Peruvian economist Hernando de Soto has found a way to enrich the poor.
Author: Kleiner, Art
Source: Strategy + Business
As Mr. de Soto knew well, developing nations are rife with anomalies. He and researchers in his private, nonprofit economic development research organization, the Lima-based Institute for Liberty and Democracy (ILD), had found dozens more during the years they had spent collecting data and studying the hidden economic life of Egypt. Cairo was apparently full of illegal apartments constructed literally on the rooftops of public housing, where contractors had paid off local officials (and the first- and second-story residents), built extra floors, and sold the apartments themselves. The extra stories could be seen plainly by anyone walking by, but they were invisible to the government. There were no official records of the structures or their inhabitants, no titles of ownership, no tax records, and — most important for Egypt's economic future — no way for apartment owners to use these assets as collateral or capital. “I'm sure the residents have pieces of paper saying they own the property,” says Mr. de Soto. “But if the public records don't recognize that the property exists, how can a banker give them a mortgage?”
For the last 30 years, Hernando de Soto has been presenting such stories to government leaders, first in his native Peru, and then throughout the developing world and in former Communist nations, to explain how their legal systems and bureaucracies prevent poor but inherently capable people from helping themselves to overcome their poverty — and the chronic underdevelopment of their countries.
What separates poor nations from wealthy ones is “the mystery of capital,” says Mr. de Soto. To solve that mystery, he argues, one must understand why it is so common for the poor in non-Western countries to be locked inside large, informal, extralegal economies where they are unable to accumulate wealth.