A Community Connecting Practice & Thought Leadership

The Mystery of Capital: Why Capitalism Triumps in the West and Fails Everywhere Else. Hernando de Soto.NY: Basic Books, 2000.

By Ross Meyers, MBA Graduate Student

". . . the major stumbling block that keeps the rest of the world from benefiting from capitalism is its inability to produce capital.Capital is the force that raises the productivity of labor and creates the wealth of nations."With that nod to Adam Smith, Hernando de Soto opens The Mystery of Capital, subtitled "Why Capitalism Triumphs in the West and Fails Everywhere Else."

De Soto walks, chapter-by-chapter, through the enormity of the money the poor do have, how capital can be created, why developing countries haven't paid attention to their citizen's resources, and after drawing lessons from US History, finally turns his attention to why, despite having laws on the books, less-developed nations still haven't enabled their citizens to make the best use of what capital they already possess.

A Summary:

Initially, de Soto sets about arguing that the amount of capital tied up in poor residences and land around the planet is astounding.He lists the total amount as 9.3 trillion USD, an amount greater than the total value of all companies listed on the world's top twenty stock exchanges.If Egypt or the Philippines were able to make use of all the undocumented property within their borders, they could unleash some $240 billion and $133 billion respectively.De Soto makes the point that draconian legal environments make registering a piece of legally purchased property in the Third World an enterprise that often takes two or more years of daily work.No wonder anarchy persists; being legal isn't worth the effort.

De Soto then outlines the seen and unseen ways capital functions in the US and Europe.In the West, a vast uniform system of bookkeeping underlies all major purchases:my mother works for an Indiana Title Company, when you get pulled over for speeding, a cop will ask you for your car's 'Proof of Registration."The idea of capital does allows the owner to instantly unleash the economic value hidden behind their home, land, or possession.That system allows us to protect assets and to dependably and quickly exchange goods and services, something that the citizens of many developing nations cannot easily do.

Next, de Soto ties political power to the poor's ability to access capital. With squatters pouring into big cities around the world, favelas full of economically active, ingenious peasants are springing up.Until third world nations give these people a legal leg to stand on, he says, they remain illegal, on the economic 'outside,' just waiting to contribute economically.As a multitude of laborers left the countryside and poured into European cities, beginning in the late 1500's, European governments were slow to recognize them.Eventually, the reality of the situation forced governments to grant legal status to these new urbanites, and, in part, modern Western property rights resulted.

In the West about two hundred years ago, Western nations established modern property rights when they acknowledged that purchases and contracts that were set up outside of official law were legitimate.In frontier America, miners and farmers set up associations that protected the claims they had begun to squat on.Politicians began to realize that in order to extend legal order throughout the US, they would need to begin to recognize the informal legal system the poor were already using.

De Soto's final point is that law around the world is an established acknowledgement of the agreements already in place among men.Western law took these into account piecemeal, not with a sweeping, top-down reform, as many developing nations attempt to do.Developing nations need to start with the methods the poor already use to mark out ownership and territory and make it cheap, legal, and easy for their citizens to integrate their extralegal ownership into a simple, national title system.Governments must listen to the poor around the world and give them the tools they need to participate in the global exchange.In effect, the leaders simply need to help the poor tap the assets they already own.

My Response:

De Soto lays out a convincing argument in his book, and one that seems to hold water.Since the poor already possess so much in terms of their own homes, land, and possessions, it seems right that helping them unleash the economic potential locked up in each of these could transform developing world economies.

He startlingly lays out the fact that the poor already have their own resources.It's not that the poor don't have money."The [current] value of savings amount the poor is, in fact, immense – forty times all the foreign aid received throughout the world since 1945 (5)."

Such an acknowledgement of the poor's ability, a respect, really, is becoming of global development professionals.We're quick to acknowledge the work ethic, pluck, and ingenuity of the poor, but I'm glad that de Soto did the leg work to help us easily see that the poor already possess vast financial resources waiting to be utilized.

I like the view that the poor living in suburban shantytowns around the world need not drain government coffers, since they truly are financially active, intelligent people ready to form new economic relationships, make money, and work hard.It's the government's responsibility to harness the untapped human potential all around them.

