EclectEcon

According to the Coase Theorem (named for the economist who developed it, Professor Theorem),

• If property rights are well-defined and well-enforced, and
• If transaction costs are low (less than the expected gains from the transaction), then
• resources will move to their most highly valued use.

The passing of legislation to establish, enhance, and enforce private property rights in China suggests that as Chinese residents come to trust and expect that their property transactions will be protected by law, there will be more resource movement toward more highly valued uses in China. From the Washington Post,

Jiang Ping, former president of the China University of Political Science and Law and a scholar who advised officials drawing up the law, told the official New China News Agency that it is significant because it helps codify a property law system that has been evolving through regulation in recent years as the country moves away from socialism.

"Only when people's lawful property is well protected will they have the enthusiasm to create more wealth and will China maintain its economic development," Jiang said.

What is disappointing is that the story also quotes this idiot (who clearly qualifies to be leader of Canada's NDP):

"In the property law, state assets and private assets are put on the same level, which I think is totally wrong and even irrational," said Gong Hantian, a Beijing University law professor who has advised the government on legal matters.

"The reason China has such a fast-growing economy is that we have a very strong public sector. . . . Privatization for a socialist country like China is not a gospel, but a disaster," he said.

His facts are wrong. The reason China has such a fast-growing economy is that private entrepreneurship with the ability to earn and retain profits has gained increasing legitimacy over the past two decades. Before the mid-1980s, economic growth was slow because there was little incentive to take financial risks: if you succeeded, you didn't get to keep the rewards, and if you failed, you lost your state-determined job.

The famous Coase Theorem in economics relies on the assumption that property rights are both well-defined and easily enforced. Indeed, property rights (or legal entitlements, as I prefer to use the term in my courses to make the coverage of the theorem as broad as possible) lie at the heart of efficient production and trade. Without them, as we have seen with the dismal failures of planned economies, people shirk (more than in property-based economies) and resources are frequently assigned to inefficient uses.

So what happened when the Israelis pulled out of Gaza, leaving behind massively productive greenhouses that produced bug-free vegetables? Apparently the Gates' foundation bought out the Israelis.

Gates' charitable foundation, the largest in the world, provided the bulk of the funds used to purchase the greenhouses from Gush Katif residents at rock-bottom prices, to be handed over to the Palestinian Authority (PA), according to Forbes magazine.

... Prior to the Disengagement, Israel's bug-free greens were grown in the advanced Gush Katif greenhouses and Gush Katif farmers exported more than $100 million in produce to Europe annually.

In a hasty $14 million deal brokered by former World Bank President James Wolfensohn, the greenhouses were transferred to the Palestinian Authority. The PA then took responsibility for the facilities, but failed to protect them from looters following the withdrawal of the Israeli military. PA security personnel assigned to protect the greenhouses reportedly took part in the looting as well.

The greenhouses that survived are not being successfully used, as PA farmers complain that they are having trouble reproducing the bug-free produce grown by the greenhouses’ former Jewish owners. WorldNetDaily reports that the Arabs have asked the US governmental development group USAID to hire back the expelled Israelis as consultants for the declining vegetable businesses.

Without well-defined and well-enforced property rights, productivity in the remaining greenhouses will be low. Incentives will not be compatible with efficient production and growth.

Also, as I wrote back in January, acquiring physical capital is not sufficient to guarantee the success of many operations; know-how is also important. Perhaps the Gates' foundation will also pay for licensing this know-how [after they hire enough non-corrupt security forces to guard the greenhouses!].

[h/t to The Emirates Economist for the pointer]

Speaking of water, as I did yesterday, from Stuff in New Zealand comes news that at least some people are beginning to consider allowing markets to help allocate water:

Environment Minister David Benson-Pope and Agriculture and Forestry Minister Jim Anderton have prepared a Cabinet paper, which is expected to rule out privatisation but allow limited trading of water rights and establish an economic "price" for water.

... the Government did not want a regime which would prompt users to exploit their full water right, because that might encourage them to use more, not less, water.

One option could be a "cap and trade" system which could allow consent holders to trade a proportion of their water right, but not the full amount.

... The South Island river faces competing demand for hydro-generation, irrigation, industry and recreation, while the available flow is arguably "over-allocated" in dry years.

Existing users effectively have priority, on a first-come-first-served basis, which may not allow for new or more economic uses.

Let's see, now:

• Well-defined property rights.
• Dramatically lowered transaction costs

It all sounds pretty Coasean/Coasian to me.

[h/t to Rodney Hide]

Nearly a year ago, I wrote,

An important extension of the Coase Theorem for economic policy makers is that the creation of well-defined and easily enforced legal entitlements is crucial for economic growth.

Here is further evidence, from Gaza [h/t to Melanie Phillips]:

Hafiz Barghouti, the editor of the newspaper Al-Hayat Al-Jadeed, has written: ‘It appears we are neither prepared to change, nor admit that we have failed in running our own affairs. Everyone is busy calculating how to make the biggest possible gains at the homeland's expense. While most Palestinians find it easy to blame the occupation for all our ills, it is a fact that the occupation was not as bad as the lawlessness and corruption that we are now facing.’