What happens when a person owns property? Aside from the well-established financial benefits of equity and potential access to credit, there is the equally strong pull of the American Dream and everything it suggests—the idea that through hard work and determination, it's possible to get ahead, own a home, and achieve some level of success, security, and happiness.
But how does this vision change in parts of the world where property rights, if they are present at all, are threatened by weak law enforcement, corruption, crime, and arbitrary government policy? In a recent paper published in the Quarterly Journal of Economics, HBS professor Rafael Di Tella, Sebastian Galiani of the University of Washington, St. Louis, and Ernesto Schargrodsky of the Universidad Torcuato Di Tella delve into this question by comparing the beliefs of two groups of squatters living in the Solano neighborhood on the outskirts of Buenos Aires, Argentina.
What the scholars found could be the start of a better understanding of why capitalism remains unpopular through large swaths of the world—particularly in areas where property rights are weak or nonexistent.
In an unusual set-up that Di Tella describes as "a natural experiment," about 1,800 landless families (organized by a Catholic priest) occupied the area in 1981, believing it was owned by the state. In fact, it was made up of privately held tracts of land belonging to 13 owners. Over the years, the squatters resisted several eviction attempts, until a change in government in 1984 resulted in a state proposal to pay off the owners and allocate the land to the squatters. Each owner was given the option of accepting the deal or suing to obtain higher compensation. By 1998, 9 of the owners had settled, and the tract of land was transferred to the squatters. With the remaining 4 lawsuits still pending, 62 percent of the squatters now hold title to their land, while 38 percent do not.
As a result, squatters who enjoyed the security of property rights existed in proximity to those with no legal claim to the land on which they lived. For Di Tella and his coauthors, the situation presented the ideal opportunity to research the beliefs of those who hold property rights versus those who do not, all other conditions being equal.
"In the United States, there are few dramatic policy changes that will create situations like this," Di Tella says. "In Latin America, you can observe things that you would not in a more stable environment."
The researchers asked survey questions to gauge the squatters' stance on beliefs common to a capitalist society. For example, did the squatters agree that it is possible to be successful on one's own, or did they think it necessary to have a large group supporting one another? To what degree did they believe money was important to be happy? Do people who put effort into working end up better, worse, or much worse than those who do not? Finally, did the squatters believe that other people could be trusted?
Di Tella and his coauthors found that squatters with land titles believed individual achievement is possible by a margin of 31 percent over those who did not hold title to their land; the margin for those with the materialist view that money is important to be happy was 34 percent; and 17 percent more squatters with titles believed that other people could be trusted. The only question that did not show a significant difference related to the meritocratic belief that effort pays off—in this case, the majority of both groups believe that this is true.
When Di Tella benchmarked these results against a sample of residents from the Buenos Aires metropolitan area with generally higher income and education levels, their responses tallied closely to the beliefs of squatters who hold titles. This showed the importance of property rights in closing the belief gap between a group of very poor squatters and the general population.
"How is it that property changes peoples' lives?" asks Di Tella. "In developing countries, there are many claims or challenges to property ownership, which generate differences in the beliefs that people hold. Important research has been done to demonstrate the material effects of property ownership, like increased access to credit.
"However, I've been more interested in looking at the immaterial effects of how that influences people's view of the world and, by extension, how those beliefs may or may not foster development."
Capitalism, Di Tella says, is not popular in most parts of the world—and in Latin America, the backlash against free markets has reached epidemic proportions.
"Why is capitalism so unattractive outside of the United States and other rich countries? This paper shows that secure property rights are one part of the answer," he says. "If people don't own property, they don't believe that they can build on their success."
How is it that property changes people's lives?
Two other strands of Di Tella's research also point to how beliefs affect attitudes toward capitalism. In one, he notes that because the economies of poorer countries are often dependent on volatile resources such as oil and minerals (which are often controlled by a relatively small number of individuals) it is in fact true that hard work and effort don't pay off for the vast majority of people.
"As a result, voters favor high taxes," Di Tella says. "It's like a tax in a casino—people believe that it should be high because so little effort has been expended in winning the money."
Corruption is another issue. "If you perceive the system to be illegitimate, the tendency is to demand justice through increased government intervention and policies," Di Tella observes. These three factors, taken together, create an unfriendly environment for capitalism.
"I'm concerned about beliefs and how they are formed because I think that the rejection of pro-market reforms in Latin America or Eastern Europe or Africa is not related to economic interests, as most economists claim, but to the way that people see the world," says Di Tella. "We think it's important to understand what causes these changes in beliefs because they form the underpinnings of capitalism and have a profound effect on development."