'The Mystery of Capital' by Hernando de Soto (don't laugh) finds glass walls that keep poor classes from growing assets into wealth

The book 'MYSTERY OF CAPITAL: Why Capitalism Triumphs in the West and Fails Everywhere Else' by Hernando de Soto is a 2000 release that became the #1 best seller in the author's native Peru in 2003. Economists do not often become best-selling authors, but Hernando de Soto has made it his mission to identify the glass walls that divide the haves from the have-nots.

He puts a finger on the defining legal and economic barriers the poor face when trying to convert their assets into true capital. Capital is not just money, it is accountable and fungible legal assets that one can parley into true wealth.

Thru years of study in Peru, Egypt, Haiti, and Russia, de Soto found a bewildering array of steps to make one's abode and land legally recognized. I wish that I could show you one of the plates included in the book, showing the 168 steps (taking 13-25 YEARS) to formalize property in the Philippines. It somewhat resembles a circuit board, or maybe a seismograph. The one word that comes to mind is: Byzantine.

The former superpower Russia is lumped in with Latin America as a an example of an area that is trying to build capitalism without capital. They have also "shared the same political, social, and economic problems: glaring inequality, underground economies, pervasive mafias, political instability, capital flight, and flagrant disregard for the law."

Contrary to common assumptions, the peasant is not without assets. The poor own land (altho with extralegal paperwork), they have buildings, they save, sometimes they have fairly significant business income. (De Soto estimates the total value of real estate held but not formally owned by the poor of the Third World and former Communist nations is at least $9.3 trillion - ie twice the US money supply.) But they are cut off from the benefits of having their holdings formalized.

"Extra legal businesses," De Soto explains, "are taxed by the lack of good property law and continually having to hide their operations from the authorities. Because they are not incorporated, extralegal entrepreneurs cannot lure investors by selling shares; they cannot get low interest formal credit because they do not even have legal addresses. They cannot reduce risks by declaring limited liability or obtaining insurance coverage. In fact, the only 'insurance' available to them is that provided by their neighbors and the protection that local bullies or mafia are willing to sell them. Moreover, because extralegal entrepreneurs live in constant fear of government detection and extortion from corrupt officials, they are forced to split and compartmentalize their production facilities between many locations, thereby rarely achieving important economies of scale. With one eye always on the lookout for police, underground entrepreneurs cannot openly advertise to build up their clientele or make less costly bulk deliveries to customers."

He also points out how farmers strapped for credit often find it only through drug traffickers, and so have little choice of growing anything other than coca or other illegal products.

The land reforms attempted thus far have focused more on creating accurate maps rather than reducing bureaucracy or formalizing the informal documentation. What we have forgotten in the Western world was the slow process of formalizing property in Europe in the 1700's and 1800's - and the Homestead and other land grant programs in American history that merely recognized people who were already living on and farming the land.

I see a warning flag go up when foreign investment in Third World nations directly benefits, as de Soto says, only the 10% or so who have legal rights to capital. The poor see the gap between the haves and the have-nots widening instead of closing. Of course they rebel and blame capitalism, when in truth it is their own politico-legal system that is shutting them out. The official, legal receivers of foreign aid and investment hardly have any suitable places to invest that money - unless they finally wise up and formalize the informal paperwork that already exists.

De Soto points out that the migration of the poor from the country to the cities is progressing so fast that it aggravates the problem of how to harness all their economic potential. I am disturbed that the poor are leaving what little they do have - family farms and houses and crops - for a share of nothing in the big cities. In places like China they make much more money per month, but with higher expenses of rent and no chance of ownership of even a small home.

Basic Books, 2000, paperback -- 276 pages
Winner of the Antony Fisher International Memorial Award for 2001

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