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| Reference Material |
| Demystifying Hernando de Soto: A Review of The Mystery of Capital1 By Roy Culpeper, President, The North-South Institute March 26, 2002 It is apt to begin a reading of de Soto�s book, The Mystery of Capital, with the dust cover. The back cover provides effusive compliments from Milton Friedman and Margaret Thatcher, among other notable conservatives. The front cover includes an illustration of New York�s World Trade Center towers, seen through a glass bell-jar, which is a key metaphor in Mystery. The symbolism, in the wake of the terrorist attacks of September 11, could not be more poignant. And yet it is very fitting, since de Soto�s thesis is that if countries around the world only got their act together by establishing a system of formal property rights, the thriving capitalism now restricted to the bell-jar of the West would be universal. Would de Soto�s proposals have prevented the terrorist attacks of September 11? Or would they help defuse the conflicts over land around the world? It is worth considering these questions while reading Mystery. De Soto�s book is important both for what it says and what it omits or misconstrues. It poses extremely relevant questions about poverty and its eradication. It provides some useful insights into the development process. But its policy prescriptions, with their singular emphasis on titling informal property, are flawed and do not necessarily serve the poor well, in spite of the fact that Mystery purports to speak on behalf of, and to empower, the poor and disenfranchised. The fundamental and valuable question de Soto poses is this: in the post Cold War world, how can market capitalism be made more equitable? In particular, how can the poor enjoy the benefits enjoyed by so many in the rich countries and the rich elites in poor countries? In trying to answer these questions, de Soto and his colleagues took a long journey through the Third World and a historical journey through the First World. What de Soto found is some cause for optimism. Poor people and communities around the world struggle to survive against formidable natural and man-made obstacles, and in so doing demonstrate that their entrepreneurial skills are similar to those of the world�s most successful businesses. He maintains that the poor are not the problem in developing countries, but the solution. The key factor inhibiting the success of poor entrepreneurs, in de Soto��s view, is access to capital. Given such access, de Soto argues, there is nothing to stop developing countries from replicating the experience of the United States. According to de Soto, the poor can gain access to capital if they are given formal property rights, i.e. legal title to the property that they actually possess. Legal title gives property-owners greater access to credit by using their property as collateral, thereby �unlocking� their capital and enabling them to invest, or considerably deepen their investment, in their own businesses. In the countryside, farmers could increase their agricultural productivity; in the cities, urban-dwellers could buy equipment to establish themselves in the needle trades, for example, or expand their activities in the service sector. De Soto builds a case on his estimate that the poor in developing countries possess in excess of $9 trillion in informal assets, a huge sum (equal to the total capitalization of the 20 largest stock exchanges) that is �locked� for want of legal title. He also builds on an analysis of Western historical experience with property titling, arguing that 150 years ago, the United States was also a Third World country (p.107). These are shaky foundations for de Soto�s thesis. Historians will find his account of land titling very selective. To begin with, real wages (as opposed to per capita incomes) in the United States (and Canada) were substantially higher than those in Britain and Europe from as early as 1830 (Aghion and Williamson: 114) This should not be surprising, since it was the substantially higher standard of living that attracted huge wave of migrants during the 19th century. Furthermore, he overlooks the enclosure movement in England from the 16th century which led to the migration of dispossessed peasants to the cities as landlords converted their fields to sheep pasture (Barrington Moore, Ch.1). He also overlooks the expropriation of aboriginal land by settlers, backed by governments in the U.S. (and Canada), a historical legacy North Americans are still trying to remedy through land claims. And he ignores U.S. slavery, in which property rights in human beings was highly developed. At the same time he lauds the trends in England toward upholding the rights of the free tradesmen (dispossessed peasants) against those of the guilds, and squatters� rights and pre-emption in U.S. jurisprudence and legislation, examples that he urges 21st century developing countries to follow. As one reviewer points out (Woodruff:1218) there is an irony, even a contradiction, here. If the criterion for titling informal property is the principle that the current occupier is putting the property to better use than the formal owner or occupier, this provides a justification for land invasion, as practiced by the English landlords and North American settlers. In the Third World today, peasants would be justified in expropriating the landlords, most conspicuous current example being that of Zimbabwe. (While it is certain that Robert Mugabe would not have adopted de Soto�s proposals, since they would simply justify the current distribution of land, neither would the opposition, which would likely pursue more democratic processes to redistribute land from white to black farmers.) Indeed, the other side of formal property rights is to exclude non-owners from the benefits that owners enjoy. The most glaring current example is in the realm of intellectual property rights, relating to HIV/AIDS medication, which effectively sentences millions of potential beneficiaries in Africa to an early death. The example serves to illustrate the point that, unlike human or civil rights, property rights cannot be irrevocable or incontestable, particularly if they infringe the rights of others or the public interest. Since property is nine-tenths of the law, it also helps to explain why the United States, where property rights are most developed, is also the most litigious country in