Hernando de Soto: The Mystery of Capital -
Why capitalism triumphs in the West and fails everywhere else

Bantam Press, Transworld Publishers, 61-63 Uxbridhe Road, London W5 55A, 2000, 244 pages

Henk Hogeboom van Buggenum

The Peruvian economist, Hernando de Soto, together with a group of financial experts has investigated the measure of property in third world countries and in the former communist countries. He has demonstrated without doubt that the poor masses there own more property than is usually thought. This ownership, though, is only acknowledged by the people living in the immediate area. In other words: the property is not registered. not formally legalised. This last fact is crucial, for only by proprietary rights is it possible to obtain credit, which stands for trust/confidence. Property can only be converted into capital when there is enough creditability. One cannot assume that capital is synonymous to assets like a plot of land , a house, or money. Capital is the potential to create, to produce, to grow. Landownership can only be exchanged for a loan if it is registered.

The book points out that poor people may possess various assets, but are nevertheless de-capitalised. They haven't been able to legalise their property. It cannot be made creative, it is 'dead' capital. Of the five large cities, Cairo, Lima, Manila, Mexico City and Porto Prince and their environments, the amount of dead capital was surveyed and indexed. The image is very clear, for instance in Cairo the poor people own $ 241.4 billion dollars dead capital, which is six times the value of all savings deposits in the Egyptian banks, as well as thirty times the intrinsic value of the 746 companies registered at the Cairo Stock Exchange, fifty-five times the value of foreign investments in Egypt until 1996, and one hundred and sixteen times the value of privatised companies between 1992 and 1996. They are available to the poor but cannot be used because the ownership is informal. 92 % of the total ownership are not registered as such and are not open to councils, town planners, investers, banks, post offices and other firms.

Why is it so? There is only one reason and basically it is the same for all continents where the investigators heard the stories of the poor people themselves. The rich substratum have entry to facilities as lawyers, accountants and legal advisors who are able to safeguard their interests in the labyrinth of burocracy. The way to legalisation is so complicated that for instance in the Filipines it takes 13 to 25 years and 168 different steps in order to have a house registered. In Egypt it took 77 steps along 31 offices to obtain a licence for building. In Haiti, it took 4.112 days of 111 tedious visits to officials to implement a deed of sale. They are but a few examples of complicated legalisation of ownership. The phenomenon compels people into illegitimate and informal negotiations. A society of mostly poor people therefore also encourages feelings of inferiority.

The reason for poverty, however, cannot be found in the nation's culture. The author describes the history of American ownership. In Europe, also, ownership came into being only recently, perhaps in the last 200 to 100 years. It was a question of gradual adaptation. A few enlightened beings instigated the process and in time the practice of informal activities came to an end. It was a question of deliberate planning and organisation.

The author, Hernando de Soto, demonstrates a new fact, namely that the cause for poverty in three quarters of the world is due to poor ownership legislation. It is interesting to note that the body of experts addressing the issue could hardly find any institutes anywhere that would make similar investigations. The Peruvian economist points out quite clearly that it is not the poor themselves that are the problem. One should be open to the potential of their capacities, ideas, wishes. In other words, the solution to the problem comes from 'bottom-up'. They should have access to legalisation so that they can cash in on their assets into new possibilities and investments. The potential for bare survival should be used to enhance the wellfare of the nation. In the Western countries it happened not so long ago through better legislation of ownership. In this respect we cannot speak of any cultural differences between us and other nations.

So are we sitting back and waiting for the governments in the poor countries to wake up to the fact that they might copy our facilities? It seems today, at the pace of Western capitalism spreading around the world, that it is not to our advantage. The media of today show the immense influence of Western capitalism on governments and the elite, and everybody can see it, even the very poor living in dire circumstances. With the ever increasing gap between the rich and the poor, worldwide, frustrations accelerate. The author knows, he himself grew up like this.

'Meanwhile, the promotors of capitalism, still arrogant and drunk on their victory over communism, have yet to understand that their macroeconomic reforms are not enough. We must not forget that globalization is occuring because developing and former communist nations are opening up their once protected economies, stabilizing their currencies and drafting regulatory frameworks to enhance international trade and private investment. All of this is good. What is not so good is that these reforms assume that these countries' populations are already integrated into the legal system and have the same ability to use their resources in the open market. They do not. Most people cannot participate in an expanded market because they do not have access to a legal property rights system that represents their assets in a manner that makes them widely transferable and fungible, that allows them to be encumbered and permits their owners to be held accountable. So long as the assets of the majority are not proper documented and tracked by a property bureaucracy, they are invisible and sterile in the market place. [...] The capitalistic countries designed their tools to work in countries where systematized law has been 'globalized' internally, when inclusive property rights systems that link up to efficient monetary and investment instruments are in place - something these countries have yet to develop. Too many policy-makers have taken an Olypian view of the globalization process. [...]. They forgot that people are the fundamental agents of change and they forgot to focus on the poor. [...] Economic reformers have left the issue of property for the poor in the hands of conservative legal establishments uninterested in changing the status quo. As a result, the assets of the majority of their citizens have remained dead capital stuck in the extralegal sector. This is why the advocates of globalization and free market reforms are beginning to be perceived as the self-satisfied defenders of the interests of those who dominate the bell jar. [...] In the West those discontented with the system live in 'pockets of poverty'. Misery in developing and ex-communist nations, however, is not contained in pockets; it is spread throughout society. What few pockets exist in those countries are pockets of wealth. [...] But as information and communications continue to improve and the poor become better informed of what they do not have, the bitterness over legal apartheid is bound to grow. At some point those outside the bell jar will be mobilized against the status quo by people with political agendas that thrive on discontent." (p. 192-194)

This danger threatens humanity globally. Indications for new solutions in the book should be looked at by organisations that are involved in this area. The book is an absolute 'must' .