Saturday, 5 January 2008

PROPERTY RIGHTS AND CORRUPTION IN PAKISTAN

Property rights are the core of economic development. Hernando Desoto argues that capitalism in America and Japan is successful because they have a good system of property rights, thus property rights are essential for the people to believe in the market system and capitalism cannot be successful without having proper property rights system in the country. Protection of property against expropriation is one important yardstick against which foreign investors assess the risk of investment. Thus we should have better system of property rights with lesser corruption to increase investment and achieve ten percent GDP growth rate[1].
Secured property rights reduce the insecurity of land. It also reduces the workload of the courts to settle disputes and credit availability to small farmers is easier due to property ownership. Moreover, it generates tax revenues and prevents cost and time overruns in development projects involving land acquisition. Thus property rights are inverse transaction cost and increase efficiency.
Pakistan’s property rights system has several anomalies such as benami transactions and general power of attorney. There are several loopholes in the system through which big landlords with the help of authority personals avoid/evade taxes and create a scenario where the third (any other) party remains deprived off using the land.
Corruption of authorities is an undeniable fact. Several cases of corruption are reported in Foqia Khan’s paper on Property right in Pakistan in the Lahore Development Authority (LDA), which is the main registration authority in Lahore. Authority personals ask for bribe to issue allotment letter for an already purchased plot, accessing a file, giving NOC etc.
Designing property rights is the most concerned thing because we need to take care of customs and social norms in Pakistan in designing the formal rules otherwise enforcement would be very difficult। Enforcement is the most important element after the rules have been made. The enforcement should be done by third party who is neutral and acceptable to both the parties (buyers and sellers).
Several problems including registration of title, non provision of legal successors in the records, oral declaration of gifts, under the Islamic law, and inherited land, petwari system, khewat based complicated system, and benami transactions.

Designing property rights is the most important step. One need to see at the increase in transaction cost, which can be financed through increase in revenues and setting up some funds for it[2]। Douglas C North argues that to get better outcomes we need to build formal laws based on cultural and social norms (informal constraints) and enforcement characteristics। Thus if people need to learn a totally different system then this might be the major informal constraint. Thus, it should be designed in such a way that the system would be formal, procedure remains the same and there should have third party enforcement which is neutral and acceptable to both parties. Third party enforcement in informal way will definitely reduce the transaction cost in the short run but in the long run in case of disputes the transaction cost will rise. On the other hand, doing it informally will reduce the potential revenues which a government can get otherwise. Thus formal third party enforcement is better as an enforcement agency.

Following are some of the points which can improve the property rights system in Pakistan. First ten points are take from PIDE Policy View Point Number 3.
1. Removal of obsolete and dysfunctional systems managed by Patwaris, Tehsildars, Tapedars, and Mukhtiarkars.
2. Set up a system of guaranteeing title to land rather than a system that merely serves the purpose of registration of documents.
3. GIS is a good way of enabling quick and efficient recording of title transfers. Though it will be expensive initially but it can be financed through increased tax revenues and setting up special fund for this purpose.
4. There is a need to establish a centralized land registry system in the form of a central registration of title of the most expensive and commercially attractive land, which should be Excise and Taxation Department (ETD) in the provincial governments.
5. There should be a requirement for compulsory registration of all documents relating to property including sale agreements, declaration of gifts, awards, transfers, and powers of attorney.
6. General Powers of Attorney should be abolished altogether [PIDE Policy Viewpoint (2007)].
7. Benami transactions should be declared unlawful [PIDE Policy Viewpoint (2007)].
8. Any suit with respect to any immovable property should be compulsorily registered with the Registrar of the High Court. The Registration Act and the Stamp Duty Act should be amended to reflect this. Moreover, by linking court records to the computer database of the Registrar, prospective buyers would be informed that the property is under litigation.
9. Simultaneously, the government could start a process of converting presumptive titles into exclusive titles after preparing draft lists that would be open to public inspection for a period of 6 months, during which objections and disputes would be settled.
10. One of the main reasons for the long delays in settling title disputes in the courts of law is the system of multiple appeals and revisions even in the case of a small property dispute. This system must be replaced by one in which a party in a civil claim does not have a right of more than one appeal. The final court of appeal should be the High Court, and not the Supreme Court, since property is a provincial subject.
11. Torrens system of land titling is a parcel based system, which is followed in the rural areas and is very successful in Australia[3]. Following this system people may not need to know entirely new system, which helps in reducing the transaction cost initially.
12. One of the main problems identified in Section III was that main emphasis of the registration process is on the identification of parties instead of identification of property. Thus an authority needs to check the existence of property before getting sign the contract between the parties and should not put ask the party to check the authenticity of the existence of property. This evolves the issue of enforcement which should be formal system and done by the registration authority who are registering the titles.
13.The enforcement authority should endure the legality of transaction, actual price of the property and buyer should pay the total amount to the seller as well as revenues to the revenue authority.

Third party enforcement is a better idea for having good property rights law but pertaining to current system of development authorities or revenue boards it is extremely unlikely that it is going to happen on fair basis. Fair role of enforcement authority, i.e., they should treat everyone equally and in a justified way. Moreover, we need to change our habits and role of individual behavior is very important for it. Unless enforcement authority does not do their work with honesty and sincerity, people will not believe in the system and the mindset of the people will not be changed. On the other hand if the individual behavior (mindset) and habits are changed that each individual do not bribe the authorities to have their work done, then the corruption will definitely decrease. Some authors find that (1) it may be optimal to allow some corruption and not enforce property rights fully; (2) less developed economies may choose lower levels of property right enforcement and more corruption; and (3) there may exist a 'free-lunch' such that over a certain range it is possible simultaneously to reduce corruption, increase investment, and achieve a better allocation of talent

Titling and registration of property rights in a formal way, coherent with informal constraints, would definitely increase corruption in short run, i.e., in the period of transition. But in the long run when the system is setup we can hope that the extent of corruption will decrease. Most important, if the punishment and enforcement of punishment for taking and giving bribe is very strong then people and authorities would fear of punishment and corruption will be reduced. This would change the habits and behavior of the people.


[1] This issue was discussed, among other issues, in the PIDE-LUMS seminar on “Law and Economics” in June 2006
[2] PIDE Policy Viewpoint (2007) available at www.pide.org.pk.
[3] Foqia Khan’s Paper on Taxonomy and Immovable Property Right in Pakistan.

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