THE MYSTERY OF THE MYSTERY OF CAPITALCAPITAL

WHY CAPITALISM TRIUMPHS IN THE WEST AND WHY CAPITALISM TRIUMPHS IN THE WEST AND FAILS EVERYWHERE ELSEFAILS EVERYWHERE ELSE

HERNANDO DE SOTOHERNANDO DE SOTO

Presented byPresented byChandra BhushanChandra BhushanMan Thi M VangMan Thi M Vang

Bosson C Bosson C Kouassiaman Kouassiaman Nidhi PasiNidhi Pasi

Rebeca OliverRebeca Oliver

STRUCTURESTRUCTURE

INTRODUCTIONINTRODUCTION

MYSTERY OF MISSING INFORMATIONMYSTERY OF MISSING INFORMATION

MYSTERY OF CAPITALMYSTERY OF CAPITAL

MYSTERY OF POLITICAL AWARENESSMYSTERY OF POLITICAL AWARENESS

MISSING LESSONS OF US HISTORYMISSING LESSONS OF US HISTORY

MYSTERY OF LEGAL FAILUREMYSTERY OF LEGAL FAILURE

CONCLUSIONCONCLUSION

INTRODUCTIONINTRODUCTIONBackground of enquiry: post cold warBackground of enquiry: post cold warStumbling block: inability to produce Stumbling block: inability to produce capital for domestic capitalismcapital for domestic capitalismPoor own assets, in defective form: Poor own assets, in defective form: houses, but not titles; crops, but not houses, but not titles; crops, but not deeds; businesses, but not statutes deeds; businesses, but not statutes of incorporationsof incorporationsWithout Without representationsrepresentations, assets , assets are dead capitalare dead capital

INTRODUCTIONINTRODUCTION

Learn from history: ‘something Learn from history: ‘something momentous’ did happen in the past momentous’ did happen in the past in US-establishing formal property in US-establishing formal property law & inventing the conversion law & inventing the conversion process in that law that allowed them process in that law that allowed them to create capitalto create capital

Least attention to capital: neglect is Least attention to capital: neglect is shrouded in five mysteriesshrouded in five mysteries

The Mystery of Missing InformationThe Mystery of Missing InformationA Surprise RevolutionA Surprise Revolution: Huge rural migration. : Huge rural migration.

–e.g. in China, since 1979 100 million rural people have e.g. in China, since 1979 100 million rural people have moved to the cities.moved to the cities.

The obstacles to legalityThe obstacles to legality: On the basis of field : On the basis of field surveys, in Egypt, Haiti, Peru, Philippines and Mexico, surveys, in Egypt, Haiti, Peru, Philippines and Mexico, number of years and number of steps for getting number of years and number of steps for getting approvals related to property have been described, so approvals related to property have been described, so you have extralegals.you have extralegals.

The undercapitalized sector:The undercapitalized sector: These extralegal social These extralegal social contracts have created a vibrant but “undercapitalized contracts have created a vibrant but “undercapitalized sector” (street vendors, apartment building workers, sector” (street vendors, apartment building workers, garbage collectors)garbage collectors) How much dead capital?:How much dead capital?: Examples from 5 Third Examples from 5 Third World cities (Cairo, Lima, Manila, Mexico and Port-au-World cities (Cairo, Lima, Manila, Mexico and Port-au-Prince) show that most people’s resources are Prince) show that most people’s resources are commercially and financially invisible.commercially and financially invisible.

How much is dead capital worth?:How much is dead capital worth?: $9.3 trillion. $9.3 trillion.

The Mystery of Missing InformationThe Mystery of Missing Information Solution: Solution: Acres of diamondAcres of diamond

““Leaders of the Third World and former Leaders of the Third World and former communist nations need not wander the communist nations need not wander the

world’s foreign ministries and international world’s foreign ministries and international financial institutions seeking their fortune. In financial institutions seeking their fortune. In

the midst of their own poorest the midst of their own poorest neighborhoods and shantytowns, there are neighborhoods and shantytowns, there are trillions of dollars, all ready to be put to use trillions of dollars, all ready to be put to use

if only the mystery of how assets are if only the mystery of how assets are transformed into live capital can be transformed into live capital can be

unraveled.”unraveled.”

The Mystery of CapitalThe Mystery of CapitalThe mystery: Why can assets be made to The mystery: Why can assets be made to produce abundant capital in the West but produce abundant capital in the West but very little in the rest of the world? very little in the rest of the world?

What do we mean by capital?What do we mean by capital?

What role do formal property systems play?What role do formal property systems play?

Why does this matter? Why does this matter?

Six Property EffectsSix Property Effects1)1) Fixing economic potential of assets.Fixing economic potential of assets.

2)2) Integrating dispersed information into one system. Integrating dispersed information into one system.

3)3) Making people accountable.Making people accountable.

4)4) Making assets fungible.Making assets fungible.

5)5) Networking people.Networking people.

6)6) Protecting transactions. Protecting transactions.

Why capitalism isn’t enoughWhy capitalism isn’t enoughDistinction between West Distinction between West and the rest exists and the rest exists because of the results of because of the results of a formal, integrated a formal, integrated property system. property system.

