THE MYSTERY OF CAPITAL WHY CAPITALISM TRIUMPHS IN THE WEST AND FAILS EVERYWHERE ELSE HERNANDO DE SOTO Presented by Chandra Bhushan Man Thi M Vang Bosson C Kouassiaman Nidhi Pasi Rebeca Oliver

STRUCTURE INTRODUCTION MYSTERY OF MISSING INFORMATION MYSTERY OF CAPITAL MYSTERY OF POLITICAL AWARENESS MISSING LESSONS OF US HISTORY MYSTERY OF LEGAL FAILURE CONCLUSION

INTRODUCTION Background of enquiry: post cold war Stumbling block: inability to produce capital for domestic capitalism Poor own assets, in defective form: houses, but not titles; crops, but not deeds; businesses, but not statutes of incorporations Without representations, assets are dead capital

INTRODUCTION Learn from history: ‘something momentous’ did happen in the past in US-establishing formal property law & inventing the conversion process in that law that allowed them to create capital Least attention to capital: neglect is shrouded in five mysteries

The Mystery of Missing Information A Surprise Revolution: Huge rural migration. –e.g. in China, since million rural people have moved to the cities. The obstacles to legality: On the basis of field surveys, in Egypt, Haiti, Peru, Philippines and Mexico, number of years and number of steps for getting approvals related to property have been described, so you have extralegals. The undercapitalized sector: These extralegal social contracts have created a vibrant but “undercapitalized sector” (street vendors, apartment building workers, garbage collectors) How much dead capital?: Examples from 5 Third World cities (Cairo, Lima, Manila, Mexico and Port-au- Prince) show that most people’s resources are commercially and financially invisible. How much is dead capital worth?: $9.3 trillion. How much is dead capital worth?: $9.3 trillion.

The Mystery of Missing Information Solution: Acres of diamond “Leaders of the Third World and former communist nations need not wander the world’s foreign ministries and international financial institutions seeking their fortune. In the midst of their own poorest neighborhoods and shantytowns, there are trillions of dollars, all ready to be put to use if only the mystery of how assets are transformed into live capital can be unraveled.”

The Mystery of Capital The mystery: Why can assets be made to produce abundant capital in the West but very little in the rest of the world? What do we mean by capital? What role do formal property systems play? Why does this matter?

Six Property Effects 1)Fixing economic potential of assets. 2)Integrating dispersed information into one system. 3)Making people accountable. 4)Making assets fungible. 5)Networking people. 6)Protecting transactions.

Why capitalism isn’t enough Distinction between West and the rest exists because of the results of a formal, integrated property system. The promotion of capitalism in the vein of Washington Consensus has not worked. Challenge of accessibility for the poor. Is this capital?

Mystery of political awareness Political blindness- –Unaware of the growth of extralegal sector and breakdown of existing legal order –Problems are not new

Mystery of political awareness Problem - –Worldwide industrial revolution-gigantic movement (migration) from isolated communities to participate in wide scale economic exchange –Failure of legal order to keep pace/ lack of institutions- forcing migrants to set up extralegal substitutes for established law –Fragmentation of property rights arrangements and unavailability of standard norms prevent interaction with the financial and investment markets

Mystery of political awareness Solution- –Piecemeal solutions and stopgap measures not sufficient –Need to integrate property systems and reform laws that are discouraging and preventing people from being more productive –Laws need to adapt to the needs of the common people, including their expectations about property rights

Missing lessons of US History Question- –How to give people the rights or access to legal property rights? –How to integrate nation’s extralegal assets into one legal property system

Missing lessons of US History All western nations in past have made transition from dispersed, informal arrangements to an integrated legal property system –Squatting tomahawk rights pre-emption This transition had little to do with technology More with adaptation of law to social + economic needs of population Acknowledge social contracts born outside the official law were legitimate and absorb them –“forces that change the law in other than trivial ways lie outside it” –Accommodate extralegal arrangements for use of assets as capital

Missing lessons of US History Lessons –Recognize and integrate extralegal property rights –Construct national laws to integrate loose and isolated property data into new formal property system Will allow use of property to create capital needed to fuel explosive economic growth that (still) drives US economic growth. –Changes in political attitudes and legal trends “legal institutions can survive only if they respond to social needs”

The Mystery of Legal Failure Most developing countries have formal property systems. –Property systems not open to the poor.

Why is there legal failure? Five main problems/misconceptions –Belief that people operate extralegally to avoid taxes –Real estate not surveyed, mapped or recorded –Belief that gov’t enacting law is sufficient/ ignore costs of compliance –Belief that social contracts can be ignored –Belief that change can be enacted w/o high level political leadership

Truth Must look at existing social arrangements and structures People willing to pay taxes Reform is long and hard Problem is political

CONCLUSION Only 25 of world’s 200 countries produce capital in sufficient quantity to benefit fully from the division of labor in expanded global markets People are fundamental agents of change Property makes capital ‘mind friendly’ Lift the bell jar & do away with property apartheid

CONCLUSION Enemies of representations? Succeeding at capitalism- a Cultural thing? Only game in town: capitalism governments must recognize Reform the property law & use representational system

Thank You