Catalog

Vision

Fighting Poverty with Property Law

Hernando de Soto

The poor worldwide hold $10 trillion in assets, says Hernando de Soto, president of the Institute for Liberty and Democracy, an influential Lima-based think tank. Unleashing this capital through property law reform offers a potentially powerful tool in the fight to eradicate poverty

By Dave Kruger
External Relations Specialist

Hernando de Soto has been called a man with only one idea. That’s not an insult.

His idea—to reform legal systems to give the world’s poor title to their land, ideas, and other assets—has been recognized by a long line of politicians and academics as a new and potentially powerful tool in the fight to eradicate poverty.

Mr. de Soto, president of the Institute for Liberty and Democracy, an influential Lima-based think tank, lays out his argument for change in his book, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. His institute estimates that 4 billion people around the world now lack the legal instruments necessary to participate in modern market economies.

Legal reform that would provide these people with title to their assets would enable them to enter the formal economy and unleash a vast store of untapped capital. The poor, as a group, are not as poor as is commonly thought, Mr. de Soto argues.

His institute estimates they hold assets worth up to $10 trillion worldwide, much more than their countries have been lent or given by developed nations or multilateral agencies.

If legal systems in developing countries were reformed to enable the poor to leverage their holdings, he says, the impact on poverty reduction would be significant. Mr. de Soto discussed his ideas and the challenge of putting them into action with ADB Review.

You have said that billions of people in the world are legally disenfranchised by their own governments. What does this mean?

We are 6 billion people in the world of which 1 billion are enfranchised. With very small exceptions, these are essentially people in the developed nations in Western Europe, North America, Japan, and the four tigers.

The rest of us, from the former Soviet Union to the third world, are disenfranchised at least up to 80%. That is to say that of the 5 billion in the third world, 80%, which would make 4 billion people, do not have the instruments with which to participate in a market economy. I’m not even saying a global economy.

They cannot participate in a market economy because to participate in a market economy you basically have to be able to come into the market with a property right: a property right over an idea, a property right over a physical asset, a property right over money—a bond, a share, an investment, anything.

And about 80% of the people in developing countries, two thirds of humanity, are simply not in a state to participate in a modern market economy. And that to me is the biggest challenge.

What are the economic impacts of this disenfranchisement, both on the people themselves and on their national economies?

The loss of potential is immense. All the assets of these 4 billion people are “dead capital.” They are alive as physical assets, but cannot be used as collateral for getting a loan, a mortgage, or a guarantee to get credit, as a security to be able to engage a foreign investment, as a point of reference to collect bills, for example, for the supply of electricity or the supply of clean water.

In fact, if I show you a picture of a street in Mexico City and one of a street in Denver, Colorado, you will basically see the same thing: land and buildings. But I can give you a list of practically a hundred things that a building in the United States can do that one in Mexico cannot.

And those are things that have nothing to do with their physical capacity but their capacity to engage their reputation or their value in the market, which is capital. That is exactly what is missing [for the poor].

So what has the world lost? These people have lost all the capacity to have modern development, all the capacity that the West has today to make out of any asset much more than simply its physical value.

You read the possibility of knowing that Microsoft can develop further not by looking at the building of Microsoft but by looking at the property documents that tell you about its potential, its ideas, and tell you how you can capture them. So basically [the disenfranchised] do not have the possibility of generating new business, of being leveraged.

"In the case of Manila - if you actually want to gain in a legal fashion one of the homes that most people now get through squatting - it would take 25 years of red tape"

What sort of figures are we talking about when we add up all this dead capital?

If we took the assets of the poor today, the way we’ve done based on sample countries in most parts of the world, they amount to about $10 trillion. They are mainly real estate assets because over the past 40 years the poor have squatted, forced their way in and come, through agrarian reforms and other things, to actually control large amounts of real estate.

You take that real estate together with small businesses that they have and it’s about $10 trillion. And that $10 trillion is the size of the 20 biggest stock markets in the developed world, all the way from Wall Street to Shanghai.

It’s not an unimportant number. It is roughly 50 times the size of all World Bank loans so far. So what the poor have is actually much more than what the West has to offer them, many times more. The trouble is that it’s not leverageable, and it’s not liquid.

What is the state of the property rights situation in Asia?

We haven’t seen every Asian country, just like we haven’t seen every African country. But let me tell you, since we seem to be the ones that are most experienced in this because this is the type of work we do, they are all pretty similar. I don’t think that there is much difference between what we’ve seen, for example, in Peru and the Philippines or between Egypt and the Philippines.

Some countries are better off than others. Mexico, for example, has about 78% of its population basically in the dead capital area. In Egypt, it is 90%. But they are always around 80–90%.

What do Asian governments need to do to pursue this idea, to activate the assets of the poor?

The first thing that they have to realize is that the poor are a source of wealth. They are not only recipients of assistance. They are essentially the biggest source of wealth within the country.

