Study Looks at Squatters and
Land Titles in Peru
By Alan B. Krueger
January 9, 2003
An estimated 400 million to
600 million people worldwide are squatters, living on land they have no
legal right to occupy, usually on the outskirts of cities. Urban squatting
poses a growing economic problem in less-developed countries.
Hernando de Soto, a Peruvian
economist, has long advocated reforming property rights for squatters as
the path to economic development for poor countries. Now hard evidence
suggests there may be something to Mr. de Soto's argument, although for
reasons he did not anticipate.
The new research was done by
Erica Field, a Ph.D. student in economics at Princeton University, and is
available from www.irs.princeton.edu. For the last three years, she has
studied land title reform in Peru, which, at Mr. de Soto's prodding, began
the world's largest program to provide property titles to urban squatters.
From 1995 to 2001, more than 1.2 million households — 6.3 million people
— received title to the properties they were inhabiting.
Before the reforms, it could
take years for squatters to obtain a title. The reforms, started in
different neighborhoods at different times, enabled squatters to get
titles quickly, for a fee of $20 to $50. To be eligible, squatters needed
only to establish that they had lived in their residences before 1996.
Without a title, Ms. Field
hypothesizes, squatters devote extra time and effort to protecting their
residence from intruders. This typically requires someone to stay home and
defend the property, reducing the opportunity to work in the formal labor
market. Cutting the opposite way, however, is that home ownership
increases a squatter family's wealth; all else being equal, wealthier
families work less.
Ms. Field exploits the
natural experiment created by the staggered introduction of title reform
in different areas of Peru to test whether granting land titles increased
or decreased the amount of labor supplied by squatters.
She first looks at squatters
eligible for a title at the start of the reform in 1995. For this sample,
she compares the number of hours worked per family in 2000 depending on
whether the family lived in a neighborhood that had already introduced
title reform or in another neighborhood in the same city that had yet to
The neighborhoods where
title reform was introduced early were quite similar to those where it was
introduced late, as far as poverty, literacy and access to sewage and
electricity were concerned. Still, as an additional layer of control, she
subtracts the difference in hours worked by those in previously titled
families between the two sets of neighborhoods.
She performs the analysis
using a sample of 2,750 households surveyed in eight Peruvian cities in
2000. About a third of the households were in neighborhoods where title
reform had already been introduced.
Her results strongly suggest
that labor supply increased as a result of land titling. Two to three
years after title reform came to a neighborhood, families that were in
untitled houses before the reform worked 20 more hours a week, on average,
than those from untitled houses in neighborhoods that had not yet had
title reform. By contrast, among households titled before the reforms,
family work hours were a statistically insignificant four hours greater in
areas where reform was introduced early than in those where it was yet to
These results suggest that
introducing title reform caused hours of work to rise by a net 16 hours a
week — or 17 percent — among those who initially lived in untitled
residences. And this figure understates the effect among families that
actually obtained a title, as only about 70 percent of squatters had
obtained a title two to three years after reform was begun in their
Despite the overall rise in
work hours, the amount of labor supplied by children was an impressive 27
percent lower for families that were initially squatting in neighborhoods
that introduced title reform early. Although school enrollment did not
rise, this may be because many children in Peru already attended school
while they worked. Still, the reduction in child labor should allow
children to devote more time to school.
Ms. Field's results further
suggest that too many squatter families try to run a small business out of
their house so they can safeguard the homestead at the same time. Title
reform enables them to run a business or work outside the home.
Lastly, she finds that those
who were initially squatters and live in areas that underwent title reform
are more likely to say they consider their dwelling very secure from
eviction or invasion than are squatters in areas that have yet to undergo
reform. This reinforces the notion that the shifts in work effort are
indeed a result of the additional security provided by land titling.
Mr. de Soto has argued that
giving title to squatters fosters growth by enabling entrepreneurs to
leverage their capital; squatters can use their homes as collateral to
obtain a loan to start a business or renovate a house, or sell a home and
buy a new one.
The benefits that Ms. Field
documents, however, relate to the improved allocation of work effort from
not having to devote labor to protect the home and possessions. Although
important, especially for the families involved, these benefits are
unlikely to increase a country's long-run growth rate greatly because they
represent a small proportion of nationwide work hours.
Preliminary studies by the
Peruvian government have not found much evidence that access to credit has
increased for families that gained titles. But Ms. Field notes that
increased access to credit may come at a later stage, as has been the case
for government loans for housing materials. The irony may be that although
title reform has been touted as a boon for capital markets, at least in
the short run its greatest benefit is in the labor market for poor
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