Russ Roberts

Karol Boudreaux on Property Rights and Incentives in Africa

EconTalk Episode with Karol Boudreaux
Hosted by Russ Roberts
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Karol Boudreaux, Senior Research Fellow at George Mason University's Mercatus Center, talks with EconTalk host Russ Roberts about her field work and research in Rwanda and South Africa. In Rwanda, she studied how a change in incentives and property rights for coffee farmers has allowed the coffee bean growers to improve quality and prosper. In South Africa's Langa Township, she looked at how renters were allowed to become homeowners and how the ability to own changed their lives.

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0:36Intro. Enterprise Africa: investigate and analyze what is working on the ground to alleviate poverty, promote development. Seven countries, southern and east Africa, including Mauritius. Institute of Economic Affairs (IEA) in London, Free Market Foundation of Southern Africa (FMF). Economics research as field work, not sitting in armchair. Local partner matters.
5:21Coffee in Rwanda. History: landlocked, was Belgian colony, Belgians favored the Tutsis, a minority of the population, lighter skinned, tall, had been the leaders--they looked and behaved like leaders. Hutus, tend to be shorter, darker, agriculturalists, little access to education or economic opportunity during the Belgian rule. Early '60s independence, Hutus took over, 1994 genocide. Tightly-controlled one-party state. Coffee has been major export earner. In 1989, International Coffee agreement broke down, coffee prices fell. Government looked to foreign aid. Tutsi rebels invaded from Uganda. Cyclical violence. 1994, President's plane was shot down, which triggered a genocide where close to 1 million people were murdered (neighbors killing neighbors, mostly Tutsis killed). Tutsis then took control and have been in power, not much retaliation. Now democratically elected government, Kagame. Some question about opposition groups' access.
12:36Coffee sector: farmers were required to grow coffee--1/4 of your land had to be devoted to growing coffee. Government had agents to enforce it; it was the key source of government revenue. You sold your coffee to the government at a below-market price; government then sold it to the markets. Like a tax. Started in Belgian times. Farmers also had to pay an export tax in addition. In late 1990s, Kagame government had a lot of debt to service, people going hungry were pulling up coffee trees to grow other crops, Michael Porter, consulting group suggested paying attention to quality and allowing growers to enter into their own contracts, direct feedback from buyers. Removed requirement to grow coffee, allowed direct contracts, allowed cooperatives amongst growers. Let coffee producers flourish and then tax them was the goal. Liberalization started about ten years ago. 25 times greater price received by farmers today vs. ten years ago. Output is different kinds of coffee, rather than quantity. Reputation: foreign aid effort. U.S. supported a project including focus on cooperatives and taking people to trade shows to help buyers know about Rwandan coffee. About 50,000 families have seen their incomes double, kids can go to school, corrugated tin roofs instead of thatched roofs, etc.
22:50Rwandan future. Coffee sold with a story; buyers know they are helping ex-genocide victims. Munger podcast. Fair Trade coffee. Cooperatives that are newly formed like the insurance that Fair Trade represents. After that, Fair Trade can become burdensome, record-keeping. European purchasers won't pay more than the Fair Trade price even for better quality, no incentive to produce better quality. Cooperatives with ability to produce higher quality want to get out of their Fair Trade contracts. Cultural impact, quality of life: journalistic evidence, tea, rice cooperatives; coffee cooperatives have helped reconcile Hutus and Tutsis, common goal. Economic liberalization can change incentives. Sam Fleischacker article. War crimes tribunals , etc. may in fact be complemented by economic liberalization as methods of healing. Pro-market, pro-private-sector. Clustering initiatives: jumpstart an IT sector and put them all next to each other, industrial park.
30:05Langa Township in South Africa. Background: one of oldest black townships, created 1918 during flu to isolate blacks. Legal restrictions limiting movement and land ownership for blacks. Place to live, but not much to do economically. All rental units. Hostels, dorms where men could come and live in cities. Shack housing in 1960s-'70s. City government, Capetown, owned the property in Langa. Population? About a half a million people. [N.B. Following the podcast, Karol corrected her comment that the population of Langa Township was about 1/2 million. It is actually much smaller--closer to 100,000. She confused the population of Langa with that of a neighboring township, Guguletu.] Bedroom community, but little opportunity. Needed permission to paint, change windows, etc. In late 1980s, government undertook some reforms, allowed long-term (99-year) leases, and then free-hold prices set at a kind of market price, but there was no real market at first. By 1994, government often simply transferred ownership. Hernando de Soto, Mystery of Capital, no incentives without ownership of property, dead capital. Insecure tenure: you may have rights to be in a place, but your ability to stay there securely may be limited. Government or crime may force you out. Different and additional reason to not invest than dead capital-ownership reason. South African government has respected the contract, so it's proven secure now. Investment, but people in Langa still don't use their house-ownership to secure loans.
39:34Langa improvements after getting titled: replastering, new roofs, new windows, decorative gates. Starter house because you are proud of it. Home improvement. Some do it themselves, others hire local artisans. Economic growth, bricklayers, tile layers, etc. Signs advertising skills--and cell phone numbers. Sheila: Entrepreneur in Langa township, had been domestic helper in Capetown, saw receipt for two glasses of wine and some cheese and saw it was more than she got paid per month! Decided to go out on her own. When she got title to her home, she saw entrepreneurial opportunity. Buses with tourists looking out the windows. Sheila thought if she could get people off the bus and feel safe, she could serve them. Opened a restaurant in her house. Can't do it in Virginia, but she could do it in Langa. Cuba. Sheila grew up in the house, but it's now improved. She approached giving an interview as a kind of trade--wanted to see what was written. Basic courtesy and civil thing to do, advertising, Lalapa Restaurant. What other businesses and how did she market it? Word of mouth, blogging, internet, travel books for Sheila.
48:00Other businesses in Langa Township. Barbershops, small groceries, computer repair, butcheries, tailors, cleaners, etc. Now not illegal, often out of people's homes. But not using the property itself as investment. Doing it out small amounts of savings. What keeps people from using their homes' titles as capital? Housing shortage, won't use title because if they can't make their payments they will end up in a shack or with relatives. Housing prices are rising, in white areas and starting to rise in black townships. Most blacks are not formal sector employees, so loan officers are skeptical, erratic pay, poor credit risk; early lending, banks tried to repossess, threatened personal harm. Sheila doesn't want a bank loan because she could lose not only her home but her business and her daughter and other employees would also be out of work. Home titles as collateral are risky. Erica Field, Harvard, Peru study.
52:38Monopoly power, lawyers. Need specific kind of lawyers to transfer title, conveyance attorneys have monopoly. People avoid those costs and informally convey property. Puts deeds registry in S.A. completely out of date. Also, no good information about who owns a piece of property. Cities can't collect taxes to support provision of public services--electricity, garbage collection, crime protection--don't know who is living where. Lessons: Humbling experience. We need to be careful about titling programs. Kenya tried a land titling effort in 1950s that failed, etc. Titling is not a panacea. Urban situations may be useful but it's costly and other intermediate steps to give security in property may be helpful. Lessons for the U.S.: keep your garage door down in Irvine, CA, inspections, transactions costs for buying a selling a house and establishing title, zoning, Richard Epstein podcast, can't build a house in your own backyard and rent it out. How might inner cities in the U.S. change if the licensing restrictions changed?

