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 / Summer 2004 / Issue 35(originally published by Booz & Company)


The Philosopher of Progress and Prosperity

Peruvian economist Hernando de Soto has found a way to enrich the poor.

Photography by Vera Lentz / Blackstar
Nasser City, a neighborhood on the northeast side of Cairo, contains the biggest housing project in Egypt. Its concrete block apartment buildings, each six stories high, stretch for miles. When the Peruvian development economist Hernando de Soto presented a photograph of this project to Egyptian Prime Minister Atef Ebeid and his cabinet at a meeting in 1999, they recognized it immediately. It has been a landmark in the country ever since President Gamal Abdel Nasser’s socialist regime built it in 1960.

According to two observers of the meeting, Mr. de Soto asked, “Do you remember how tall it was when it was built?”

“Yes,” said the minister of housing. “Two stories.”

“Then who built the other four?”

As Mr. de Soto knew well, developing nations are rife with these sorts of anomalies. He and researchers in his private, nonprofit economic development research organization, the Lima-based Institute for Liberty and Democracy (ILD), had found dozens more during the years they had spent collecting data and studying the hidden economic life of Egypt. Cairo was apparently full of illegal apartments constructed literally on the rooftops of public housing, where contractors had paid off local officials (and the first- and second-story residents), built extra floors, and sold the apartments themselves. The extra stories could be seen plainly by anyone walking by, but they were invisible to the government. There were no official records of the structures or their inhabitants, no titles of ownership, no tax records, and — most important for Egypt’s economic future — no way for apartment owners to use these assets as collateral or capital. “I’m sure the residents have pieces of paper saying they own the property,” says Mr. de Soto. “But if the public records don’t recognize that the property exists, how can a banker give them a mortgage?”

For the last 30 years, Hernando de Soto has been presenting such stories to government leaders, first in his native Peru, and then throughout the developing world and in former Communist nations, to explain how their legal systems and bureaucracies prevent poor but inherently capable people from helping themselves to overcome their poverty — and the chronic underdevelopment of their countries.

There are plenty of talented, aggressive, entrepreneurial, and technologically capable people among the world’s poor. “You cannot walk through a Middle Eastern market, hike up to a Latin American village, or climb into a taxicab in Moscow without someone trying to make a deal with you,” Mr. de Soto wrote in his best-selling book, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else (Basic Books, 2000). Why, then, is it so difficult to succeed at transforming the economies of these nations?

What separates poor nations from wealthy ones is “the mystery of capital,” says Mr. de Soto. To solve that mystery, he argues, one must understand why it is so common for the poor in non-Western countries to be locked inside large, informal, extralegal economies where they are unable to accumulate wealth.

To be sure, there are always some people in even the poorest countries with registered assets, credit with global banks, and formal protection of their property against seizure and disputes. “But they are only a tiny minority,” Mr. de Soto writes in The Mystery of Capital. “The great majority of people … cannot get the fruits of their labor represented by the formal property system.” Lacking legitimacy, most citizens of developing nations are driven into the underground economy, where they can’t register their assets in any system that banks recognize; where they must spend inordinate amounts of time bribing officials and protecting their property from thieves; where they obtain credit at exorbitant rates, often from organized crime; and where their wealth has far less impact than it otherwise would. Indeed, Mr. de Soto has estimated that what he calls dead capital — assets that currently can’t be used to spur investment or economic growth and are controlled by the world’s poor — adds up to as much as $10 trillion. If it could be converted to “living capital” by giving people legally enforceable rights to the property they already have (and the knowledge to use those rights to grow their assets), then the developing world would finally gain the leverage to achieve a healthy free-market economy and vibrant middle class.

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  1. C.K. Prahalad and Stuart L. Hart, “The Fortune at the Bottom of the Pyramid,” s+b, First Quarter 2002; Click here.
  2. Hernando de Soto, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else (Basic Books, 2000)
  3. Hernando de Soto, The Other Path: The Economic Answer to Terrorism (Second ed., Basic Books, 1989)
  4. Francis Fukuyama, Trust: The Social Virtues and the Creation of Prosperity (Free Press, 1995).
  5. C.K. Prahalad, The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits (Wharton School Publishing, 2004)
  6. The World Bank, Doing Business in 2004: Understanding Regulation (Oxford University Press/World Bank, 2003), Click here.
  7. Erica Field, “Entitled to Work: Urban Property Rights and Labor Supply in Peru” (July 2003); Click here.
  8. Erica Field, “Property Rights, Community Public Goods and Household Time Allocation in Urban Squatter Communities” (September 2003); Click here.
  9. Erica Field with Maximo Torero, “Do Property Titles Increase Credit Access Among the Urban Poor? Evidence from a Nationwide Titling Program” (January 2004); Click here. 
  10. Center for International Private Enterprise: Click here. 
  11. Center for Sustainable Enterprise, University of North Carolina: Click here. 
  12. Institute for Liberty and Democracy: Click here.
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