Monday, March 21, 2005

Interview With Hernando de Soto

Stephen Pollard posts an interview that the Belgian think tank Liberales had with Peruvian free-market economist, Hernando de Soto, who is near the top of my personal most admired list. Link. The entire interview is worth reading, but here are a few highlights.
If you are poor, like the majority of the people in the Third World or the former Soviet Union, you have only two things that allow you to survive —where you are living and whatever you are working with to provide you with an income. Poor people, for instance, put their simple belongings on a piece of unoccupied ground in the countryside or in the (...) shantytowns around big cities in the developing world. If no one disputes his or her claim, a bit of a roof follows. As time goes by, and as the neighbours come to recognize the newcomer’s property, a regular structure will be added. Over time, not only do the neighbours recognize the squatter’s property, but also informal organizations may ‘register’ the ownership — unofficially, of course. The occupants have to dedicate all their time to protecting their possessions against such enemies as poachers, intruders, and, of course, the government. (...)

Almost 5 billion people out of the 6 billion in the world live in either developing or formerly communist countries, where much of the economy is extralegal. Capitalism doesn’t thrive in these countries because of their inability to produce capital. However, capital is the force that raises the productivity of labour and creates the wealth of nations. It seems that poor countries cannot produce capital for themselves no matter how eagerly their people engage in all the activities that characterize a capitalist economy. In fact, the poor inhabitants of less developed countries do have things, but they lack the process to represent their property in such a way that it can create and transfer capital. They have houses but no titles; crops but no deeds; businesses but no statutes of incorporation. In other words: their property is not registered, not formally legalised. This last fact is crucial, for only through property rights is it possible to obtain credit. Property converted into capital provides the potential to create, to produce, and to grow. Landownership can only be exchanged for a loan if it is registered. The main objective of the ILD is to establish and incorporate the invisible network of laws that turns assets from ‘dead’ into ‘liquid’ capital. (...)

Look at the situation in Egypt. There, extralegals have accumulated up to $ 248 billion in their enterprises and homes. This is 37 times more than all the loans received from the World Bank. It is 55 times greater than all the direct investments in Egypt and 35 times more than the value of the companies listed in the Cairo Stock Exchange.

In fact, the total value of the assets held but not legally owned by the poor in the Third World and former communist nations is at least $ 9.300 billion. So, the poor are obviously the solution. (...)

If a squatter wanted to acquire a legal title to his or her property, it would take at least 13 years in the Philippines, over 11 years in Haiti, and 6 years or more in Egypt.

Moreover, in business, it takes you 549 days to get a license to operate a bakery in Egypt and that is with a lawyer. Without a lawyer, it takes about 650 days. In Honduras, it costs an individual entrepreneur 3.765 dollar and 270 days to legally declare, register, and start up a business.

To create a mortgage in Mexico it takes 2 years. It takes 17 years to get a title on a house in Egypt; in Peru it used to be 21 years before we corrected that, and in the Philippines it’s 24 years. (...)

In the case of Egypt, we found that 92% of all the constructions and the land and 88% of all enterprises are outside the legal system. This means that the large majority of owners are not registered as such and are therefore not visible to councils, town planners, investors, banks, post offices, water companies, electricity providers, and other firms. (...)

Seventy-eight million Mexicans — this is almost 80 percent of the total population — is either living or working in the extralegal economy. They produce approximately 35% of the GNP. In total there are about 137 million hectares of rural real estate, 11 million houses, and 6 million businesses that are not registered. Those are assets that can only be used as a shelter or as business tools, but not as a means to obtain collateral for a loan, to generate investment or to create additional functions to obtain surplus value. The whole value of this ‘dead capital’ amounts to $ 315 billion. That is equivalent to seven times the value of all known oil reserves in the country and 31 times the value of foreign direct investment.

Spreading political democracy is very important, but without a legal system that recognizes property rights, countries will not see their populations rise out of poverty. The masses are not just mouths to feed. They and their property are the largest natural resource that most developing countries possess. The key to development and wealth is simple. Get out of the way, and let the people do their thing. Make every business legal, so the owners can enforce contracts in the legal system, and do not have to pay bribes to continue in business. Large numbers of small businesses are the key to the future, not the few, old giants that have always had legal recognition.


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