We haven’t found any [developing] country where the poor are not the majority of the resources. For example, in Mexico, which is one of Latin America’s two biggest oil producers, we found that the poor have about $315 billion worth of assets from about 11 million buildings all the way to 6 million small enterprises.

These $315 billion are seven times the size of all known Mexican oil reserves. So there is much more in the poor than is expected. That means they have to be respected. They have to be passed in many governments from the charitable desk of the first lady of the republic to the political desk. Then they will be treated as potential wealth rather than as charity cases.

The second thing that one has to do is understand that existing law is obviously not functioning because everybody would like the poor to participate in the legal system. If they are not participating in the legal system, it is because essentially it is hostile to them.

We have found, for example, that in the case of Manila—if you actually want to gain in a legal fashion one of the homes that most people now get through squatting—it would take 25 years of red tape.

I can tell you that in every country, the law is hostile to the poor. It has not been made for the poor, and it is inaccessible to them. So the next thing that you have to understand is that the number one instrument is law.

It doesn’t have to do with mapping. It doesn’t have to do with surveying. It doesn’t have to do with traditional titling. It doesn’t have to do with homes. It has to do with law and the possibility of creating a legal system that will make the poor want to enter it so they can start leveraging things and connecting to the real market economy.

And that involves understanding that you have to do reforms that go beyond titling, that have to do with literally integrating the extralegal system.

How do you integrate the systems?

If the poor hold assets, they do not hold them outside rules. They have rules. One of the reasons, as a matter of fact, that you cannot evict a group of poor when they have squatted someplace in Manila is because they are held together by a group of rules that are much more powerful than the existing political system, otherwise they would have been evicted.

This means the legal system has a lot to learn from the extralegal system. Obviously, the extralegal system has been able to produce norms that are more interesting for the poor.

If you’re going to build a legal system that works, you are going to have to do what developed countries did throughout the 19th century and the 18th century, which essentially is aside from taking the old Roman codes or the old common law feudal precepts, you also have to inspire yourself with what people are doing on the ground.

That’s the way the United States absolutely and totally overhauled the legal system all throughout the 19th century until it created something very different from what people had migrated from the United Kingdom with.

You will have done what the Germans have done since 1806, which is to absolutely revamp Roman law. That exercise — which was at the center of political debate a century or 150 years ago in what today are developed countries — should now be at the center of policy discussions in developing countries.

Some observers have pointed out that untangling property disputes in the American west a few hundred years ago was much less complicated than it would be to try to do the same in a vast megacity today. How do you respond? How do you translate that American experience into 2003 Manila or Bangkok or Kolkata?

There are many examples of areas that are not in the United States that did the same. To start, there is Switzerland, which up until 1908 was the poorest country in Western Europe, and it didn’t have large amounts of land. But it created under the Civil Code of 1908 one property system, which converted Switzerland from being a poor country to being a very rich country.

Or you have the case of Japan. Only 50 years ago it was so poor that a good amount of Japanese migrated to my country, Peru, because we were richer than they were. Today they are much richer than we are and without having large amounts of land. They also formalized. So it is not limited to the United States.

All developed countries have gone through the same process that the United States has in their own cultural fashion, in their own historical context. But essentially there was a property rights revolution before they became prosperous.

What are the real life roadblocks to implementing this type of change?

The first problem is awareness. The majority of political authorities in the world are simply not aware of this. They may have heard about it, but they are not aware.

And my experience is that you can only make them aware if you bring out numbers on their own countries. For example, when people first heard what we were doing in Peru they said please come and give us a conference. And we did and nothing happened. It was only when we started saying we accept to give you a conference only if you allow us to get the numbers on your country, and that requires an investment.

Then all of a sudden people produce change…. When it refers to Peru, it is not a political argument. But if it refers to your own country, you now have the tools not only to understand but also to convince. That’s why the first thing we do in any country we are called to is to raise awareness by getting the numbers.

The number two enemy, of course, is the existing people who take care of property rights. It is going to be very difficult for them to accept that they may be doing excellent work but that you have to change the system in which they are working. It is very difficult to get Louis XIV to change Louis XIV.

In basically every country we go to, we are contracted by the head of state—and we are then able to reform the system. If what the head of state asks you to do is to work with the existing authorities, you’re cooked. You have no way of changing them because they will eat you up. So the second enemy is the status quo.

To change the status quo you need a strategy. You need a strategy that brings you close to the head of state and that allows the head of state to produce a reform program that keeps everybody happy but essentially allows them to radically modify a system that a majority of the people haven’t been willing to accept.

What can organizations like ADB do to push this agenda forward in the countries in which it works?

I suppose take an interest in this although it is not traditional. Probably ADB may have financed titling projects. But we are not talking about that. We are not talking about titling people. We are talking about creating a legal environment that is so suitable that the poor will migrate to it.

I suppose it would be to put a focus on those legal and institutional aspects. If that is possible within the mandate of ADB, that would be the kind of thing to do. In most international organizations they don’t even have divisions that look at this or divisions that look at this in terms of implementation.

Email this to a friend