When the phrase “institutional reform” comes up in today’s economic and policy rhetoric, we tend to view it in a positive light, as an action that will perhaps help liberalize societies and open doors to free trade by downsizing or somehow igniting improvement in government organizations. But are we correct in our assessment about the cause and effect of institutional reform and improved economic development? Are we right to believe that reforming institutions will always result in benefits to the system regardless of when and how they take place? Are some institutions more important than others?
Elena Panaritis’s debut work, Prosperity Unbound, not only answers these questions but targets what the writer believes to be the most valuable institution necessary for growth — the property system and its underpinning laws and regulations. In making this claim, Panaritis cites a 1997 report by the World Bank that suggests that property rights and the laws surrounding them may be the single most important issue under the scope of an institution. Specifically, Panaritis asks us not to think of “reforming” the institution of property by shrinking it, but rather to change it by deep and rigorous analysis and in accordance with the environment and historical context of each community.
Prosperity Unbound may at first glance seem common sense. Why wouldn’t policy makers acknowledge a country’s demographics, its cultural norms and its history before attempting to make reforms to its property system and government? Don’t most policy officials work towards building partnerships with locals and investors on the ground before going forward with their strategy for change?
Panaritis, who heads Panel Group — a Washington, D.C., firm that helps governments open illiquid markets — accurately argues that not enough of this basic, preparatory work is actually done. She alludes to the flawed methodology of strategy consulting firms and their use of performance benchmarks and streamlining tools in hopes of fitting a square peg into a round hole. Panaritis also points to similar potential deficiencies in the school of thought dubbed the “Washington Consensus,” whereby policy prescriptions overly stress the role of free and open markets while de-emphasizing the role of the state. She argues that this approach fails to understand the root causes of a country’s economic woes.
Eight years ago, Hernando de Soto’s now seminal work, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, gave policy makers important insights into the significance of a property system and its major role in the health and development of a society and its people. Panaritis takes de Soto’s approach further by focusing on how societies can ensure that the institution of property is healthy and robust enough to carry out its function as a social guardian.
Panaritis suggests that institutions can be formal or informal. They can be found in laws and rules (the Constitution of the United States) or can be simple norms and values commonly accepted by society. Furthermore, institutions are to be separated from organizations (ministries, agencies) which are the branches through which institutions funnel their mandates. Moreover, the institution of property, above all others, not only enhances economies, but provides stability, cohesion and overall safety to all members of society.
Panaritis then underlines how property rights — specifically real estate (i.e., tradable assets with potentially numerous financial uses that can increase its value), if existent in non-functioning, informal or black markets — can result in a staggering amount of waste, stagnation and disrepair. She describes such real estate as “unreal estate”. Panaritis asks us to picture farmers in Latin America, selling fruit from their farms without licenses and rights to their farmland; and poor families in urban America that live in the slums, having no title to property, but grappling with the insecurity that goes with living and working but never owning.
“Reality Check Analysis”
In order to solve the problem of “unreal estate” in inefficient markets, Panaritis coins the term “Reality Check Analysis.” She uses this as her diagnostic tool to give policy makers effective guidelines for reforming a property system in any country or society and eventually converting unreal estate into real estate. Trust is the basis for the use of this tool.
In a recent interview with Knowledge at Wharton, when asked how important trust was in executing such reforms, Panaritis described it as “the absolute backbone of not only understanding the property market but understanding markets [in general]. It’s the most basic of contractual arrangements. Trust is the element that brings agents and parties together. [Without] trust, you won’t be able to buy or sell. [This value has been] well understood and written about from the time of the classics all the way to today.”
Panaritis further points out that her “solution is to build trust. In order to do that, Reality Check Analysis [can be used to] check the reality of the market throughout its history. This analysis shows when trust was first broken, why it was broken, and who gained from the breach of that trust. You have to [ask] the correct questions so that they can lead you to the right answers.”
The first step in using Panaritis’s approach is to build a thorough understanding of a population’s links with trust through examining its history, culture and heritage. Panaritis believes that without understanding history, any attempt to reform the rules and laws of real estate ownership, anywhere, will fail. Next, she addresses the need for reform to come from within a specific society, because change driven by outsiders would essentially be futile. Finally, she highlights the necessity of partnerships among three distinct groups — investors, government and citizens — as well as the overall timing of the reform strategy.
Peru: A Case Study
Next, Panaritis takes readers through a case study based on her work in Peru during the 1980s and 1990s. Using her methodology, Panaritis highlights the analysis her team undertook upon examining the historical legacy of Peru and its journey from one political extreme to the other, moving from a “transitional economy” to a “developing country” to a nation run by guerilla groups to complete autarchy. Concurrent with this historical analysis, Panaritis uncovered pitfalls and roadblocks in a Peruvian government bureaucracy that functioned in a style that was archaic, outmoded and out of sync with current times.
Eventually, after establishing partnerships between citizens, governmental authorities and investors, Panaritis and her team helped recast Peru’s laws and regulations in a pilot program by creating a modern registry under a new government agency umbrella named the Commission for the Formalization of Informal Property. This reform effort in the country’s government simultaneously eliminated 14 mismanaged agencies. As a result, Peru’s property market, from a state of latency, sprung into action, loans were extended, capital was enhanced and the gap between unreal and real estate decreased. In 1996, the Peruvian government used this pilot program as a basis for a full-fledged national reform initiative.
Overall, Prosperity Unbound provides much needed insight into how to solve the battered and ineffective structure of the institution of property in many of today’s economies across the world and to release the locked capital hidden in unreal estate. It may be too early to judge, however, whether Reality Check Analysis can be put into action uniformly across all economies since the sole example Panaritis cites is that of Peru — a country with a unique history. The country is a constitutional republic of 28 million with a literacy rate of nearly 90% and a population that describes itself as 80% Roman Catholic; it is unclear how its experience might play in an Asian economy such as Thailand or an Eastern European nation like Poland.
How might Prosperity Unbound and its diagnostic tool of Reality Check analysis play out in the years to come? Panaritis believes that using this method and getting all key players on board can allow reform to happen relatively quickly. “You align incentives between all the three major key players — the owners and citizens, the government and the private sector. If you manage to align these key players, then you start creating an impetus for change.” Above all else, Panaritis believes timing is crucial. If a country finds itself at war or in economic despair, taking on the project of institutional reform will be an uphill battle. If the populace is not ready, though, real estate reform and the prosperity it brings will inevitably have to wait.