Review: Capitalism's Promise for the Third World

First Quarter 2001

A Review of Hernando De Soto's New Book

In one of the presidential debates, then Governor George W. Bush said he didn't think U.S. military forces should be dispatched around the world for "nation-building" purposes. Vice President Al Gore was cautiously open to the idea. Hernando de Soto should have been given a few moments to speak to the two debaters.

De Soto is president of the Institute for Liberty and Democracy, headquartered in Peru. He became famous for his first book, The Other Path, in which he offered a new interpretation of the problems and prospects of economic and political development in Latin America.

Now in The Mystery of Capital (Basic Books, 2000) de Soto is out to explain "why capitalism triumphs in the West and fails everywhere else" (the book's subtitle). This is a book that the new American president ought to read and require all of his cabinet members to read. De Soto makes the surprising, empirically grounded argument that "most of the poor already possess the assets they need to make a success of capitalism." What they lack is the ability to turn their assets into usable, mortgagable, multipliable capital.

In the West, says de Soto, "every parcel of land, every building, every piece of equipment, or store of inventories is represented in a property document that is the visible sign of a vast hidden process that connects all these assets to the rest of the economy." The vast hidden process is the western, legalized property system. Yet surprisingly, says de Soto, this system is clouded in mystery, a mystery to people in both the West and the rest of the world.

Actually, there are five mysteries that de Soto tries to fathom and then bring to light. The first is that of "missing information." We simply did not know that the poorest people in the Third World are sitting on billions and billions of dollars of assets. Second, there is the "mystery of capital" itself: capitalism is what a legal, property/contract system allows westerners to create on the basis of their material assets. The third mystery is the lack of "political awareness." In recent decades, billions of people throughout the world have moved to cities, a migration with implications of revolutionary proportions that have been virtually ignored. In the fourth place, there is the mystery of American forgetfulness—the "missing lessons of U.S. history." Those of us in the United States don't even recall how our legalized property system came into existence. And finally, the author explains the "mystery of legal failure"—why property law does not work outside the West. Most citizens in other parts of the world "cannot use the law to convert their savings into capital."

De Soto worked for more than a decade with a research team that went neighborhood to neighborhood, door to door in cities and villages throughout the world, to gather "missing information." Some of his statistics are astounding. "In Peru, 53 percent of city dwellers and 81 percent of people in the countryside live in extralegal dwellings." In Haiti, it is 68 percent and 97 percent respectively. In Egypt, "dead-capital housing is home for 92 percent of city dwellers and 83 percent of people in the countryside."

But these people living "outside the law" are not doing nothing. They are scrambling with entrepreneurial creativity to put together shanty towns and their own, extralegal market exchanges. In fact, the poor have "created wealth on a vast scale . . . assets [that] far exceed the holdings of the government, the local stock exchanges, and foreign direct investment; they are many times greater than all the aid from advanced nations and all the loans extended by the World Bank."

If that sounds unbelievable, consider this: "By our calculations," writes de Soto, "the total value of the real estate held but not legally owned by the poor of the Third world and former communist nations is at least $9.3 trillion. . . about twice as much as the total circulating U.S. money supply. It is very nearly as much as the total value of all the companies listed on the main stock exchanges of the world's twenty most developed countries."

Intrigued? Read de Soto's book. The way capitalism is now structured in the world, the poor will not be able to prosper from their massive, extralegal assets, regardless of the extent of free trade and the degree of debt-forgiveness by the rich countries. Today's global capitalism, de Soto concludes, "is not equitable. It is out of touch with those who should be its largest constituency." At present, "capitalist globalization is concerned with inter-connecting only the elites" who live within the small circles of legalized property.

—The Editor