For development professionals, this book holds some prudent observations.Community-based economic projects alone are not the silver bullet that will eradicate global poverty.Nor is any other single element of development. [de Soto's theories included.]Likewise, the Washington Consensus also is also not magical; de Soto makes the argument that macroeconomic liberalization is simply not enough in and of itself.The West could pour currency into the poorer parts of the planet for years and would not make the impact that could be made by simply giving people the ability to capitalize on the land and assets they already own.

De Soto is at his best when describing the need to help poor capital owners to actively participate in the marketplace.They already have resources and already have the informal frameworks that give them an agreed-upon ownership of property inside their community.De Soto's solution, like most well-constructed development theories, starts with the abilities of the poor to help themselves, and recognizes that only solutions that make it simple for them to improve their own lot will lead to lasting, permanent change.

I would have appreciated a few changes in de Soto's book, however.As a future development professional, I would have appreciated suggested steps that NGOs around the world could take in order to help bring about the changes he suggests.For that matter, he does not give many step-by-step solutions that Developing World governments could follow.(though he does mention his organization's consulting services!)Surely he has more detailed instructions he could provide us with.

I would also have appreciated a better understanding of how de Soto's discussion of capital fits in with modern theories of development.What are his critiques of the IMF or microfinance?How can a broadening understanding of ownership rights fit within a broader development effort? This last question is glaringly omitted from Mystery.Is that because de Soto sees his views as the sole answer to global poverty?

Answers to these questions would have been the bread-and-butter portion of the book for me.I would like his views about how my NGO could integrate his thoughts into what we would do on the field.Can his principles find use even in nations that have no desire to grant private property?

Finally, I loved his detailed discussion of private property's development and perfection within the West around the turn of the 20^th century.Still, de Soto needs to address why only the West and Japan currently have highly-developed levels of private property ownership.A discussion of nations that are currently making great strides in creating a beneficial legal environment for their poor would have made his book more complete.What are some recent examples of Third World nations that have gotten their act together?Who can the developing world emulate?

In short, de Soto's theories seem beautiful and simple, but he needs a little less theory in his work, and a few more answers as to how his ideas should be put into place.Clearly, property rights do have a significant role to play in the development of most nations.I could have used more insight into how development professionals can help put them into place.

What different publications have said concerning The Mystery of Capitalism:

Robert J. Samuelson, writing in Foreign Affairs, Jan/Feb 2001, says:

Unfortunately, de Soto strains too much. He wants to make property rights -- or their absence -- the center of everything. Culture modifies de Soto's sweeping conclusions. His is a "single bullet" theory of development, when the process is far murkier. Property rights are not the be all and end all of progress but a simple reflection of the larger culture.The challenge for many developing countries now, de Soto contends, is to imitate [the American] example. If they can somehow convert informal property rights into legal property rights, they too can enjoy the benefits of more rapid economic development.

This prescription may be correct. But de Soto never asks why the United States accomplished this feat, whereas so many developing countries have not. What is more likely is that American culture -- the enthusiasm for material advance, the faith in democracy, and the belief in the sanctity of property -- created a climate in which change was possible. In turn, these same beliefs and values (along with rich natural resources) explain U.S. economic success and suggest that the story of property rights is only an interesting sideshow.

Heather Borbeau, writing in the November/December 2001 issue of Foreign Policy, wrote that the poor often sell their land, once granted property rights, and find themselves landless and poor yet again.Simply having rights won't magically cure their maladies. Culture, she also notes, varies so widely that ownership isn't clear-cut in all places, and not open at all to some women and minorities around the world.De Soto hasn't convincingly constructed a case that whatever benefits access to capital creates won't be lost in the nuances of cultures that don't traditionally value private property.Finally, Borbeau has deep problems with the simplicity of de Soto's views.Many simultaneous reforms must happen in order to lift nations out of poverty, and de Soto serves as a valid and useful 'reference point' in the discussion of poverty.His views, however, don't offer a panacea for Third World misery.