Integrating the poor into official legal system can unleash their economic potential

• Author: Prakash Loungani
• Position: IMF External Relations Department
• Pages: 360-361

Page 360

“The hour of capitalism’s greatest triumph is its hour of crisis.” This warning comes not from Jubilee 2000 or Das Kapital, but from Hernando De Soto in The Mystery of Capital. The Peruvian economist and author of the best-seller The Other Path repeated his warning on September 28 at an event organized by the American Enterprise Institute-Brookings Joint Center for Regulatory Studies.

De Soto suggested that capitalism is at risk because it does not fully utilize the tremendous potential of its largest constituency, the poor. The poor save and accumulate assets like everyone else. What they lack are widespread property rights that would allow them to readily convert their assets into capital. Copying the property rights and formal laws of the West, as some developing countries have done, does not provide the poor with true access to the fruits of capitalism. Why this is the case is the “mystery” De Soto solves in his new book.

Dead capital

Why can’t the poor participate in capitalism? According to De Soto, the poor hold their resources in the form of “dead capital”—that is, capital that cannot be used to its fullest. Though the poor in these countries—a majority of their populations—do save and accumulate assets, their property rights to these assets are not adequately protected, because these rights are recognized only within the limited informal (“extra-legal” to use De Soto’s favored term) economy within which the poor operate. The assets therefore cannot be readily turned into capital, cannot be widely traded, and cannot be used as collateral for a loan. In short, the wealth of the poor cannot easily be used to produce additional value.

And why don’t the poor try to enter the legal economy? The obstacles are daunting, according to De Soto and his research team. They have been crisscrossing the globe documenting the hurdles the poor face in finding a legal job, entering formal business, or acquiring legal housing. The examples are shocking:

• In Haiti, it takes two years to meet the bureaucratic requirements needed to obtain a five-year lease on government land.

• In Peru, the research team spent nine months of nearly full-time work to obtain all the certifications required to register a small-scale garment workshop. The cost of legal registration was over $1,200—30 times the monthly minimum wage.

• In Egypt...