindered economic growth because they were extractive institutions, which focused on maximizing the ruler's wealth and not the nation's.
By Malavika Madgavkar, Published 5/1/13

Economist Douglass North argues that the key to sustained economic growth is efficient economic institutions. By efficient, he means that they provide incentives for individuals to engage in economic activity that is socially beneficial. Until recent times, according to North, governments mainly hindered economic growth because they were extractive institutions, which focused on maximizing the ruler’s wealth and not the nation’s. This kind of government provided almost no incentives for economic growth because the redistribution of wealth from the poor to the rich meant that the tax rate was essentially 100 percent for the non-elites. What does a country do to get out of this kind of inefficient rent seeking system? North maintains that there needs to be a shift in power. The society needs to go from one that is dominated by a few to a more inclusive and democratic society that has some form of a legislative body. Having secure property rights is one of the most important characteristics of the kind of society North describes as one that would encourage economic growth. 

Let’s look at 17th century Spain as an example of this inefficient rent seeking society. At this time there was the Spanish Mesta, which was an association of powerful sheep ranchers who influenced the government to grant shepherds the right to let their sheep graze all over the country for an annual fee. This basically meant that the people did not have property rights as the shepherds were allowed to use anyone’s land for their sheep. The Spanish economy stagnated in the 17th century. In contrast, at the same time in England, the Glorious Revolution took place. The Parliament asked William and Mary to take over because the Parliament wanted strong property rights. This revolt changed the nature of Parliament, giving it the exclusive right to tax. David Landes, another prominent economist, argued that the difference in the governance of these two countries led to the divergence in economic progress. England experienced much greater economic growth than Spain.

However, the connection between secure property rights and economic growth has come under fire. Terra Lawson-Remer claims that this view is too simplistic. She developed a property-insecurity index, which concentrates on the experience of minority groups and looks at the economic risks they face (for example, expropriation of land and forced resettlement in other parts of the country). Even though there was a strong correlation between property security for foreign and elite investors and economic growth, she found that there was no correlation between secure property rights for minorities and economic growth. There also appeared not to be a correlation between secure property rights and countries’ rankings on the Human Development Index.

These findings clearly have troubling implications. It could be the case that in order to maximize economic growth, countries need to “strengthen the property rights of foreigners and elites,”[1] even if that means weakening those of minority groups.



[1] "Property and the Lady." The Economist 30 Mar. 2013. Web.