The Secrets of Nonsuccess

This article appeared in Time, April 16, 2001.

Picture a country, whose private property laws are so deficient that noone can tell who owns what. Where home addresses cannot be easilyverified and people cannot be forced to pay up debts; a system wherepeople cannot use their house or business as collateral to secure credit.Picture a property system where a successful business cannot split itsstock to sell to other investors. Where there isn’t even a standardizedand commercially viable way to describe assets.

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

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

Their assets in Peru amount to close to 90.000 million dollars, or 11 times over the value of all thestocks listed in the Peruvian Stock Market and 40 times more than the sum of the foreign aid thatthe 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 asthe more privileged classes are. One of the great political challenges facing the Third World is tohave these goods move from the “extralegal” sector, where they stand now, to a less excludinglegal property system, where they may be more productive for all, in addition to generating capitalfor their owners.

Third World governments have already proved that it is possible to reform deficient propertysystems, at least when it comes to dealing with the rich. For instance, in 1990 the PeruvianTelephone Company (CPT) was quoted at 53 million dollars total value. However, the governmentwas unable to sell CPT stock to foreign investors, due to problems with property titles over manyof its assets. Peruvians decided to gather their best and brightest legal minds to come up with alegal 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 andto generate enough confidence to attract credit and investors were generated. The legal team alsodesigned laws for litigation in patrimonial cases, bypassing the cumbersome and corrupt Peruvianjudicial system. Three years later, CPT entered the world of liquid capital selling for a total of2.000 million dollars, or 37 times its initial market value. That’s how far the power of a goodproperty system can go.For the dispossessed to have access to legal titles for their assets so they can have a tool to freetheir potential capital, it would be necessary to know what is it they really own. How could weknow this?

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

The history of western capitalism tells in fact how governments, duringhundreds of years, have been adapting “the people’s rights” to uniformrules and codes that all could understand and abide by. Propertiesrepresented by dogs, fences and armed guards were turned into titles,stock and certificates. Once the west managed to focus a home propertytitle instead of the house itself, it gained a great advantage over the restof the world. Titles, stocks and patrimonial laws allowed to consider thegoods, not just for what they are — a house as a refugee — but, for whatthey could be turned into — collateral to obtain credit to start a business ‑Almost seamlessly, through standardized property systems that integrateall, western nations build a stairway that allowed its citizens to claim upfrom the chaotic underground of the material world to a representativeuniverse where capital is created.

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