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Review of Hernando de Soto's Mystery of Capital

Author: Matthew J. Rosenberg
January 1, 2002
International Affairs


The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else by Hernando de Soto. New York: Basic Books. 2000. 275 pages. $27.50. ISBN: 0-465-01614-6

The World Bank's 2002 World Development Report states that effective property law systems would greatly lower transaction costs in the developing world. Lower transaction costs for property holders leads to a greater amount of capital available to develop land and establish credit. However, the problem for the developing world is that most of its property is held in extralegal arrangements that raise transaction costs and prevent millions of people from collateralizing their land through mortgages. If more people had access to legal systems that would protect and add value to their property, then more capital would be generated and weak financial systems could be strengthened.

In The Mystery of Capital, Hernando de Soto builds upon the World Bank's findings by calculating that the total value of real estate held but not legally owned by the poor of the developing world is at least $9.3 trillion. Some critics are skeptical of how de Soto arrived at this $9.3 trillion figure, but his evidence is convincing. De Soto and his research team assembled a vast array of primary documentation from land offices throughout the developing world in both urban and rural areas. He estimates that the total amount of land informally or illegally held is 85% of total urban land holdings and 53% of total rural land holdings. By assigning a fair market value to all this informally held land, the grand total comes to $9.3 trillion-more than the total value of all the companies listed on the New York, Tokyo and London stock exchanges. Even if one takes issue with the exact value de Soto assigns to all this land, he does show that the bulk of the developing world's property is held informally and that this land could be worth enough to stimulate many developing economies.

What de Soto really needs to establish is that a marketplace for all this dormant capital can be created by overhauling existing property law systems. Compelling evidence points to how property law that legally incorporate the titles of the majority of a nation's people allows for increased access to capital. The key here is to show that all those informal property arrangements can be incorporated into a formal body of law that is enforceable. De Soto shows that this is possible because existing informal arrangements in the developing world have distinct commonalities based on quasi-legal precedents that could be legally standardized and codified. Even squatters in Haiti can produce some piece of paper to show you that they have some claim to their land. Thus, all this quasi-legal paper needs to be made legal in a fair and equitable manner. This is a political task that would involve a tremendous reorganization of power, but the bottom line is that the people must have more direct political control over their property. There is no reason why this cannot be achieved. If the 19th century United States government gradually recognized squatters' rights to land, why can't the same process occur in the developing world?

There is no gaping rift between the key points de Soto makes in The Mystery of Capital and those made in the World Development Report. The major difference is one of style and presentation, as de Soto makes bolder assertions and broader prescriptions that may capture the interests of a wider audience. This may, in turn, invite a variety of criticisms; however, de Soto defends his main points with convincing logic and documentary evidence.

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