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Book Review:
"The Mystery of Capital"
 by
Hernando de Soto
(Bantam Press - 243 pages)
Reviewer - Luke Brown
The hour of capitalism's
greatest triumph is its hour of crisis. So begins the Peruvian economist
Hernando de Soto's intriguing work on his view why Capitalism has
triumphed in the West, but seemingly failed so many in the developing
and former communist countries. Whilst it was published in the year
2000 and follows on from his previous work, The Other Path, the
ideas contained within are important and still relevant.
One does not have had
to travelled too far and wide amongst the poor nations and regions
of the world to draw similar conclusions to that of de Soto. The
slums, poverty, poor sanitary conditions, lack of available education
and similar inadequacies speak for themselves. But is it Capitalism
itself that is to blame, or rather an inadequate implementation
of it?
Anti-Capitalists are
quick to nod their heads solemnly, sigh and proclaim that all they
have been saying about the so-called free market has been confirmed.
For a group of critics that place so much emphasis on an analysis
of history, they appear irrevocably blind to it. Marxist and socialist
ideologies have been disastrous and invariably been brought about
through brutal methods to conform society to their aims. But, they
cry, it was never really carried through properly. Thank goodness.
But look at Capitalism and the way it plunders, exploits for the
benefit of the elite West. Like Hong Kong, Singapore and South Korea?
But it causes racism, Imperialism and war. That existed before Capitalism,
did it not? And war and the like harms trade and the creation of
wealth. But so-called free trade merely serves the elite? So call
for the end of Protectionism. But what about unemployment; it proves
that the free market doesn't work? It cannot work without free labour
markets. But Multinationals exploit the poor. They of course conveniently
ignore the wealth-destructive statist practices of certain governments
and their own state-run industries in which these corporations invest;
plus, only through capital investment can wages be increased and
eventually move an economy away from labour-intensive industries
towards capital-intensive ones. But the elite runs the world, they
call themselves Capitalists and the world is a mess; therefore...
So what, I call myself a nice guy who should naturally be a babe
magnet; it doesn't mean its true. Irritatingly, not a but is voiced
at this point.
Of course there are those,
supposedly on the other side of the fence, who will also snidely
nod their heads, safe in the knowledge that History Proved Them
Right and that it is a fait accompli that things will eventually
just work themselves out. Not so fast. While Capitalism pulled some
parts of the world out of immense poverty and despair over a century
ago, it has clearly not repeated itself in other parts. If the anti-Capitalists
can be categorised as the "But" school of thought, our
own set of Capitalists-when-it-pleases-them can best be described
as generally belonging to the "Yes, but" school. The usual
suspects can be found (or found out) when their own interests (or
those of their practically interchangeable entity, the State) are
being threatened. Whether it be for the idea that free trade is
beneficial… Yes, but at times we need a little bit of subsidies
and tariffs, for the good of our own people and our industries.
Surely you recognise, though, that paying more for goods is not
really good at all? Yes, but they have subsidies for their goods
and dump them on us. I thought subsidies were good? Yes, but for,
um… besides they started it. Two wrongs evidently make a right.
Or the State that can use force to get what it wants because it
gives certain people who give it what it wants, what they want;
the same entity that can bomb others, far and wide who will not
fall down before it. Yes, but you mean other tyrants. Indeed.
One could go on to the
subject of destructive Keynesian boom and bust policies and the
like, but most people's eyes unfortunately glaze over when discussion
turns to Economics. I believe that Hernando de Soto's book can prove
to be an antidote.
He begins with the premise
that the market-based Capitalism is now the only viable game in
town. Next he sweeps aside a commonly held notion of some Westerners
that citizens of developing and former communist countries have
failed to transform themselves into successful capitalist nations
because they lack the necessary entrepreneurial spirit, or cannot
handle a market-oriented world. Having seen myself the activities
of the local businessmen, taxi entrepreneurs and vendors, in such
countries as Albania, the Philippines, Burma, Yugoslavia and South
Africa, is enough to dispel this myth. And markets and trade have
been with us for thousands of years.
So if it is not a cultural
phenomenon then, what is it? Over a number of years and, with the
assistance of a research team, de Soto travelled to Asia, Africa,
the Middle East and Latin America in order to attempt to discover
why these countries had failed in their attempts to transform themselves
into successful Capitalist nations.
What he found was that,
while the poor in these countries had an immense amount of savings
and assets capable of being transformed into capital, what was missing
was the procedures to turn this "dead" capital into "liquid"
capital; this being the representation of assets in the form of
adequate property documents.
