A gem of a book

Thomas Sowell

12/11/2000 12:00:00 AM - 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.

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 poor.