"Many westerners have been led to believe that what underpins their successful capitalism is the work ethic they have inherited, in spite of the fact that people all over the world all work hard. Therefore, a great part of the research needed to explain why capitalism fails outside the west “remains mired in a mass of unexamined assumptions labeled ‘culture’” - De Soto
I recently had an opportunity to write a book review on Hernando De Soto's "The Mystery of Capital". The author is one of the better economists of our time and has been an influential figure in changing Peru's economic system. More can be learned about him here.
I found the book to be very well written, and thoroughly enjoyed reading it. The book was convincing to me in many ways, especially since I have lived in both the developing countries as well as in the west for considerable periods.
De Soto's central claim is that it is not culture that prevents the developing world from turning into prosperous capitalistic societies, but rather the informal allocation of property. In other words, the disparity of wealth between the West and the rest of the world is far too big to be explained by culture alone. Because there is no formal property recognition system in the developing world, assets cannot be turned into capital to generate surplus value. After all, the poor in the third world already possess enough assets, generate enough savings, and have vibrant commercial industries, talent, enthusiasm and the “ability to wring a profit out of practically anything”. De Soto claims that the poor of developing world own $9.3 trillion worth of real estate. But their countries remain poor. Why?
What the author claims as the major impediment that keeps the developing world from capitalizing on their assets is that these assets are hidden in nature, and are not properly represented in the legal property system. In other words, these countries do not have a proper representation process to capitalize on their assets. Especially the real estate properties are built on land whose ownership rights are not adequately recorded. Without representations, their assets are dead capital. The author claims that capital is the force that raises the productivity of labor and creates the wealth of nations. The inability to create capital roots purely from the fact that the developing countries hold their assets and resources in defective forms.
The author summarizes years of research into the reality of life in places such as Haiti, Peru, and Egypt to demonstrate that the poor inhabitants “have houses but not titles; crops but not deeds; businesses but not statutes of corporation”. Without an integrated formal property system, no matter how many assets the developing worlds accumulate or how hard they work, most people will not be able to prosper in a capitalist society.
In addition, the author also mentions that the developing world is now benefiting from the communications revolution. As information and communications continue to improve and the poor become better informed of what they do not have, “the bitterness over legal apartheid is bound to grow”. Compounding the problem further, the economic reformers have left the issue of property for the poor in the hands of conservative establishments uninterested in changing the status quo.
I found that certain steps prescribed in the book are not concrete enough for concerned individuals to take advantage of. For example: To overcome the legal and political challenges of property reform, the author suggests that the leaders and the politicians need to visit people on the streets and communicate in language familiar to those at the grass root levels of society. The author suggests that once the benefit of property reform is well explained to those living in the extralegal sector, they will convincingly adapt to the reform proposals. The author does not talk about situations where there might be resentment towards such reform from the extralegal sector. What immediate benefit do the extralegals see in integration, when it is evident today in the third world that the amount of money being circulated in extralegal sector is huge? The extralegal sector doesn’t keep their money in their houses and they do circulate it to run vibrant economies. What negotiation tactics can the governments use to get the extralegals to build a vision? Would they be open to suggestion by these same leaders that have tried to suppress them in the past?
The author compares the situation of the developing world to that of the US history during the era of mass immigration from Europe. At that time, the US was plagued with lawlessness, anarchy, and huge number of people that disregarded the law and created their own social property contracts. The importance of this historical perspective is that the US government slowly began to adapt to the social contracts that were constituted by illegal settlers and squatters, and were able to bridge the gap between formal law and social contracts by carefully combining the two. The author suggests that the developing countries can learn a great deal from this lesson and try to enact similar laws that take into account the aspirations of the extralegal sectors and bridge them into the formal law.
Disregarding the extralegal sector as irrelevant can be disastrous and some level of compromise is needed, mentions the author. My view is that governments in the third world need to be careful in this regard, because the extralegal sectors might not have noble intentions for the common cause, but rather might try to trick the government for temporary monetary gains.
In the developing countries, the land that the squatters have occupied is usually owned by someone else within the legal means. It is just not possible to adapt a model from the US history and draft a law that transfers ownership of these illegally occupied lands to the squatters as long as they develop it into a capital generating machine. In the US historical context, awarding lands to squatters was possible because of the abundance of it; there was plenty of it to go around. In contrast, heavily populated developing countries are deprived of acres of land luxury and have to fight for every square inch of what they own. Giving away land to illegal occupiers for the benefit of society is therefore just not practical.
The book’s central merit is that property can be used as the means of obtaining credit in order to generate surplus value and further investment. Property can therefore be seen as generating a multiplier effect that produces compounding growth. He claims that through property reform, the poor too can use their assets to generate further capital, and if this continues, the third world will no longer be the third world.
Another interesting noticeable pattern in the book is that the author pinpoints the mass migration into cities resulting in extralegal activities as the root to untapped capital. The author does not provide much insight on rural poverty, or the cause of it. If extralegal activities in the urban settings give us a clue as to the underutilization of assets, what is to explain the capital generating inability of rural agricultural lands that these settlers have left behind? Surely, these agricultural lands would not have been used in extralegal settings; therefore what might be the explanation for rural poverty, which is much more prevalent in the developing world today than is urban poverty?
In other ways, I find this book to be a rare collection of convincing arguments. It provides for a fresh thinking as to what might be the root cause of the difference between the western world and the developing world. By painstakingly digging for details in a number of the third world countries, the author and his researchers have established that the third world does have a large amount of property. They have flipped through the history books to uncover the genesis of real estate as the capital generator in the western world. In spirited language, the author provides a blue print for a new revolution – property revolution. He states that one of the greatest challenges to the human mind is to realize those things we know exist but cannot see. The creators of wealth were able to reveal and extract capital from assets by devising new ways to represent the invisible potential that is locked up in the assets we accumulate.
Although a fabulously written book, an argument can be made that property rights alone will not propel the third world into a first world status. The issue of dead capital is only one aspect of the entire spectrum towards prosperity. Other pressing issues in the developing world such as lack of human rights, striking rate of unemployment, high rate of infant mortality and trade imbalance in favor of the developed world are all standing tall and need to be dealt with.
-SP
toys for my kids. When I accidentally ran into a Rubik's cube shelf, the constant struggle that I had faced in trying to solve the cube in my childhood re-emerged. I immediately picked one up hoping that I could perhaps conquer in my adulthood what I could not achieve in my childhood. Well, it was not easy, but I can finally say that I now can solve the cube. The difference this time in my approach was the level of determination, and getting myself familiar with cube algorithms, which can be found online. I am attaching a couple of photos to show that the proof is in the pudding :-).
