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Hernando de Soto Asks Why Capitalism Triumphs in the West and Fails Everywhere Else

July 23, 2002Renowned economist Hernando de Soto spoke on the role of property rights and development before a capacity-filled audience of Bank staff and members from the Inter-American Dialogue at World Bank headquarters last week. The presentation, which can be viewed by clicking here, offered participants keen insight into De Soto's work at the Institute for Liberty and Democracy (ILD).

De Soto argues that every person who owns property, no matter where he or she lives, is entitled to a legal document—a title—that certifies that property’s value in the eyes of the law. While the concept seems simple, very few property owners actually hold official government-licensed titles outside the United States, Canada, Australia, Western Europe, and Japan. De Soto estimates that nearly five billion people are legally and economically disenfranchised by their own governments. Since these people do not have access to a comprehensive legal property system, they cannot leverage their assets to produce additional wealth. They are left with what De Soto calls "dead capital".

Why is the United States so good at creating wealth and capital? Part of it is hard work. But according to De Soto, the rest has to do with a series of legal actions—thirty-two, in fact—that were written into law over the course of the 19th century, culminating with the Homestead Act in 1862. A similar legal property system emerged in the United Kingdom, though over a much longer period of time. Switzerland was in 1888 the poorest country in Western Europe. Today it is the richest. Much of its success is due, in large part, to the unification of 179 different systems of rules, De Soto notes. All the rules were pulled together, codified, and ratified by every canton as the national system of property law.

Why should it take three to four hundred years, as it did in the United Kingdom, for countries to prosper under the rule of law? Japan proved that this process could be done in one or two generations. Following World War II, Japanese technocrats drafted new laws and proceeded to redistribute the country’s lands and other properties, town by town, in accordance with these new laws.

In his native Peru, De Soto and his team at the ILD drafted a "Property Registry Law," which they then presented to the Peruvian parliament back in 1988. With public opinion firmly behind ratification, the Peruvian parliament unanimously enacted the ILD's draft into law (Ley Registro Predial) in November of that same year. To ensure that extralegal property was titled and recorded, the ILD created a new organization called Registro Predial, and then proceeded to run it on behalf of the government from 1990 until 1996.

In 1997, the World Bank loaned $37 million to help finance ILD’s work. This loan has helped over four million Peruvians become part of the formal economy, and has created close to $6 billion in assets simply by getting property registered, titled, and valued. As a result, banks have been increasingly willing and able to make loans to applicants whom they had previously turned away because of the inability to verify asset and income data.

For more information on the World Bank’s work with the ILD, please click here.

 

 

 


Hernando de Soto
Photo:
ILD website

 





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