Review of The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, by Hernando de Soto (Black Swan, 2001; first published by Bantam Press, 2000).
Recognize the property rights of the poor, argued Hernando de Soto in this bestseller. Nice idea – but does it work?
The value of savings among the world’s poor is forty times all the foreign aid received throughout the world since 1945. The assets of poor people in Haiti are 150 times greater than all the foreign direct investment the country has received since independence from France in 1804. The total value of all informally-held real estate in the developing world is $9.3 trillion – nearly as much as the value of all companies listed on the main stock exchanges of the world’s twenty most developed countries.
The Mystery of Capital, by Hernando de Soto, is full of statistics like this. De Soto is an economist at the Institute of Liberty and Democracy, a Peruvian think tank: his mind-boggling figures are a mixture of patient, on-the-ground research and carefree, dubious extrapolation. The effect is both stupendous and stupefying. In de Soto’s narrative, the world’s poor – the immiserated, despairing masses of the charity posters, in their hovels of plywood and tin – are transformed into avatars of the capitalist spirit.
His argument is simple. Capitalism thrives in the West, and fails everywhere else. The reason is capital: specifically, the unified, formalised property systems of the West which ‘inject life’ into assets, allowing them to be used as collateral to secure transactions. Most capital in the developing world, by contrast, is held extralegally. The poor ‘have houses but not titles; crops but not deeds; businesses but not statutes of incorporation’.
Burdened with ‘dead’ capital, which they cannot protect, sell or securitize, the poor cannot access credit to start businesses. A system of ‘legal apartheid’ allows capitalism to flourish inside the bell jar of the formal sector, while the vast shanty towns of informality grow all round: reminiscent, de Soto says, of the extralegal suburbs that grew up around the guild towns of early modern Europe.
All this is invisible, argues de Soto, from the shiny offices of aid agency headquarters. His researchers encountered the problems of informality by living it themselves. They tried to set up a legal business in Peru, and discovered it took 289 days; they attempted to purchase legal property on government land in Haiti, and waited19 years. Along the way, they discovered the myriad, complex systems of informal property rights that are established by slum-dwellers and peasants the world over: a hidden ‘social contract’, unrecognised by the state, but lived out in the daily practices and negotiations of people themselves.
The solution, de Soto says, is to integrate these informal arrangements into the official legal system, giving the poor formal title over their property. Extralegal ownership already receives de facto recognition, he points out, when governments and NGOs pipe water or connect electricity to informal settlements. And there is a precedent in the forgotten history of the West: a long, contested process where political elites pragmatically incorporated customary rights into state law.
This argument is in many ways appealing, especially in its emphasis on the agency of poor people. But probe deeper, and it is clear that de Soto has a certain kind of hero in mind. The protagonists of his story are inventive, individualist entrepreneurs, moving to the cities in their millions to find their fortunes: an army of Dick Whittingtons, imbued with a Lockean fervour for settlement and improvement. There is obviously something romantic about this, and the political flavour is easy to detect. It is not for nothing that the dust-jacket reads like a neoliberal hall of fame, with Margaret Thatcher, Milton Friedman, Niall Ferguson and Francis Fukuyama among the luminaries to heap praise on de Soto’s work.
For de Soto is not so much puzzled by the mystery of capital, as entranced by the metaphysics of it. An unlikely roster of philosophers, from Plato to Derrida, are press-ganged into his argument as he rhapsodizes about the ‘representational system’ of property. A good property system, he writes, ‘is a way to represent reality that lets us transcend the limitations of our senses’; capital, like energy, ‘can be discovered and managed only with the mind’. He sensibly anticipates concerns about the ‘virtuality of capital’, but tellingly wrongfoots himself when he reassures readers about mortgage-backed securities – advice that doesn’t look so wise from this side of the financial crisis. It would be unfair, but only just, to say that the de Sotoan vision is for a world of sub-prime mortgages.
Strip away the rhetoric, and what is left are some shaky empirical claims. Those dramatic figures about the value of informal assets are almost certainly overestimates. De Soto has published little in academic journals, and it seems he has extrapolated from outlying examples. Nor does de Soto provides evidence that his proposed solutions actually work.
In particular, he does not defend his assertion that giving people formal title will enable them to borrow, and that credit is a route out of poverty. After all, formal title is only one way to overcome the problem of collateral. Microfinance is another: by organizing people into groups, microcredit institutions leverage social capital to ensure repayment, and make lending viable. The evidence from numerous studies of microfinance is that it does little to raise incomes. It is hard to see why loans secured on property would work differently.
Microfinance has succeeded, though, in creating an armada of tiny, unproductive micro-enterprises, the ubiquitous convenience shops of the global South. The people who run them are de Soto’s heroes, but most lack his entrepreneurial enthusiasm. Surveys show that they do not want to formalize their business; they want a decent, secure, reasonably paid job. Rafael La Porta and Andrei Shleifer, economists at Dartmouth and Harvard, argue that lowering the costs of registration does not bring these firms into the formal sector. The informal economy is not a shadow of the formal economy, waiting to be unleashed. It is an unsustainable appendage, less a sign of development potential than a symptom of its absence.
It is also an arena of exploitation. Despite de Soto’s professed enthusiasm for on-the-ground studies, he overlooks the hierarchies and networks which permeate informal settlements. Many poor urban dwellers are tenants: their lot is worsened by clumsy titling schemes, which can trigger rent hikes and evictions. It is perhaps no coincidence that The Mystery of Capital includes a lengthy discussion of the Wild West.
The geographer Mike Davis, in a devastating critique, mocks de Soto as ‘the Messiah of people’s capitalism’. There is some truth in that. De Soto has been lauded across the world, and his ideas feted by the international development community – success which probably owes more to ideology than to empirics. His ideas are thought-provoking, and undoubtedly deserve an audience; formal titling schemes can have a positive impact, and are often a demand of squatters movements seeking to defend their property rights. But titling won’t save the world.
This book is worth reading. As for the mystery of capital, it remains unsolved.