Issues Paper for ECOSOC 2004

Ministerial High Level Segment

Turning Assets in LDCs into Useable Capital to Enhance Resources to Achieve the MDGs

Lack of Fungible Capital Assets and the Need for Alternative Sources

While the Financing for Development Conference has created a commitment to increase official development flows to enhance the capacity of LDC to address poverty and meet the MDGs, continuing efforts are needed to identify, test and search for new resources. While external resources will continue to be needed, domestic resources also need to be enhanced and fully explored.

It is increasingly revealed that poverty is not due to a lack of capital as such, but instead due to a lack of usable capital. Poor rural and urban households have assets. But, the lack of legal, regulatory and tenurial security often means that ownership (expressed in various forms) prevent the poor from using their assets to leverage access to other resources, such as credit or other incentives to improve their levels of investment and productivity. Under these conditions, transactions become informal and extra-legal, thereby putting the already vulnerable poor into conditions of further risk. Due to the insecure nature of their rights to land and other productive assets, their assets are not fungible. Their assets need to be brought into a secure position protected by the rule of law.

Legalization of land rights can provide the poor with security and incentives that can produce many development benefits, inter alia: (i) security from being removed by fraudulently claims by more powerful interests; (ii) incentives to invest (from ones own resources) in long term productivity; (iii) stronger community bonds, identity and social standing; and (iv) household food security and subsistence during economic shocks and loss of other income sources.. These benefits are known to accrue to smallholders when they have secure tenure such as through long term security, reliable leases, community or individual titles, et cetera. Policies and programmes that enable security of access can be a major stimulant for rural economic growth, providing that the transaction procedures and costs (as presented in the work of Hernando de Soto ) remove unnecessary steps that prevent resource poor people from being able to complete the bureaucratic procedures required.

Rationale and Objective

The challenge and objective starts by assessing the issues that need to be addressed in order to establish the enabling framework to absorb extralegal assets into the formal economy, and create legal frameworks that empower the poor, particularly in LDCs, by creating comprehensive legal property systems that secure their rights. This would allow a significant number of people in rural areas to turn their assets into usable capital. These issues are complex and cut across many areas of public policy requiring consideration on legislative, regulatory and judicial levels. To be effective, a partnership framework is the appropriate way to engage all relevant parties, especially those affecting and affected by land policies, to work together to realize the financial potential to leverage the assets of the poor to by unlocking the potentially huge level of fungible capital.

Some of the Pre-Requisite Considerations

1. Secure property land rights of the poor is a first step to address rural poverty.

Secure property rights or titles can catalyse the acquisition of other assets that can / may have collateral value. Secure land rights generally result in higher productivity, thus higher income levels and the acquisition of other moveable assets which can / may provide collateral benefits.  Examples have also revealed that land rights have enabled access to financial services based on harvest values.  In this scenario, smallholders gain financial services, without putting their land at risk.

2. Formalization of land rights is necessary, and has to take into account the diversity of contexts .

There are a variety of forms of property that arise from the combination of historical, cultural, economic and geographical experiences, which are critical social factors in actions proposed at the local level,  even if these factors are not recognized legally. It is important to explore ways to formalize these different forms of property so they can contribute to the modernization of agriculture to the benefit of smallholders and overall rural economic development.

Governments must take consideration of the form(s) of property rights that may best meet locally specific situations. They must find solutions to situations that presently do not have formally documented land histories and protect against fraudulent claims to rights by powerful vested interests. These situations have been resolved in many countries, whose experience and knowledge can help other countries in their search for suitable solutions.

3. Land as collateral is a promising issue, and should be examined in its advantages and risks

Property titles permit assets to be held as collateral against loans or for investment or other mortgaged investments . This is particularly applicable to small family farms or independent producers. In these cases, titling campaigns may permit significant numbers of rural poor to have access to usable capital. On the other hand, this may not be easily generalized to other groups of the poor who have other forms of property rights. Community ownership systems, for example, can be a strong force in the preservation of the social capital of peasant communities and the building block for their economic progress as a group.  This is a situation that merits consideration of how to leverage their jointly owned and managed assets.  From the perspective of reducing poverty and strengthening the rural economy, these community systems provide intra-community assistance during periods of economic, social or climatic shocks to a greater degree that is not provided under systems of individual ownership. In some reported cases (the Philippines ) there has been re-concentration of land into the hands of  the former land owning class as a consequence of their role as moneylenders and the mounting or fostering of  indebtedness of land reform beneficiaries.   

4. Access to usable capital is a necessary but not a sufficient condition to reduce poverty.

Large numbers of the poor are only loosely related to markets. Helping land beneficiaries to enter the market is both necessary and complex. Even if financial services could be leveraged on the basis of land titles, the poor would simultaneously need access to other productive services in order to be successful in entering and benefiting from the market. This is necessary in order for the poor to achieve sufficient profitability to service the mortgage costs and to improve the living standard of their family, without which their land can be put at risk.

5. Lending procedures should be adapted to serve the poor well

The transaction costs of providing small loans, especially to small holders, is difficult for commercial lenders. From the demand side, the risks of losing the land, given as collateral, inhibits small farmers and peasants from seeking commercial credit. These challenges must be at the centre of the issue of converting the assets of the poor into useable capital. These challenges have stimulated a great variety of alternative proposals for rural financing in Africa , Asia and Latin America , with diverse, but in some cases reason for optimism and promise. These experience need to be document, analyzed so the lessons learned can inform decision-makers, lenders and borrowers of the conditions that are most conducive a profitable investment that benefits poor households.

6. Partnership framework

A partnership framework must be devised to unlock this huge and currently unutilized potential. existing already in a de facto , though not currently a de jure , state in many LDCs.  It will stimulate new opportunities, providing new ways of work among and between national governments, civil-society organizations, the private sector and the bilateral and intergovernmental organizations and IFIs. The High Level Session will ask how such an alliance of interests can identify one or more pilot countries to examine the subject of Turning Assets into Usable Capital.

Prepared by the International Land Coalition