The Magazine

The Poverty of Nations

Is it bad culture or bad laws that keep some countries poor?

Jan 15, 2001, Vol. 6, No. 17 • By MICHAEL NOVAK
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The Mystery of Capital

Why Capitalism Triumphs in the West and Fails Everywhere Else

by Hernando de Soto

Basic, 276 pp., $ 27.50


Culture Matters

How Values Shape Human Progress

edited by Lawrence E. Harrison and Samuel P. Huntington

Basic, 304 pp., $ 28

In the overlooked parts of the earth, the most amazing forces of cultural dynamism are sometimes hidden. Take Peru, for instance, where, in 1971, an obscure diocesan priest named Gustavo Gutierrez published a book called A Theology of Liberation that stimulated revolutions all over Latin America. Simultaneously, the primitive Marxists of the "Shining Path" were conducting a brutal war of intimidation in the Peruvian mountains. In Lima, the great novelist Mario Vargas Llosa was turning away from the Left and entering politics, while a dynamic community of Japanese immigrants -- among them, Alberto Fujimori -- were mounting steadily upward in economic and social power.

From this maelstrom came as well the most stimulating of the third world's social thinkers, Hernando de Soto. While more colorful and flamboyant figures were in battle all around him, de Soto quietly opened a research center in Lima called the Institute for Liberty and Democracy. His first book, The Other Path: The Invisible Revolution in the Third World, concluded that socialist methods helped the poor very little, but that the existing versions of third-world capitalism were also failing. So de Soto set his band of assistants a single question: How can the poor be brought within the circle of economic development?

The answer grew from his discovery that the vast majority of people in Peru were neither peasants nor proletarians but, in fact, small-scale entrepreneurs -- and illegal entrepreneurs, at that. Having left the land for the city, where there were few factories to employ them, they had built an entire economy of small businesses, supplying nine-tenths of the public transport in Lima and building half the houses. But they were kept outside the legal economy, without protections of law, property titles, or sensible practice, and their activities were subject to official penalties and harassment. (At the time, setting up a legal business in Peru required more than two hundred days of full-time effort, with fees and bribes that could easily amount to three times the average annual income.)

Before the poor can toil up out of poverty, de Soto decided, they need to be able to incorporate small businesses easily, to find low-cost entrepreneurial credit (micro-loans, really), and to acquire legal title to their homes and businesses. De Soto's analysis was so persuasive that in the early and creative stage of the Fujimori administration, his institute was given public power to register 276,000 poor families as legal owners of their own property, and ten governments in Eastern Europe, Asia, and Africa requested similar assistance from him.

In the ten years since, de Soto has been pursuing broader questions of economics, and now, in The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, he presents the fruits of his research. The central concept he employs is "dead capital." De Soto's researchers calculate that the poor in the third world hold more than 9.3 trillion dollars of property -- but it avails them little or nothing. No laws or institutions exist by which they may use this capital as collateral for cash or credit.

The failure of analysts to recognize just how much capital the poor possess derives, in part, from a lack of technical and imaginative skill, and, in part, from charitable organizations' emphasis on the misery of the poor. The failure of governments to see the existing wealth of their own poor -- and thus bring it within the legal system so that it might be multiplied and, not so incidentally, taxed -- he blames on the prejudice of privileged elites and on widespread ignorance about the origins of prosperity.

Such ignorance exists even in the United States. How did illegal squatters go from being "bandits" in George Washington's time to "brave pioneers" in Lincoln's time? That long struggle is a story of great importance to the world, and de Soto devotes a lengthy and fascinating chapter to it. Most land in America, he points out, was settled before the Homestead Act of 1862. What the Act really accomplished was the regularizing and legalizing of squatters' claims: Between 1862 and 1890 some two million Americans claimed lands on 372,649 farms. The era of millions of "illegal settlements" lies forgotten.