Habari Post

This eye-opening book highlights parts of the Western legal system that I never realized how much I take for granted. Most Americans buy, sell or mortgage property in their lifetime. The ease at which one can acquire or transfer property rights and leverage assets to obtain capital is one of those processes that seems to take place beneath the surface in the U.S.

This is not the case for many developing countries. Hernando de Soto and his Institute for Liberty and Democracy, headquartered in Lima, Peru, illustrates how legal systems are failing billions of people in developing countries. I can start a legal business in the U.S. online in a matter of hours. It takes 289 days (working 6 hours per day) and registration fees at a rate of 31 times the monthly minimum wage in Lima, Peru! The situation is similar in a number of Middle Eastern countries.

De Soto's team delves into legal processes for acquiring property and focuses especially on Egypt, Haiti, the Philippines and Peru. The book is organized into six main sections.

The first section suggests that the development agencies and non-profit organizations have it all wrong. The billions of poor people living in developing countries actually control enormous amounts of capital. The problem is that it is usually 'dead capital.' In other words, the assets are held outside the law and the cannot be used to take out a loan, etc.

The second section provides context on a subject level and explores economic schools of thought around capital, what is it, how is it produced and how it relates to money.

The third section explores the link between politics and law. Political leaders in developing countries are dangerously out of touch with the reality of the masses, according the de Soto's findings.

The discussion then transitions to the history of property law in the U.S. De Soto cites over a hundred years and more than 500 laws passed in an effort to develop property law in the U.S. He compares the 1800s in the U.S. with present day in many developing countries when it comes to property law. One example that compelled me to do a bit of research was a discussion on the Homestead Act of 1862. I remember learning about this act as a way of helping Americans fulfill their dream of owning land, while developing new frontiers of the U.S. De Soto points out that two thirds of the land earmarked by the Homestead Act was settled by squatters, people who were living on the land without official legal authority, before the law was passed. In other words, American politicians realized that their constituents were settling on the land and passed the law in order to keep up with reality. The author points that while U.S. history of property law was often confusing, bureaucratic and sometimes violent, it has developed into a system that works well today without most Americans even noticing it. De Soto suggests that developing countries can find hope and guidance in this example.

The fifth section proposes that legal reform, led by talented high-level politicians is needed in order to improve property law as a basis of capitalism in developing countries. I was especially struck by this passage from page 154:

"Most people do not resort to the extralegal sector because it is a tax haven but because existing law, however elegantly written, does not address their needs or aspirations. In Peru, where my team designed the program for bringing small extralegal entrepreneurs into the legal system, some 276,000 of those entrepreneurs recorded their businesses voluntarily in new registry offices we set up to accommodate them - with no promise of tax reductions. Their underground businesses had paid no taxes at all. Four years later, tax revenue from formerly extralegal businesses totaled US$1.2 billion."

The author concludes that capitalism is not serving the vast majority of people in developing countries. This view is not unique, but the road map to overcome some of the fundamental legal challenges that billions of poor people face in saving and transferring their savings into capital. This challenge can be overcome only with political will to overhaul the legal system in developing countries.

More info from Amazon: The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else