The Mystery Of Capital, by Hernando de Soto, Basic Books, 2000

Hernando de Soto is an economist and the President of the highly respected Institute for Liberty and Democracy in Peru. The fact that developing countries have, for the most part, not participated in the prosperity created by free markets has challenged de Soto. Similarly, the fall of communism has not brought the flourishing of free markets and prosperity that many anticipated in Russia and former communist countries. To try to solve these mysteries, de Soto wrote The Mystery of Capital.

Capitalism is the Only Game in Town
De Soto states his position very clearly, "I am not a die-hard capitalist," he writes. "I do not view capitalism as 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." (p. 228)

The Assets of the Poor
Economists have advanced many theories for why prosperity has shunned developing and former Communist countries. De Soto took a new approach to finding the answers. Over a five-year period, he and hundreds of colleagues went into the streets and countrysides to learn, firsthand, what was really happening. Surprisingly, he found that many of the poor have, in sum, acquired enormous assets. Unfortunately, because these assets are mostly what he calls "dead capital," they don't multiply in the way that creates true prosperity.

Counter to the beliefs of many who oppose globalization, "Everyone will benefit from globalizing capitalism within a country," states de Soto, "but the most obvious and largest beneficiary will be the poor" (p. 189). The poor in developing and former communist countries live and work in an extra-legal or underground system. Homes built on land that they have lived on for years are not granted title, so they cannot be sold or borrowed against as collateral. De Soto explains the many ways that people in emerging economies build assets that could be the basis for growing prosperity, but because of the lack of property rights or functioning systems of property transfer, these assets are "dead." De Soto's discussion of the six effects of the formal property systems of the West explains how formal property systems allow citizens to generate capital. As de Soto details the conditions necessary for these assets to gain value, one may be tempted to think that there is little hope that they can be created in underdeveloped economies. However, de Soto shows how, although the challenge is substantial, it can be accomplished.

"The grimmest picture of the Third World is not the most accurate… A truer image would depict a man and woman who have painstakingly saved to construct a house for themselves and their children and who are creating enterprises where nobody imagined they could be built. I resent the characterization of such heroic entrepreneurs as contributors to the problem of global poverty. They are not the problem. They are the solution" (p. 35-37).

"I am not a die-hard capitalist," de Soto writes. "I do not view capitalism as 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."

A History of Property Rights in the U.S.
De Soto helpfully lays out the history of property rights in the United States for his readers. In the nineteenth century, the U.S. "wild west" went through much the same turmoil as is happening in Russia today, until a court case in 1827 gave rights to those occupying land, converting "squatters" into land owners. As de Soto describes it, "No longer were they scruffy criminals skimming the cream of the nation's lands but 'noble pioneers' helping to develop the country" (p. 133). There were many other occurrences in the evolution of property law and infrastructure in the U.S. that have resulted in the dramatic ability of Americans and those in other developed nations to create capital. And it is the creation of capital that is crucial to prosperity.

Solutions—A Road Map to Prosperity
In Chapter 6, de Soto provides a virtual road map for countries like Peru and Russia to accomplish what is necessary to create capital and prosperity. These important steps will benefit entire countries, especially the 80% of people currently excluded from economic participation. While undertaking these changes requires challenging the status quo, and consequently creates great political challenges, the rewards for governments that take these steps are great. De Soto reports that thanks to the work of his team, 276,000 extralegal entrepreneurs voluntarily registered their assets without any promise of tax reductions. This transfer of extralegal assets into the legal system resulted in additional tax revenues of US $1.2 billion just four years later. The incentives for change are great for governments, and for their people.

The Mystery of Capital is a must-read for all who are interested in how markets provide potential for poor nations and poor people to prosper. With this text, business and government leaders in developing and former communist countries have a text book for the job that needs to be done, as well as ideas for how to do it. De Soto's work is both ground breaking and brilliant.

About the Author (from Basic Books)
Hernando de Soto is President of the Institute for Liberty and Democracy [ILD], headquartered in Peru and regarded by The Economist as the second most important think-tank in the world. He was recently named one of the five leading Latin American innovators of the century by Time. As Personal Representative and Principal Advisor to the President of Peru, he initiated that country's economic and political reforms. His previous book, The Other Pathwas a bestseller throughout Latin America and well read in Washington, D.C.




Contributed by Bill Early, Founder, Global Envision.

Click here for more information on the Institute for Liberty and Democracy (ILD).

To read more about de Soto's work, see Why Capitalism Triumphs in the West and Fails Everywhere Else. Another book dealing with property rights and the alleviation of poverty is A Lesson on How Property Rights Dictate Freedom.

To learn more about de Soto, read a more in-depth bio or an interview with him.

Click the icon to buy this book from Amazon.com. A portion of your proceeds will go to support Global Envision.

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