On “The Mystery of Capital”

I read this very interesting book around 2003/4. I am told that this book was the basis/inspiration for our MKURABITA programme. For the buzz it created back then, its influence on public policy in many countries, and certainly for the interesting history and background anecdotes entailed in it, I would recommend it. Anyway, let me summarize it quickly, and then make the point I want to make.

de Soto central thesis is that we are poor because we cannot turn our assets into capital. He starts with the obvious: that the basis of a market economy is capital and the basis of capital as an economic tool is rational property law. Therefore, without a complex system to delineate and protect rightful ownership, capital is "dead". He estimates that the poor in the developing countries posses an excess of US$9 trillion in informal assets, indeed a huge sum, that is "locked" for want of title deed. In our own country, where, through the invitation of President Mkapa, de Soto came to do research and design our formalisation programme, "dead" assets are estimated to worth US $29 billion. 

de Soto notes that most of "the poor" already possess the assets they need to make a success of their businesses (so they are not really poor). What they lack is the framework in which those assets can become capital. So, de Soto finds that the real problem that is keeping our countries trapped in poverty is actually the inability to produce capital because we hold these resources in defective forms: houses built on land whose ownership rights are not adequately recorded, unincorporated businesses with undefined liability, industries located where financiers and investors cannot see them. So because these assets are not adequately documented, they cannot readily be turned into capital, cannot be traded outside of the narrow local circles where people know and trust each other, cannot be used as collateral for a loan, and cannot be used as a share against an investment.

In that case then, a large part of a country’s commerce is bled off into the underground (informal) economy. This system creates a fundamental problem, the capital moves, but not in a manner transparent and secure enough. Therefore, his prescription: formalise, formalise, formalise - and the rewards of capitalism will be realised. Now, with what is going on with the global economy, have we not now learned that formalisation of capital does not make it secure, in that it moves on paper as fast as it can be wiped out. We now know that, yes, you can have your title and your property can be "protected", but then it can mean and worth nothing.  

January Makamba.

December, 2008.