Jewish World Review Oct. 4, 2000 / 3 Tishrei, 5761
The lack of clear rights to private property in developing nations may be why they find it hard to transform their fortunes
http://www.jewishworldreview.com -- What is it about capitalism that it does not always take? After the Soviet Union fell, many inhabitants of the former Eastern Bloc and the developing world assumed they would be able to "turn capitalist". Yet the transition has often proved hard, and resentment has grown. In some places, there is still a lingering sense of us versus them.
On the one side stand those Marie Antoinettes, the international development organisations, saying: "Let them eat markets". On the other are the reforming countries, who find that macroeconomic adjustments alone are not sufficient, and that they are vulnerable to unpredictable movements in global capital.
All the more useful to have one of "them" - Hernando de Soto of Peru - charging around the globe explaining the problem. Mr de Soto has long played the role of intellectual conquistador in Latin American politics. At great personal risk, he and his Lima-based Institute for Liberty and Democracy challenged the Maoism of the Shining Path. In the early 1990s, it cranked out legislation for successive governments, initially including Alberto Fujimori's.
After breaking with Mr Fujimori, Mr de Soto turned to the greater puzzle of capitalism's failures in developing countries. Now he gives his findings in The Mystery of Capital: Why Capitalism Triumphs in the West and Nowhere Else (Basic Books). The de Soto answer to the mystery is wonderfully mundane: real estate. Like many other thinkers at the legal end of the economics field, Mr de Soto says that the rule of law is the missing feature in developing economies. Where he adds value is in arguing that the absence of one narrow aspect of the rule of law, established rights to real property, has devastated prospects for the accumulation of capital from Peru to the Philippines.
Property, to Mr de Soto, has a mystical characteristic: "It does more than prove ownership, it also transports value." In his view of the world, dowdy parking lots and family homes suddenly acquire all the sexy dynamism of internet start-ups.
This thesis will certainly gratify the real estate investment trust managers of this world, who have long suffered in comparison with their counterparts in the glitzy equity sector. There is also much truth to it. As Mr de Soto points out, even in the 1990s, the single most important source of capital for new entrepreneurs in the US was their homes. The fact that houses, or at least their mortgages, have become fungible has provided enormous leverage in capital markets.
In developing countries by contrast, an entrepreneur is not even likely to have a house to borrow against. This is mainly so, as de Soto shows, because of the enormous legal obstacles such countries erect to clear-cut ownership.
In the Philippines, establishing legal ownership takes 168 steps, and between 13 and 25 years. In Egypt, a worker who wants to buy land on state-owned desert must complete 77 procedures that take up to 15 years. In Haiti, the number of steps to obtain a leasehold of government land is 65; to buy the land takes 111 steps.
As a result, the majority of homebuilding and ownership takes place in grey and black markets. A Deutsche Bank analysis finds that 70 per cent of construction in Peru never makes it into the official record. Even an entrepreneur's informal ownership is recognised in his community, he does not possess official title. The same often holds for his business.
In other words, citizens of developing nations are, despite their image, not always poor. Their trouble instead is that what they own may not be used as collateral. "People with nothing to lose are trapped in the grubby basement of the pre-capitalist world," says Mr de Soto. Their capital is "dead capital". Being squatters rather than owners, traps them in a society where operating outside the law - with its attendant corruption - becomes the norm.
This focus on property is, of course, not original. It dates back as far as England's "tragedy of the commons" - the devastation that occurred when farmers allow their livestock to graze too much on public lands since none of them bore individual responsibility. Since then, various thinkers have posited that private ownership of land is the most effective way of minimising such damage. Ronald Coase, the Nobel prize-winning economist, even offered the insight that it matters less who owns a piece of property than that it is owned by someone.
An element of common land in a country or city can clearly benefit economic development. London and New York both gain from having common land: Hyde Park and Central Park both do much to draw capitalists - and so capital - to the two cities.
Still, Mr de Soto's work is enormously valuable. For one thing, it debunks cultural relativists in an extremely gratifying fashion. "Is illegal squatting on real estate in Egypt and Peru the result of ancient ineradicable nomadic traditions among the Arabs, and the back-and-forth custom among Quechua-speaking farmers of cultivating crops at different levels of the Andes? Or does it happen because, in both Egypt and Peru, it takes more than 15 years to obtain legal property rights to desert land?" Mr de Soto suspects the latter.
Most interesting is the de Soto solution to the problem of extra-legal property claims and informal local property arrangements: to legalise them. The biggest precedent for this is the US of a century ago, where homesteading pioneers moved so rapidly that Congress was reduced to ratifying claims. As one lawmaker said: "We are to legislate after them in full pursuit, to the Rocky Mountains or the Pacific Ocean."
Legalising billions in property in the developing world is a daunting notion - what
about other claims to the same land? Still, it may be the most truly liberal answer
to the problems facing those who are told to eat
JWR contributor Amity Shlaes is a columnist for Financial Times
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