All Commentary
Tuesday, January 1, 2002

The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else

Property Rights Are Essential to Freedom and Economic Growth

Taking things for granted isn’t always a bad idea. Anyone who checks the morning paper to see if the sun will rise in the east is wasting his time. But the role of property has been taken for granted, with awful results. Economics textbooks may discuss incentives to invest, but they seldom, if ever, make clear the assumption that a person investing in property would have some confidence that he could continue to own the property. That assumption turns out to be pivotal to economic development.

Several recent books have raised our awareness of the dramatic role that property plays in economic development and in freedom. Tom Bethell wrote The Noblest Triumph, a readable, broad survey of the role of property in economic development. Then Harvard historian Richard Pipes wrote Property and Freedom, inspired by his study of Soviet Russia.

The latest of the property trilogy is Hernando de Soto’s The Mystery of Capital. De Soto runs a free-market think tank in Peru and was widely hailed for The Other Path, which made the case for free markets in less-developed countries. His new book showcases a multi-country study of how difficult it is for poor people to get legal title to property in various Third World countries.

Where most of the land is government-owned, poor people become squatters. In America, we build a house and then add furniture. In the Third World, poor people reverse the process, putting simple belongings on a piece of unoccupied ground. If no one disputes their claim, a bit of a roof follows. As time goes by, and as the neighbors come to recognize the newcomer’s property, a regular structure will be added. Over time, not only do the neighbors recognize the squatter’s property, but also informal local organizations may “register” the ownership—unofficially, of course.

But what if the squatter wanted to acquire legal title to the property? In the Philippines, de Soto shows, it would take 168 steps, and 13 to 25 years. In Haiti, it’s 111 steps over 11 years. Egypt looks like a hotbed of freedom with only 77 steps that could possibly be completed in six to ten years.

As a result of these difficulties, legal title is not sought, and this type of property is called “marginal.” The research team that de Soto led estimated the size of the marginal sector and found that it’s anything but: “In fact, it is legality that is marginal; extralegality has become the norm. The poor have already taken control of vast quantities of real estate and production.” In fact, de Soto estimates that four of every five rural Peruvians live in untitled property, with similar figures for other countries. A shanty may only be worth $500 or so, but the shanties add up. In Haiti, the value of untitled property is estimated at $5 billion, four times the value of assets of all legal businesses in the country!

Again, the broad conclusions hold across all the countries studied. The lesson is that poor people can accumulate capital, but without legal title they cannot fully exploit their assets. De Soto shows that property has several uses. Not only can it provide a dwelling, but it can also provide collateral. Where legal title does not exist, however, its collateral value is limited.

Throughout the world, extralegal organizations have formed to register property. De Soto cites neighborhood business organizations, residents’ committees, farming conventions, and so on. Those organizations recognize and document extralegal property claims. “We did not find a single extralegal plot of land, shack, or building whose owner did not have at least one document to defend his right—even his ‘squatting rights.’” The limitation, though, is that there is no good source of information for outsiders who might lend money based on the extralegal collateral. The potential lender will also not know whether the local property-recognizing organization would recognize the lender’s lien. The government typically does not want to surrender its own title to land, and the economic elite may also have claims to land occupied by squatters. The result of conflicting claims is that no one can realize the full value of the property.

Hernando de Soto has done a great service by demonstrating that the poor people do have property and can accumulate capital. But the poor cannot realize their potential because of the conflict between their real but extralegal claims and the unreal but legal property systems. Taken with the fine books by Bethell and Pipes, The Mystery of Capital demonstrates that property rights must never be taken for granted.

William Conerly is an economic consultant in Portland Oregon, and chairman of the Cascade Policy Institute.