THE MYSTERY OF CAPITAL

The Mystery Of Capital

The Mystery Of Capital

Introduction

Consider The Term “the Third World” Most people probably would conjure up in their minds the image of tens of millions of poverty-stricken people living in Asia, Africa, and South America possessing no means for survival other than their unskilled and primitive labor. Property ownership, in this image, is limited to a select few extremely wealthy individuals and families, who exploit others in societies so they may live lives of comfort and luxury.

Hernando de Soto, Peru's leading free-market economist, says this image is both false and misleading. The ordinary peoples in the “undeveloped countries” of the world, in fact, have a vast amount of wealth. And this wealth enables a flourishing world of trade, commerce, industry, and employment.

Indeed, if one adds up the estimated value of real estate held by “the poor” in these countries, the total value comes to something in the neighborhood of $9.3 billion. The only problem is that most of this wealth is not in the form of legal titles to property; instead, these are “informal” ownerships not recognized or enforced by the political authorities in these parts of the world.

Throughout the world, extralegal organizations have formed to register property. De Soto cites neighborhood business organizations, residents' committees, farming conventions, and so on. Those organizations recognize and document extralegal property claims. “We did not find a single extralegal plot of land, shack, or building whose owner did not have at least one document to defend his right—even his 'squatting rights.'” The limitation, though, is that there is no good source of information for outsiders who might lend money based on the extralegal collateral. The potential lender will also not know whether the local property-recognizing organization would recognize the lender's lien.

Discussion

The government typically does not want to surrender its own title to land, and the economic elite may also have claims to land occupied by squatters. The result of conflicting claims is that no one can realize the full value of the property. The heart of de Soto's argument is that under this informal system, a vast amount of private wealth exists as “dead capital.” Without legal title to real property — residential homes, retail businesses, factories, apartment buildings — the informal owners are unable to tap into either the national or global financial markets. Normal loans or lines of credit with real property as the collateral are difficult to acquire.( Boaz, 1997)

How can a creditor know who owns the property, what its estimated market value might be, whom legal action could be taken against in case of failure to meet the terms of the loan agreement, and how the property title might be transferred? Instead, financial relationships are limited to the local communities in which informal customs and rules have spontaneously evolved and taken shape, in the context of which the local residents, merchants, and manufacturers recognize, respect, and even enforce property rights beyond the eye and control of the formal law of the ...