The Mystery of Capital
I picked up Hernando de Soto’s The Mystery of Capital in London at the Economist store on a whim. It’s a very interesting book, bridging development economics and libertarian notions of property rights.
De Soto’s argument is that the main thing holding back economic development in the Third World is the lack of clear property rights. Large swathes of developing world populations are considered “squatters”, living in places that they have no legal right to do so. They’ve, however, improved the properties that they’re occupying, say, by building actually buildings, bringing in ad hoc electrical and water supplies, etc. The reason they have to resort to these extralegalities is because of the tangled mess that is developing country property rights.
A piece of developing world property may have multiple, contradictory claims upon it: land may be held by the traditional tribe, the local governor or party official, the state governor, and so on. Documents describing property may be non-existent, non-standardized, or may simply exist in the memory of the local headman, so one piece of property can’t be compared to another. This inhibits the “squatters” from using the property as collatoral for loans, etc., and makes the property “dead capital” that cannot be used productively.
De Soto argues that formalized property laws in the West happened so incrementally and gradually, over the course of centuries, that we’ve forgotten how impossible it is to create these sorts of institutions out of whole cloth. Development advice that doesn’t at least pay attention to property laws miss out on a important resource — potentially trillions of dollars worth of “dead capital” — as well as ignoring a possibly necessary institutional step.
In the developed world, the vast majority of anything that can be owned, be it real estate, objects, and abstractions such as fixed income derivatives, are tabulated in the developing world, and are owned by someone. Because ownership is clear — legal titel is well-defined — the owner can capitalize his property, basically make it collateral for liquid assets through loans. The owner also doesn’t have to spend all his time making sure someone doesn’t move into his house or swipe his cash; these are protected by abstractions, but they are protected, and they can be lent out, inherited, and so on. That’s what generates productive capital, and leads eventually to abstract notions of ownership — shares in a company or claims to a particular portion of an income stream — that can be leveraged even more productively.