Wednesday, September 15, 2010

America and Haiti

Haiti is very instructive to the US. First, when listening to economists remember they have no consensus on the seemingly straightforward question 'why is Haiti so poor?' Thus, when some economist tells you the optimality of some fiscal policy is "Economics 101", remember that any interesting important macro fact is basically a puzzle to "Economics 101". While economists can model their opinions, they do not agree on the big economic issues of the day any more than garbage men or biologists do.

As the aerial photo of the Dominican-Haiti border shows, property rights are clearly an issue. Property rights are weak in Haiti, so no one has an incentive to cultivate or protect land, and so it turns into a literal sewer. The January earthquake has highlighted this problem, as to date very little debris has been moved according to the AP:
a major obstacle to demolishing buildings has been the lack of property records, which either were destroyed in the quake or never existed at all.

Without an owner's consent, it is difficult to remove debris, he said.

In Haiti, like the USA, there is great concern that if people own land, this will exacerbate inequality. The solution, that no one, or 'the state' owns it, leads to a wasteland.

My local paper highlights the same problem in my community. Most home loans are non-recourse: the bank has no 'recourse' to go after a borrower if he doesn't pay his mortgage, merely take the property. But this seizing of collateral takes 12 to 24 months given all the rules designed to protect homeowners. The result are many properties in foreclosure have no one managing them who wants to maximize their value. Indeed, the homeowner sure to default can cannibalize the house, ripping out $2 worth of fixtures and selling them at $1. Such venal behavior would be immediately condemned by politicians and journalists if it were done by banks, but because individuals are doing it there's no outrage. Here's a case where giving bankers more power would greatly improve neighborhoods. The following is from the Minneapolis Star-Tribune:
On Labor Day, Deneen Clarke was scraping the woodwork in her bathroom when she heard banging from outside. From her window, Clarke could see workers hauling doors, leaded glass windows and even a built-in buffet out of the century-old home next door.

Clarke called the cops. Another neighbor cussed out the workers. But they learned the police weren't interested as soon as they determined the person who authorized the work -- the homeowner.

It turned out that Clarke's neighbor decided to strip out valuable pieces of her foreclosed house the day before the bank took possession of it.

"The person is lowering my property values by taking stuff out," Clarke said. "The house is worthless next door now... The house can't be occupied the way it is."

One key characteristic of civilization is property rights, where people have clearly delimited areas of responsibility.


Unknown said...

Mostly true, except:

(1) There is no "U.S. law" on non-recourse. Some states are non-recourse and some aren't.

(2) Notwithstanding the above, in law, the definition of a "fixture" is that it has become part of the real property.

Hence, removing fixtures the day before foreclosure and selling them for scrap is almost certainly both unlawful and criminal. But the victims couldn't bother suing judgment-proof removers and the political authorities will not bring criminal charges against even the most blatant "innocent victims" of foreclosures.

Eric Falkenstein said...

Good point! I changed the verbiage.

Unknown said...

I used to live on the border of the DR and Haiti; one big factor was simply that the DR has a much lower population density--and has for centuries--than Haiti.

Jared Diamond has a whole chapter in his book _Collapse_ on the reasons for the DR/Haiti difference. In his view, it comes down to a dictator in the DR who was environmentally conscious and enforced laws.

Optio said...

As usual Mr Falkenstein you're right; weak property rights it's a big issue, but there is another little problem in Haiti; they're all blacks and i'm not thinking about New Zeland's rugby. A low qi nation can't do nothing right.

Unknown said...

As someone who works with lenders in credit scoring, I appreciate the points about the overprotection of borrowers. I see defaulters as thieves. If not, once they were back on their feet, they would resume repayments. But this is exceedingly rare. Also, if they were not thieves, they would contact the bank to work out a restructuring once they realized they could not repay. (If non-repayment is voluntary, isn't that theft?) And if they could not repay even after restructuring, they wouldn't just sit in their house (or keep their car) until the bank came for it, they would give it back as soon as reasonably possible. I've never understood why it is OK to steal money from a bank through non-repayment but not through a hold-up.

windandwaves said...

visit Namibia to find out what happens when very few own all the land... There is plenty of income, but only very few see it. The rest is on the dollar a day thing.

Anonymous said...

On first blush i agree with you.

Then i stopped and considered if there is another way to view this behaviour. Perhaps they are modeling powerful identities eg banks, politicians, wall street, commercial property owners ie there are plenty of example of people walking away from their responsibilities.

I imagine that 60 years ago moral codes would have made this much more difficult for all levels of society, not so much now...


Anonymous said...


Restructurings happen in the corporate world, it barely exists for individuals. A "homeowner" whose income goes from 75k to 20k and stays there for few years almost never has the opportunity to restructure the loan - they lose the house. And "giving the house back to bank" serves no purpose - 1) the bank often won't take it, putting the homeowner in a worse position, and 2) the bank won't cancel the debt. The vast majority of those waiting for foreclosure would happily send in the keys in exchange for debt cancellation if they could.

Get away from your credit-scoring models, and try spending some time in the real world.

Anonymous said...

The average Haitian is a moron. Is this even slightly relevant?