Saturday, March 7, 2009

The Mystery of Capital: Property Rights and Economic Development

In the last 2 weeks I discussed the importance of a sound legal system and property rights with regard to economic growth. In his book The Mystery of Capital Hernando De-Soto explains why these are so important, especially to developing countries. It also explains why capitalism has struggled to provide developing countries with many of the benefits we enjoy in the United States.

Below are a few excerpts:


“With the help of facts and figures that my research team and I have collected, block by block and farm by farm in Asia, Africa, the Middle East, and Latin America, that most of the poor already possess the assets they need to make a success of capitalism. Even in the poorest countries, the poor save. The value of savings among the poor is, in fact, immense—forty times all the foreign aid received throughout the world since 1945. In Egypt, for instance, the wealth that the poor have accumulated is worth fifty-five times as much as the sum of all direct foreign investment ever recorded there, including the Suez Canal and the Aswan Dam. In Haiti, the poorest nation in Latin America, the total assets of the poor are more than one hundred fifty times greater than all the foreign investment received since Haiti’s independence from France in 1804. If the United States were to hike its foreign-aid budget to the level recommended by the United Nations—0.7 percent of national income—it would take the richest country on earth more than 150 years to transfer to the world’s poor resources equal to those they already possess.”


“Because the rights to these possessions are not adequately documented, these assets cannot readily be turned into capital, cannot be traded outside of narrow local circles where people know and trust each other, cannot be used as collateral for a loan, and cannot be used as a share against an investment.”
“They lack the process to represent their property and create capital. They have houses but not titles; crops but not deeds; businesses but not statutes of incorporation. It is the unavailability of these essential representations that explains why people who have adapted every other Western invention, from the paper clip to the nuclear reactor, have not been able to produce sufficient capital to make their domestic capitalism work.


It takes 168 steps and 13 to 25 years to gain a formal title to urban property in
the Philippines; 77 steps and 6 to 14 years to do the same in the desert lands in Egypt; and 111 steps and 19 years in Haiti. If you wanted to open a one-worker garment shop legally in Lima, Peru, it would take you 289 days, working 6 hours a day, to obtain the business license.

In Brazil, 60 percent of new rental housing is in the underground economy. In Egypt, 92 percent of urban dwellers and 83 percent of rural dwellers live in homes without clear legal title.

I also shared some peer reviewed research related to economic growth. Below you will find some additional resources.

Aaron Tornell & Philip R. Lane, 1999.
"The Voracity Effect," American Economic Review, American Economic Association, vol. 89(1), pages 22-46, March.

Lucas (1988). ‘On the Mechanics of Economic Development.’ Journal of Monetary Economics 22 (July) 3-42.

Krueger (1993) ‘Virtuous and Vicious Circles in Economic Development.’ American Economic Review 83 (May) 351-355.