The Mystery of Capital

Why does capitalism only thrive in the West? Hernando De Soto believes that the answer is not culture because Latin American countries and the former eastern Soviet bloc have little in common culturally. According to De Soto, although five-sixths of the world is poor, the poor own these houses, crops, and businesses, but they are all extralegal. Without titles, deeds, and articles of incorporation, the poor cannot use their extralegal property—it is what De Soto terms “dead capital,” capital that cannot legally be used to generate more capital. This dead capital is the invisible potential that cannot be used because it exists as the result of implicit, rather than legal, infrastructures. Without formal property laws that establish who owns what, it is impossible to verify addresses, force people to pay debts, divide ownership into shares, acquire legal housing, get a legal job, or enter a formal business.

De Soto and his associates literally took to the streets to find out how long it took and how much it cost to establish a business or to buy and build a legal house in Egypt, Haiti, Peru, and the Philippines. As an example, it took 289 days to register a business in Lima, Peru.

De Soto reminds his readers that the United States, with the squatting and preemption laws, had similar problems during its westward expansion. The United States did what De Soto urges poor countries to do: a nation’s leader must combine the legal and extralegal economies by gaining the perspective of the poor, co-opting the wealthy elite by showing them how they will profit, and dealing with the legal and technical bureaucracies. Global capitalism depends on countries following De Soto’s advice.