Thomas Sowell

SOME BOOKS are good, some are bad, but very few are real gems. One of these few gems is the recently published book "The Mystery of Capital" by Hernando de Soto. The subtitle tells what it is really about: "Why Capitalism Triumphs in the West and Fails Everywhere Else."

It is not really capitalism but poverty that de Soto is most concerned about. He finds most Third World poverty to be both unnecessary and grossly misunderstood.

The most amazing part of this remarkable book are the examples it gives of tremendous wealth generated by poor people in Third World countries. In many Third World countries, the underground economy is larger than the legal economy, and the total wealth of all the poor "dramatically outweighs the total wealth of the rich."

In his native Peru, de Soto found that the rural and urban real estate held outside the legal system was "five times the total valuation of the Lima Stock Exchange" and "fourteen times the value of all foreign direct investment in the country through its documented history." Nor is Peru unique is this respect.

Much the same story could be told of the Philippines, Egypt and other Third World countries. For the entire Third World and the former Communist countries, de Soto's calculation is that the total value of all the real estate held, but not legally owned, by the poor is more than 20 times all direct foreign investment in the Third World and more than 90 times all the foreign aid to all Third World countries over the past three decades.

If the poor have so much wealth, why are they still poor? Of course, when all this wealth is divided by hundreds of millions of people, the per capita amount is not enough to make them prosperous, much less wealthy. But the larger point is this: The amount of wealth available within Third World countries themselves vastly exceeds anything that the prosperous countries have given them or are likely to give them.

The crucial theme of the book is that this vast amount of wealth cannot be used, as it is in the west, as investments to create still more wealth and rising standards of living. That is because real estate, businesses and other assets in the underground economies of the Third World cannot be used as collateral to raise capital to finance industrial and commercial expansion. Illegality also creates other economic handicaps.

Thomas Sowell

Thomas Sowell is a senior fellow at the Hoover Institute and author of The Housing Boom and Bust.

Creators Syndicate