He describes the size
of these savings:
"Even in the
poorest countries the poor save. The value of savings
among the poor is, in fact, immense: forty times all the foreign
aid
received through the world since 1945. In Egypt, for instance, the
wealth that the poor have accumulated is worth fifty-five times
as
much as the sum of all direct foreign investment ever recorded
there, including the Suez Canal and the Aswan Dam."
But there is a problem:
"But they hold
these resources in defective forms: houses built on
land whose ownership rights are not adequately recorded,
unincorporated businesses with undefined liability, industries
located where financiers and investors cannot see them. Because
the rights to these possessions are not adequately documented, these
assets cannot readily be turned into capital, cannot be traded outside
of
narrow local circles where people know and trust each other, cannot
be used as collateral for a loan and cannot be used as a share against
an investment."
The difference between
this situation and of that in the West is that practically every
piece of asset in the West is represented in a property document
that connects each one together. Out of this there are many possibilities:
collateral for credit, a credit history, an accountable address
for the collection of debts and taxes, supply of utilities, and
so on. What this means is for those in the developing world and
the former communist nations, they are effectively undercapitalised,
"in the same way that a firm is undercapitalised when it issues
fewer securities than its income and assets would justify."
This may all appear rather
obvious, but it is quite easy to take it for granted. It must not
be forgotten that the West faced a similar situation well before
the twentieth century, which the developing and former communist
nations currently face. Within the last fifty years there has been
a mass movement of populations in these former communist and developing
nations from rural areas to the promises of a better life in the
cities. In fact, cities have exploded in size and are, in many places,
a large mess, unable to adapt in a timely manner. Now more than
ever, the need for a system in place to account for the property
rights of individuals is paramount. Instead, huge and seemingly
insurmountable obstacles seem to be in place, denying ordinary individuals
the opportunity to exploit the value of their assets, as de Soto
puts it, to extract "surplus value".
An example will suffice:
"To get an idea
of just how difficult the migrant's life was, my
research team and I opened a small garment workshop on the
outskirts of Lima. Our goal was to create a new and perfectly
legal business. The team then began filling out the forms,
standing in the queues and making the bus trips into central
Lima to get all the certifications required to operate, according
to the letter of the law, a small business in Peru. They spent six
hours a day at it and finally registered the business - 289 days
later. Although the garment workshop was geared to operating
with only one worker, the cost of legal registration was $1,231
- thirty-one times the monthly minimum wage. To obtain legal
authorization to build a house on state-owned land took six
years and eleven months - requiring 207 administrative steps in
52 governments offices. To obtain a legal title for that piece of
land it took 728 steps. We also found that a private bus, jitney
or
taxi driver who wanted to obtain official recognition of his route
faced twenty-six months of red tape."
With these obstacles
in place it is no wonder that a large amount of the poor live and
operate in the "extra-legal" sector. Operating outside
of the legal system means that their houses and tools are effectively
rendered "dead' capital. The scale of this is enormous. For
example, in Haiti, according to his surveys, 68 percent of city-dwellers
and 97 percent of countryside dwellers live in housing with no clear
legal title. The estimated worth for these dwellings is US$5.2 billion
(four times the total of all assets of all the legally operating
companies in Haiti, nine times the value of all assets owned by
the government and 158 times the value of all foreign direct investment
in Haiti's recorded history to 1995). In the Philippines it is US$133
billion (four times the capitalisation of the 216 domestic companies
listed on their stock exchange, seven times the total deposits in
the country's commercial banks, nine times the total capital of
state-owned enterprises, and fourteen times the value of all foreign
direct investment).
But what does this all
really mean? To answer this, it is essential to understand the nature
of capital. It is not money. Rather, it is the means to produce
other things. It must not be seen simply as a physical phenomenon,
but rather as a concept. The economist Jean Baptise Say is quoted
as saying that "capital is always immaterial by nature since
it is not matter which makes capital but the value of that matter,
value has nothing corporeal about it." By conceptual, I mean
that it is all in the eye of its owner. He can combine and link
various capital items, in roundabout ways, in order to produce what
a consumer wants. Houses by themselves cannot produce anything as
such. What it is all about is creating a process "that allows
him to convert and fix this potential into a form that can be used
to do additional work." De Soto has identified six effects
of Property:
1) Fixing the economic
potential of assets - this is done through allowing assets to be
represented in writing; not a mere description of what the asset
is but rather supplying details that will be "economically
and socially useful," in order for them to have a life of their
own.