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COMMENTS (8 to date)
Richard Sprague writes:

As usual, an excellent podcast.

Can you post the link to Sheila's restaurant?

Hi, Richard.

I can't find an exact link to the restaurant, but I did find many links to it through Google just by typing in Sheila and Langa. It may help to know that the restaurant's name is:
Lelapa Restaurant
49 Harlem Avenue
Langa, Cape Town, 7455, Western Cape, S.A.

Sheila's full name is Sheila Mahloane, and her daughter/co-owner is Monica. I've found a lot of websites listing the restaurant, particularly travel sites and travel award sites. I'm hesitating to give one here because there are so many that I don't want to sanction any one particular site.

Mark Wonsil writes:

Simply a delightful podcast. Excellent topic. Excellent discussion.

Unit writes:

Only two trips out of seven, we want to know about the other five!

Robert Finger writes:

Regarding fines for leaving garage doors open in Irvine, CA: True, but perhaps misleading. The restriction comes from CCR's, not from a city ordinance. (Although almost all homes are probably subject to CCR's with similar provisions).

Brian-NJ writes:

Enjoyed this podcast, it sent a warm fuzzy holiday tickle up my spine. Unfortunately I couldn't help but wonder, would the success of the Rwandan coffee industry have been as fruitful if the tragedy of the mid nineties had not occurred. It was mentioned that foreign aid assisted the development of a high quality coffee product, and exposure at trade shows to a global audience. This would be an audience fully aware Rwandan society was trying to piece itself back together with hopes on this new economy and be willing to devote investments of compassion as well as business trade and finance. I perceive this to be a unique edge over the competing coffee growers from stable regions with similar quality coffee. With that being said does this create incentive for coffee grower or any market collectives perhaps even governments to ruse a tragedy within their country, pardon this highly macabre thought but allow me to present from another perspective.

From the fair trade coffee episode it was mentioned that foreign aid was a bad idea, I understand it would be if it were on a frequent and known schedule. What of the situation here, it seems foreign aid was a must to prevent any more atrocity, but that foreign aid only propels an unfair advantage to the recipient and brings down a coffee farmer from another part of the world who may be hanging on by a thread, where a loss of coffee supply contract could push the grower into perhaps a cocaine harvesting business. My point is, from the fair trade episode I realized why foreign aid could be negative to the local economy, but does my theory also rule out humanitarian aid in times of crisis?

Lastly, does this confirm the notion that it takes a great catastrophe to fuel a new economy? Had the genocide not have taken place, would Rwandan coffee trade never have flourished or at least not as quickly and successfully? Does this provide a model for Myanmar, the idea that complete chaos and disorder draws attention and sympathy as well as potential business and trade? If so, I would imagine the laissez-faire approach should warrant even more stringent adherence. I never thought of humanity in such a paradoxical position but it seems unavoidable, I see Taoism in the idea of liberal markets. In the case of Rwandan coffee could you clarify, is it still liberalism despite the fact the US intervened, or is there an exception because it was only to stimulate initial growth?

Thanks for the podcast.

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