Hernando De Soto’s The Mystery of Capital

The holy grail of development is a resource that explains why the West has grown so far ahead of the rest of the world in terms of income per worker and productivity. Hernando De Soto makes a good case in The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else that property rights are one of the main reasons why the West has gone so far ahead of other countries. Every neighborhood in the world has property rights, in the sense that if I build a shack or house, the neighbors agree that it’s mine and that the space is mine. But only in the West are the property rights likely to be registered with the government, and the owner of the property able to use his land or house as collateral to secure credit from banks or strangers (people who are not family or friends, in other words). To start a legal business, or establish a formal claim to property, is an onerous process in most Third World economies. For example, in India, “about 90 percent of land titles are unclear as to who actually owns the land…[this] causes competition among real estate developers to be over finding and acquiring land with clear titles rather than over construction productivity,” according to William Lewis. Apart from explaining, for example, the number of megastores and car dealerships I’ve seen in low-traffic locales, this can explain why it’s so hard to get growth; there are a number of problems that arise when your property is on land that you don’t own. You can’t get credit, because it’s hard to use land as collateral when you don’t own it (and the bank probably can’t sell it either). When you might not be able to sell your property for very much, and the government could kick you out at any point, then you don’t have a huge incentive to make lasting improvements, either. The poor around the world own a surprising amount of capital; according to one estimate, the world’s poor collectively own $9 trillion in assets, between the land they own, the improvements they’ve made on the land and their savings. The problem is that in the absence of a formal system of property rights that’s consistent across the country, they’re unable to leverage that capital in a meaningful way. Most attempts to establish systems of property rights have failed, because of fears from entrenched parties (lawyers, the rich, special interests) about change. In Peru, De Soto’s country of specialty, the government’s tried to provide property rights to the poor on multiple occasions, and failed to help the poor in any meaningful way; sometimes the problem was in implementation and sometimes the rich hired lawyers to subvert the system and claim land that wasn’t theirs. Governments have spent billions on GPS and mapping technology, without making it any easier for the poor to own the land on which they sit; America managed to integrate property by 1900 without any of that technology. Businesses and squatters face tradeoffs; De Soto argues that many of them would like to become legal, but the costs of doing so in some countries are so high (sometimes requiring 200 steps and as many as 15 years) that most small businesses have no choice but to operate outside the law. In Peru De Soto set up a simple alternate registration system for businesses, and generated $1.2 billion in revenue for the government, by making it easier to become legal (and enjoy all of the protections of a working legal system). Capitalism, to many of the entrepreneurial poor around the world, is a series of stupefying laws, and necessary innovations to create agreements in the absence of any recognition or protection from the government. In the absence of a functional legal system, the poor in every part of the world have their own arrangements for assigning property. De Soto gives the example of walking through a field in Indonesia, where he could tell who owned the land because a different dog would bark at him when he crossed an invisible property line. The key for governments is to transform those extralegal agreements into formal agreements that foster trust and capital generation among the poor.

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