Business strategies in the context of poorly-delineated land property rights.
| Autor | Graca, Carolina Torres |
1 Introduction: Poor Legal Protection of Land Rights
Good institutions are frequently associated with economic development (Acemoglu, Johnson, & Robinson, 2001; de Soto, 2000; North, 1990). A legal framework that enables contract enforcement and protection of property rights also encourages investment and sustainable use of natural resources (Deininger & Jin, 2007). On the other hand, when such conditions are absent, investment incentives are poor and economic development is limited (de Soto, 2000). Besides hampering investment and economic development, what are the consequences of fragile institutions for economic agents?
According to Dixit (2009), "ifgovernments do not protect property rights, at least not as well as the owners require, many alternative private arrangements arise to meet the owner's needs". For Barzel (2002), the more expensive it is to draw up and enforce contracts through the state as the third party enforcer, the more people will use dispute-solving mechanisms that play the role of the state. The latter itself can create such substitute operations.
This paper is based on the assumption that the enforcement of agreements (or property rights) is a basic feature of the state (Barzel, 2002). With regard to land rights, the state is able to keep land records and advocate in disputes at a lower cost than using the testimony of members of the community to confirm ownership (Barzel, 2002). Hence, it is the steward of land rights. However, poor quality institutions may attenuate legal protection. Under such conditions, some property rights are unclearly defined, which is equivalent to allocation into the public domain. As a consequence, agents spend resources to acquire them and, in reaction, owners take protective measures (Dixit, 2004).
The paper's structure (Figure 1) follows the theoretical rationale just mentioned. Section 2 explores the reasons for the attenuation of legal protection and its consequences. Section 3 explores institutional fragilities around land rights in Brazil. Section 4 details the methodological procedures. Section 5 explores disputes between forest companies and some groups of stakeholders for land rights, which are called pathologies due to them being recurrent. Protective measures deployed by three forest companies are explored in section 6, which is called business response to insecure land rights. The following session discusses the results, followed by the conclusion. The objective is to answer two questions: what are the pathologies associated with poor legal protection of land rights in Brazil and what are the strategies deployed by forest companies to deal with land disputes? The conclusion is built on qualitative analysis of two data sources: academic publications and business sustainability reports.
The plantation forest sector has been chosen for a few reasons. Firstly, the losses accumulated by only five companies have been estimated at US$460 million up to 2015 (Graca, Reydon, Postal, Bueno, & Moreira, 2017). Secondly, it is a relevant industry in Brazil in terms of occupied area, which is about 7.8 million hectares, and accounts for a 6.2% share of GDP (Industria Brasileira de Arvores, 2017). Thirdly, all information on this industry is available to the public.
2 Property Rights Protection
What happens when property rights are poorly defined and enforced? This is the underlining question of the Economic Analysis of Property Rights, developed by Barzel (1989, 1997, 2002). The author leaves aside any legal analysis and concentrates on what he calls economic property rights. According to his theory, economic property rights are those exercised by economic agents in accordance with, in contradiction to, or even going beyond legal rights.
Incomplete definitions of property rights are frequent for many reasons. First of all, an asset is composed of many attributes, which can be owned by different persons (Barzel, 1997). Rights are linked to attributes, forming a bundle of rights. Since multiple owners share asset ownership, the definition of property rights is key to preventing disputes among them. Secondly, defining ownership is a resource consuming activity, therefore valuable attributes tend to have attached rights which are better defined than for less valuable attributes (Barzel, 1997). Thirdly, measurement and enforcement of property rights are also costly activities (Barzel, 1997). These three reasons explain why the definition of property rights is not exhaustive, leading to the allocation of rights into the public domain.
Property rights in the public domain are vaguely defined, and consequently poorly protected, creating the possibility of value capture without compensation to the due owner (Barzel, 1997). For this author, defining and protecting rights is a matter of choice. Owners choose to exercise rights whose gains surpass delineation, measurement, and enforcement costs. When the balance is (potentially) negative, they choose to let them to go into the public domain. This analysis is dynamic, which means that rights are recovered from or placed in the public domain any time that their perceived value changes (Barzel, 1997).
For the Economic Analysis of Property Rights, transaction means the exchange of property rights and value appropriation is preceded by value generation and capturing efforts. Therefore, Barzel (1997) defines transaction cost as the cost associated with the transfer, capture, and protection of property rights.
Bearing in mind that economic property rights are not entirely regulated by law, that ownership over an asset is shared among multiple owners, and that some rights are allocated in the public domain, economic agents (including organizations) strive to minimize transaction costs. One possible solution is to select an efficient ownership structure and impose restriction for shared owners (Barzel, 1997).
Although legal analysis is not the focus of the theory developed by Barzel, it does not neglect the relevance of formal institutions in reducing the portion of rights in the public domain and in improving the economic ownership of assets. In fact, enforcement of agreements is considered a basic feature of the state (Barzel, 2002).
Two types of economies of scale are linked to legal property rights protection, allowing the state to be the enforcer of various contracts. One category includes the economies of scale that arise in assembling the power needed for protection. The second is associated with the use of rulings applied when different groups of individuals make similar agreements and their causes of dispute are similar.
The more expensive it is to make and enforce contracts through the state, the more people will use dispute-resolving mechanisms that replace the former. As the state expands its scope of operations, it also expands its bureaucracy, placing itself at a disadvantage when providing dispute-solving methods other than already available third-party enforcement. The more numerous and more valuable the activities in which the substitute mechanisms are cost-effective, the less the state can exploit the economies of scale for protecting and establishing legal rights. Some examples of substitute mechanisms are close-knit groups, vertically integrated firms, trade, and criminal organizations (Barzel, 2002).
For Dixit (2004, 2009), the government's failure to protect rights, and the violation of private property rights by the government or its agents (e.g., corruption), are major causes of poor economic performance in many countries, especially the less-developed ones. Other social institutions of economic governance also exist in almost all countries. They function especially in niches where the government provides poor services, or does not provide any service at all (Dixit, 2009). Governmental and private institutions of governance coexist. therefore, it is important to find the combination between them that works well under each circumstance.
Formal institutions of the state carry out enforcement through its legal apparatus and by using its powers of coercion if needed as a last resort, and informal social institutions, which must be self-governing, use strategies available to the participants themselves in the economic interaction. For a law on the statute books to be effective in practice, citizens must expect the government to succeed in enforcing the law. Informal private and social institutions include networks that facilitate research and information, behavioral norms, and enforcement sanctions in cases of violations of norms (Dixit, 2009). Some of the private cases of economic governance explored by Dixit (2004, 2009) include integration and corporate governance, bilateral self-enforcement by a pair of agents, multilateral self-enforcement in a community of traders, private external enforcement by private adjudication, enforcement under the shadow of formal law, provision of information to be used as an input in second-party enforcement, and enforcement for profit by a third party.
Based on Barzel's theory, Zylbersztajn (2010) proposes that rights are protected by the interaction of legal and economic rights. The former are enforced by the state (formal property rights--FPR) and the latter are enforced by economic agents on their own (informal property rights--IPR). The sum of these two classes of protection can be 100%, at the extreme, but since full protection is costly, their combination can often be below that ceiling. What is left unprotected (PR0) is in the public domain, and therefore susceptible to capture. Figure 2 illustrates the components of the property rights index (PRi).
Ultimately, transactions only take place in the presence of a minimal property right protection threshold (PRi), which means a small PR0 share. In cases where PRi
In summary, some property rights over an asset can be unclearly delineated because there are costs involved in this activity. therefore, they are...
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