The promotion of The promotion of capitalism in the vein of capitalism in the vein of Washington Consensus Washington Consensus has not worked. has not worked.

Challenge of accessibility Challenge of accessibility for the poor. for the poor.

Is this capital?

Mystery of political awarenessMystery of political awareness

Political blindness- Political blindness- – Unaware of the growth of extralegal Unaware of the growth of extralegal

sector and breakdown of existing legal sector and breakdown of existing legal orderorder

– Problems are not new Problems are not new

Mystery of political awarenessMystery of political awareness

ProblemProblem--– Worldwide industrial revolution-gigantic Worldwide industrial revolution-gigantic

movement (migration) from isolated movement (migration) from isolated communities to participate in wide scale communities to participate in wide scale economic exchangeeconomic exchange

– Failure of legal order to keep pace/ lack of Failure of legal order to keep pace/ lack of institutions- forcing migrants to set up extralegal institutions- forcing migrants to set up extralegal substitutes for established lawsubstitutes for established law

– Fragmentation of property rights arrangements Fragmentation of property rights arrangements and unavailability of standard norms prevent and unavailability of standard norms prevent interaction with the financial and investment interaction with the financial and investment marketsmarkets

Mystery of political awarenessMystery of political awareness

Solution-Solution-– Piecemeal solutions and stopgap Piecemeal solutions and stopgap

measures not sufficientmeasures not sufficient– Need to integrate property systems and Need to integrate property systems and

reform laws that are discouraging and reform laws that are discouraging and preventing people from being more preventing people from being more productiveproductive

– Laws need to adapt to the needs of the Laws need to adapt to the needs of the common people, including their common people, including their expectations about property rightsexpectations about property rights

Missing lessons of US HistoryMissing lessons of US History

Question-Question-– How to give people the rights or access How to give people the rights or access

to legal property rights?to legal property rights?– How to integrate nation’s extralegal How to integrate nation’s extralegal

assets into one legal property systemassets into one legal property system

Missing lessons of US HistoryMissing lessons of US HistoryAll western nations in past have made transition All western nations in past have made transition from dispersed, informal arrangements to an from dispersed, informal arrangements to an integrated legal property systemintegrated legal property system– Squatting tomahawk rights pre-emptionSquatting tomahawk rights pre-emption

This transition had little to do with technologyThis transition had little to do with technologyMore with adaptation of law to social + economic More with adaptation of law to social + economic needs of populationneeds of populationAcknowledge social contracts born outside the Acknowledge social contracts born outside the official law were legitimate and absorb themofficial law were legitimate and absorb them– ““forces that change the law in other than trivial ways lie forces that change the law in other than trivial ways lie

outside it”outside it”– Accommodate extralegal arrangements for use of assets Accommodate extralegal arrangements for use of assets

as capitalas capital

Missing lessons of US HistoryMissing lessons of US HistoryLessonsLessons– Recognize and integrate extralegal property Recognize and integrate extralegal property

rightsrights– Construct national laws to integrate loose and Construct national laws to integrate loose and

isolated property data into new formal property isolated property data into new formal property systemsystem

Will allow use of property to create capital needed to Will allow use of property to create capital needed to fuel explosive economic growth that (still) drives US fuel explosive economic growth that (still) drives US economic growth.economic growth.

– Changes in political attitudes and legal trendsChanges in political attitudes and legal trends““legal institutions can survive only if they respond to legal institutions can survive only if they respond to social needs”social needs”

The Mystery of Legal FailureThe Mystery of Legal Failure

Most developing countries have Most developing countries have formal property systems. formal property systems. – Property systems not open to the poor.Property systems not open to the poor.

Why is there legal failure?Why is there legal failure?Five main problems/misconceptionsFive main problems/misconceptions– Belief that people operate extralegally to avoid Belief that people operate extralegally to avoid

taxestaxes– Real estate not surveyed, mapped or recordedReal estate not surveyed, mapped or recorded– Belief that gov’t enacting law is sufficient/ Belief that gov’t enacting law is sufficient/

ignore costs of complianceignore costs of compliance– Belief that social contracts can be ignoredBelief that social contracts can be ignored– Belief that change can be enacted w/o high Belief that change can be enacted w/o high

level political leadership level political leadership

TruthTruth

Must look at existing social Must look at existing social arrangements and structuresarrangements and structures

People willing to pay taxesPeople willing to pay taxes

Reform is long and hardReform is long and hard

Problem is politicalProblem is political

CONCLUSIONCONCLUSION

Only 25 of world’s 200 countries Only 25 of world’s 200 countries produce capital in sufficient quantity to produce capital in sufficient quantity to benefit fully from the division of labor benefit fully from the division of labor in expanded global marketsin expanded global markets

People are fundamental agents of People are fundamental agents of changechange

Property makes capital Property makes capital ‘mind friendly’‘mind friendly’

Lift the Lift the bell jarbell jar & do away with property & do away with property apartheidapartheid

CONCLUSIONCONCLUSION

Enemies of representations?Enemies of representations?

Succeeding at capitalism- a Succeeding at capitalism- a CulturalCultural thing?thing?

Only game in town: capitalism Only game in town: capitalism governments must recognizegovernments must recognize

Reform the property law & use Reform the property law & use representational systemrepresentational system

Thank YouThank You