Many American businesses were begun by someone who borrowed the money to get started, using his home as collateral. But a home built outside the legal system means that the owner has no legal title and therefore nothing that a bank can accept as collateral. The same is true of businesses created and run without having jumped through all the legal hoops.
Third World peoples "have houses but not titles, crops but not deeds, businesses but not statutes of incorporation." Why then do they not get legal titles? Because it can be an unbelievable ordeal, especially for people with little education and in countries where red tape is virtually boundless.
De Soto and his team of researchers have examined the processes in a number of Third World countries. In Peru, the process to get a legal title to your home "consists of 5 stages" and the first stage alone "involves 207 steps."
In Egypt, anyone "who wants to acquire and legally register a lot on state-owned desert land must wend his way through at least 77 bureaucratic procedures at thirty-one public and private agencies." These procedures "can take anywhere from five to fourteen years." In Haiti, it is 19 years.
Against this background, it is hardly surprising that most economic activities in most Third World and former Communist countries take place illegally, in the underground economy. Less than half the people employed in Venezuela work in legal enterprises. In Brazil, 30 years ago, most of the housing built was legal rental housing; today "only 3 percent of new construction is officially listed as rental housing."
When bureaucracy and frustrating legal systems drive economic activities underground, the losers are not simply those engaged in these activities. The whole country loses when legal property rights are not readily available because investment is stifled.
This book should be required reading for those -- including law professors -- who seem to think that property rights are just privileges for the rich. The poor need them most of all, especially if they want to stop being