Property Protections and Emerging Markets - dummies

Property Protections and Emerging Markets

By Ann C. Logue

Protecting property is a basic government function and a key issue in the law. And when you’re investing in emerging markets, you want to have your investment legally protected. If rules are established and enforced to determine what can be owned and how ownership can be transferred, then trade can happen. Protection of property rights makes commerce happen.

Ironing out ownership rights

The basic question about ownership is figuring out what can be owned and who can own it. The concept of ownership varies from place to place based on culture, tradition, and convenience. What you want to see in an emerging market is a lot of private ownership, which means that businesses and the land can be owned by individuals who have the money to buy them, and those owners can sell some or all of their ownership to someone else. Types of ownership include:

  • Common ownership: In many societies, certain items are owned by everyone. The economic value is low because owners can’t sell their part ownership.

  • Cooperative (co-op) ownership: The workers at an enterprise are equal owners of it. Co-ops are common in emerging markets, especially in countries that are making a transition away from socialism. International investors are rarely allowed to be involved.

  • Restricted ownership: In some places, only citizens have ownership rights, which may mean that women or members of certain ethnic groups don’t have any. This situation adds to the political risk in a country.

  • Private ownership: Most countries have a combination of public and private ownership. Full private ownership is impossible unless the country is a monarchy and the monarch considers the nation to be his private property.

Separating possession from ownership

Possession of an item may be enough to claim ownership in some situations but not in others. Possession means that you have an item but can’t produce proof of ownership. In many countries, people need to establish legal ownership of items before they can trade in them or share them with investors. Depending on the jurisdiction, ownership of many possessions can be proved in the form of a title registered with a governmental authority.

When a country develops the legal structure and procedures to clarify titles, its growth accelerates. This is especially noticeable in countries that were once Communist, as they figure out a way to move from state to private ownership. When individuals and businesses can start acquiring ownership, they can trade and grow.

Transferring property

Because possession and ownership aren’t the same, a country’s laws have to provide a way for ownership to change from one person to another. Different governments have different procedures that generally include things like filling out forms, paying fees, and filing receipts. The exact process, of course, can vary greatly from place to place.

Because property transfer procedures are one of many indicators for how efficient a government is, the World Bank tracks the average number of procedures needed to register property, such as forms to fill out and offices to visit; the length of time that it takes; and the cost from fees, transfer taxes, and so on.

The longer it takes to transfer property, the harder it is to get business done. And the more procedures involved, the greater the potential for corruption along the way. Countries that want to improve their business climate often do so by improving such matters as property transfer processes.