Commentary

The Secrets of Nonsuccess

By Hernando de Soto
This article appeared in Time, April 16, 2001.
Picture a country, whose private property laws are so deficient that no one can tell who owns what. Where home addresses cannot be easily verified and people cannot be forced to pay up debts; a system where people cannot use their house or business as collateral to secure credit. Picture a property system where a successful business cannot split its stock to sell to other investors. Where there isn’t even a standardized and commercially viable way to describe assets.

Welcome to the daily routine of the Third World, where five sixths of the world’s population lives. Their living conditions embody a paradox: Capitalism should, supposedly, be the solution to global underdevelopment, however, so far it hasn’t had the opportunity to prove it. What’s even worse is that it hasn’t even tried. In a capitalist economy all operations are based in the laws of property and its transactions, however, Third World property laws do not include 80% of its population’s assets and transactions. The dispossessed are as far apart from economic activity, as blacks and poor whites once where under South African apartheid.

Why is this so important? Conventional microeconomic reform programs have always ignored the poor, assuming that they do not have the resources upon which to build and generate aggregate value. Flagrant error: I, along with my team of researchers, recently finished a series of studies on Third World underground economies and concluded that, in fact, the disposed are no so poor after all.

Their assets in Peru amount to close to 90.000 million dollars, or 11 times over the value of all the stocks listed in the Peruvian Stock Market and 40 times more than the sum of the foreign aid that the country has gotten since the end of WWII. In Mexico the estimated amount is 315.000 million, seven times more than the value of PEMEX, that country’s national oil corporation.

The real problem lie in the fact the poor and the middleclass are not allowed to use their assets as the more privileged classes are. One of the great political challenges facing the Third World is to have these goods move from the “extralegal” sector, where they stand now, to a less excluding legal property system, where they may be more productive for all, in addition to generating capital for their owners.

Third World governments have already proved that it is possible to reform deficient property systems, at least when it comes to dealing with the rich. For instance, in 1990 the Peruvian Telephone Company (CPT) was quoted at 53 million dollars total value. However, the government was unable to sell CPT stock to foreign investors, due to problems with property titles over many of its assets. Peruvians decided to gather their best and brightest legal minds to come up with a legal title, in accord with standards set by the global economy.

As a result, the property was easily converted to stocks. Rules to protect third party interests and to generate enough confidence to attract credit and investors were generated. The legal team also designed laws for litigation in patrimonial cases, bypassing the cumbersome and corrupt Peruvian judicial system. Three years later, CPT entered the world of liquid capital selling for a total of 2.000 million dollars, or 37 times its initial market value. That’s how far the power of a good property system can go. For the dispossessed to have access to legal titles for their assets so they can have a tool to free their potential capital, it would be necessary to know what is it they really own. How could we know this?

Nine years ago the Indonesian Government invited me as a consultant to identify the extralegal sector assets, in which 90% of its population lives. Far from being an expert about that country, I noticed that whenever I went to a rice farm a different dog came barking out. Dogs did not have to have a PhD to know their master’s assets. Therefore my advise to their Cabinet members was for them to start “listening to these barks.” Ah, Jakum Adat, the people’s rights”, answered one of the Secretaries.

The history of western capitalism tells in fact how governments, during hundreds of years, have been adapting “the people’s rights” to uniform rules and codes that all could understand and abide by. Properties represented by dogs, fences and armed guards were turned into titles, stock and certificates. Once the west managed to focus a home property title instead of the house itself, it gained a great advantage over the rest of the world. Titles, stocks and patrimonial laws allowed to consider the goods, not just for what they are - a house as a refugee - but, for what they could be turned into - collateral to obtain credit to start a business - Almost seamlessly, through standardized property systems that integrate all, western nations build a stairway that allowed its citizens to claim up from the chaotic underground of the material world to a representative universe where capital is created.

Far from being a problem, the poor are in fact a solution. And now is the precise time for politicians to start thinking of them in these terms, and not the just the elites, who would be in charge to define property.

Hernando de Soto is president of Institute for Liberty and Democracy and winner of the 2004 Milton Friedman Prize for Advancing Liberty.