2) Integrating dispersed information into one system - so that those
who exist outside the close vicinities that usually are present
when it comes to extra-legal communities, can gain access to this
information.
3) Making people accountable - for example, taxes, debts and to
gain credit.
4) Making assets fungible - which means that through representations
in the forms of titles and deeds, assets can be divided up, enabling
amongst other things, multiple investors to exploit the assets.
5) Networking people.
6) Protecting transactions - and ownership.
Once such a system is
in place for representing property and assets, they can fulfil a
parallel life, "doing economic things they could not have done
before." The procurement of credit is made easier; mortgages
and collateral can back up investment, and property can be widely
represented making the pursuit of economic goals more efficient.
There is basically a system in place upon which production and transactions
can be built. This in turn provides a platform whereby savings can
be more effectively turned into more capital, and so on.
At this point in the
book the theory has now been expressed. The next step is the all-important
how. De Soto takes the United States as an example. Of course, the
first point that will pop into mind is that obviously the United
States is a different case and was undertaken in another time. While
it is true that the way the system was developed there cannot be
exactly transplanted to the current developing and former communist
countries, it is important to note that over 150 years ago the United
States was also essentially a third world country. What de Soto
discovered is that once the United States recognised and integrated
extra-legal property rights, its fortunes changed dramatically.
What basically happened is that a system of property rights developed
according to the needs of those concerned and the norms at the time.
They were not simply imposed, but rather were developed. In order
for the affected parties to agree to join up to a standard system,
they had to be persuaded that it was in their interests to do so.
In other words, giving up the life in an extra-legal system would
mean that whilst its negative aspects would diminish quite substantially
or even totally (for example, there would be no need to hide from
the authorities, they could now obtain credit, investment and limited
liability protection, and be relatively more free from criminal
extortion) these added benefits would have to compensate for the
taxes and costs they now would have to incur.
De Soto recognises that,
alongside the theoretical legal challenges inherent in setting up
a system of property rights, there is the matter of the political
challenges. The book is inherently limited at this point, not because
he has not covered the potential legal and political challenges
fairly adequately, but because theory is no substitute for actual
and widespread practice in specific countries and situations in
the here and now. As with most things, politics will either make
or break it. The elites who cosy up to the politicians may fear
that their privileged circles are under threat and that they may
be subjected to, god forbid, competition.
While the establishment
of an effective system of property rights is essential, it will
always be tempered by other important economic and political conditions.
Unstable currencies and excessively expanding money supplies, the
flouting of the rule of law, elite global economic organisations,
authoritarian regimes, terrorist groups, corruption, meddling and
expansionary foreign powers, and Protectionism, are all also impediments
to prosperity and peace. While they are really beyond the scope
of this book, they must always be kept at hand.
Last and by no means
least, there will be the resistance of those poor in the developing
and third world countries that have much to gain from this property
revolution. They have been continually told that free-market reforms
are the best thing for them. Support is in fact dropping, which
is a pity, because what has been implemented cannot be honestly
called free-market initiatives. The mostly deliberate confusion
that has been sown by those on the different sides of the economic
"expert" fence is truly disturbing. The elites of globalisation
say one thing but do another. The opponents snidely write off this
so-called free-market as not actually being free. They are to a
certain extent correct, but make no mistake about it they do not
actually want it free, despite being unable to make an effective
argument against true free market ideals. Whether they truly believe
that somehow their socialistic policies have some hope of defying
economic reason or experience, they do not like the ideas of individual
liberty or do not want to give up their distorted high moral position
in their intellectual circles, one cannot be entirely sure. No doubt
Hernando de Soto's previous ties with the disgraced former President
Fujimori as an economic adviser in the early nineties or his economic
work with GATT is proof enough for them that this important work
is a mere tool of Western Imperialism. That position sure beats
actually showing why the ideas described are wrong.
Hernando de Soto closes
with the following:
"I am not a diehard
capitalist. I do not view capitalism as a credo.
Much more important to me are freedom, compassion for the poor,
respect for the social contract and equal opportunity. But for the
moment, to achieve those goals, capitalism is the only game in
town. It is the only system we know that provides us with the tools
required to create massive surplus value.
I love being from the Third World because it represents such a
marvellous challenge - that of making a transition to a market-based
capitalist system that respects people's desires and beliefs. When
capital is a success story not only in the West but elsewhere, we
can move beyond the limits of the physical world and use our minds
to soar into the future."
Yes, but…?
Reviewer: Luke Brown
Email: editor@polosbastards.com
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