Does Anybody Own the Third World? by Hernando de Soto

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By Hernando de Soto \| Friday, April 27, 2001

Imagine a country where nobody can identify who owns what, addresses cannot be easily verified, people cannot be made to pay their debts, resources cannot conveniently be turned into money, descriptions of assets are not standardized and cannot be easily compared — and the rules that govern property vary from neighborhood to neighborhood. In this excerpt from "The Mystery of Capital," Peruvian economist Hernando de Soto examines the complexities of ownership in the Third World.

ou have just put yourself into the life of a developing country or former communist nation. More precisely, you have imagined life for 80% of its population, which is marked off as sharply from its Westernized elite as black and white South Africans were once separated by apartheid.

This 80% majority is not, as Westerners often imagine, desperately impoverished. In spite of their obvious poverty, even those who live under the most grossly unequal regimes possess far more than anybody has ever understood. What they possess, however, is not represented in such a way as to produce additional value.

Stepping into a world of "lawlessness"

When you step out of the Nile Hilton, what you are leaving behind is not the high-tech world, but the world of enforceable property rights.

When you step out the door of the Nile Hilton, what you are leaving behind is not the high-technology world of fax machines and icemakers, television and antibiotics. The people of Cairo have access to all those things.

What you are really leaving behind is the world of legally enforceable transactions on property rights. Mortgages and accountable addresses to generate additional wealth are unavailable even to those people in Cairo who would probably strike you as quite rich.

Outside Cairo, some of the poorest of the poor live in a district of old tombs called "the city of the dead." But almost all of Cairo is a city of the dead — of dead capital, of assets that cannot be used to their fullest. The institutions that give life to capital — that allow one to secure the interests of third parties with work and assets — do not exist here.

Lessons from history

To understand how this is possible, one must look to the 19th century, when the United States was carving a society out of its own wilderness. The United States had inherited from Britain not only its fantastically complex land law but also a vast system of overlapping land grants.

The same acre might belong to one man who had received it as part of a vast land grant from the British Crown, to another who claimed to have bought it from an Indian tribe and to a third who had accepted it in place of salary from a state legislature — and none of the three might ever have actually laid eyes on it.

Unclear boundaries

What you are really leaving behind is the world of legally enforceable transactions on property rights.

Meanwhile, the country was filling up with immigrants, who settled boundaries, ploughed fields, built homes, transferred land and established credit long before governments conferred on them any right to engage in these acts. Those were the days of the pioneers and the "Wild West." One of the reasons it was so wild was that those pioneers, most of them nothing but squatters, "insisted that their labor, not formal paper titles or arbitrary boundary lines, gave land value and established ownership."

They believed that if they occupied the land and improved it with houses and farms, it was theirs. State and federal governments believed otherwise. Officials sent in troops to burn farms and destroy buildings. Settlers fought back. When the soldiers left, the settlers rebuilt and returned to scratching out a living. That past is the Third World's present.

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