the world. Given the contestability of property rights anywhere, establishing who owns what among the poor in developing countries is an enormous undertaking that de Soto downplays. Moreover, de Soto�s titling project is inherently biased against the landless and propertyless tenants. As he says himself, two-thirds of Bombay�s (Mumbai�s) 10 million people live in one-room shacks or on the pavement (p.92). If anyone deserves priority when it comes to human and economic rights, as well as access to productive assets and social services, it is this large and particularly impoverished group of people (Michael Lipton has referred to them as the �ultra-poor��). Yet they would be entirely left out of a process that gives legal recognition to ownership of property, no matter how small. Moreover, any formalization of property ownership based on current possession would legitimize the distributional status quo in favour of the rich. It is recognized that, particularly in parts of the Third World, asset distribution is heavily skewed toward the elites. This maldistribution has long been recognized as a fundamental contributor to inequality and poverty, but downplayed until quite recently by development agencies because any remedial actions such as sweeping agrarian reform were politically explosive. For de Soto, giving the poor formal title to their property is just the beginning of a process of �unlocking� their capital and unleashing economic benefits for themselves, their communities and their countries. The next steps involve transforming property into collateral, collateral into credit, and credit into higher incomes (Woodruff 1218-20). Each step brings risks as well as opportunities, which may result in property passing from the poor into the hands of their creditors. Credit markets are notoriously imperfect, subject to problems of asymmetric information, over-lending and occasional crises, even in highly developed economies. Of course, informal credit markets, with their usurious moneylenders, are hardly any better and in many ways much worse. The lesson for the poor is surely that unlocking capital through recourse to credit is tricky and requires caution, no matter how rudimentary or sophisticated the lender. Beyond neglecting these essential next steps at the micro level of the poor (perhaps they will be subjects for de Soto�s forthcoming books?), de Soto is aware of the challenges presented by globalization in the form of widening wealth disparities, and the growing tide of opposition to global capitalism (p.215). Indeed, he regards his proposal as a way of empowering the poor and thereby ensuring greater equality. Unfortunately, de Soto�s emphasis on formal property rights is so singular it is almost metaphysical. He refers to formal property as a �representational system,� on a par with Arabic numerals and mathematics, about to come into its own as part of human consciousness about the cosmos (p. 215). More balanced treatments of the perplexing question of why some countries have become wealthy and others remain poor (e.g. Landes, The Wealth and Poverty of Nations, and Cohen, The Wealth of the World and the Poverty of Nations, who also emphasizes the key role of markets), address a broad spectrum of factors, historic, geographic, natural, and cultural. At the same time, de Soto�s message is much more simple (�Give the poor title to their informal property, and they will take care of themselves!), and therefore more likely to be read and understood, particularly by those who shun complexity. However, de Soto�s undiluted prescriptions could be a disaster for many of the poor who might otherwise be thought to benefit, as well as excluding huge numbers altogether. A more sympathetic rendering of de Soto�s Mystery would extract the following insights. First, formal property ownership may help the poor get access to productive resources, which is fundamental. But this needs to be complemented in a number of ways: "Through more far-reaching agrarian reform to ensure that the landless and the marginalized also benefit, and not simply reaffirm the distributional status quo; "Through the provision of a range of public services by the State, such as education, health, infrastructure, extension, and so on; "Through the development of well-functioning credit markets and institutions that ensure that credit is provided on reasonable terms to all who qualify; "And perhaps most of all, through greater openness, transparency and accountability of governments to keep them honest and efficient and meet their commitments. Second, de Soto asks how governments, typically dominated by elites, can be persuaded to enact a program that directly challenges existing property distribution. He makes it plain that the legal establishment can be expected to oppose any such program. He ends by appealing to the instincts of visionary politicians to co-opt the elites (p.191). This is a little too easy. In fact, failed agrarian reform programs are legion in the developing world; elites are generally very adept at circumventing the rules and retaining effective ownership over their property. Regrettably, there are no simple answers (including de Soto�s): this is a field fertile for ongoing research and enquiry, especially since the development agencies (such as IFAD) are now re-emphasizing agrarian reform. A last word: if development experts have agreed on anything at all recently, it is that �one size fits all� models do not work. Lessons learnt in one country can be applied in others, but always with caution and care for appropriate adaptation. The lessons of formal property ownership drawn by de Soto from U.S. and European history, for today�s developing countries, deserve particular caution, as they continue their struggles for equitable and sustainable development. References Aghion, Philippe, and Jeffrey G. Williamson. Growth, Inequality and Globalization: Theory, History and Policy. Cambridge: Cambridge University Press, 1998. Cohen, Daniel. The Wealth of the World and the Poverty of Nations. Cambridge, Mass.: MIT Press, 1998. Landes, David S. The Wealth and Poverty of Nations. New York: Norton and Co., 1999. Moore, Barrington, Junior. Social Origins of Dictatorship and Democracy. Lord and Peasant in the Making of the Modern World. Boston: Beacon Press, 1966. Woodruff, Christopher. ��Review of de Soto��s The Mystery of Capital��. Journal of Economic Literature XXXIX:4 (December 2001), 1215-1223. |