Why does capitalism thrive in the west but not in many developing countries? Global capitalism has been tried before in various parts of the world. In Latin America, for example, reforms have been tried at least four times since independence from Spain in the 1820s. Each time, after the initial euphoria, Latin America swung back from capitalist and market economy policies.
Westerners rationalise these setbacks by blaming people in the poor countries for their lack of entrepreneurial spirit or market orientation. Other popular explanations are lack of Protestant ethic, the legacy of colonialism and low IQ.
According to De Soto, the major stumbling block that keeps the rest of the world from benefiting from capitalism is its inability to produce capital. Capital is the force that raises the productivity of labour and creates the wealth of nations. It is the lifeblood of the capitalist system, the foundation of progress, and the one thing that the poor countries of the world cannot seem to produce enough for themselves.
De Soto argues in this seminal book that the poor cannot produce capital not because they do not possess assets. But they hold these assets in defective forms: houses built on land whose ownership rights are not adequately recorded, or unincorporated businesses with undefined liability. Because the rights to these possessions are not adequately documented, these assets cannot readily be turned into capital, cannot be traded outside narrow local circles where people know and trust each other and cannot be used as collateral for a loan.
In the West, by contrast, land, building and equipment are represented in a property document that connects all these assets to the rest of the economy. Thanks to this representational process, land can be used as collateral for raising loans. Third World and former community nations do not have this representational process. The enterprises of the poor are very much like corporations that cannot issue shares or bonds to obtain new investments and finance.
In poor countries, although people frequently break the law, their entrepreneurial ingenuity has created wealth on a vast scale. These assets far exceed the holdings of the government, the local stock exchanges and foreign direct investment. According to the author, the total value of the “illegal” real estate held by the poor of the Third World and former communist nations is at least $9.3 trillion, about twice as much as the total circulating US money supply. But in the absence of a suitable representational process, the value of these assets remains locked up.
The Mystery of Capital
Bringing capital to life requires us to go beyond looking at our assets as they are to thinking actively about what they could be. It requires a process for fixing an asset’s economic potential into a form that may be used to generate additional value.
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