On 2004 May 27, Mark A.R. Kleiman writes about a program for ordinary Peruvians to replace `extralegal' property rights with legal property rights:
... the World Bank, with the support of the Fujimori regime, dumped a whole bunch of money into creating a modern system of land-title registration and transfer for Peru. According to Hernando de Soto's theories, this was supposed to give ordinary folks access to the capital markets by allowing them to mortgage their houses, thus setting off a storm of entrepreneurship and prosperity.
But Kleiman's claim is false. In his book, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else 1, Hernando de Soto warns against fake efforts:
Developing and former communist countries are forever spending
hundreds of millions of dollars on mapping and computerized
record-keeping technology to modernize their property systems —
and they still cannot integrate their extralegal sectors. This no
longer surprises anyone who as thought hard about the priorities
of property reform.
Kleiman goes on to say,
... Even with a good set of land titles, mortgage lending only works if backed by the threat of foreclosure.
This latter statement is true. Bankers do not lend unless they think they will get their money back, either in proper payments or by taking and selling a defaulter's assets.
De Soto says the same,
... it is not your own mind that gives you certain exclusive rights
over a specific asset, but other minds thinking about your rights in
the same way you do.
Hernando de Soto is a Peruvian activist. He starts by asking why capitalism has succeeded in countries such as the United States but failed in most of the world? As he says,
The cities of the Third World and the former communist countries are
teeming with entrepreneurs. You cannot walk through a Middle Eastern
market, hike up to a Latin American village, or climb into a taxicab
in Moscow without someone trying to make a deal with you.
But their talent does not translate into riches.
The reason capitalism succeeded in the West, de Soto argues, is that in past centuries, countries such as the United States adapted the formal law to existing, actual social contracts. In the US, for example, in the 19th century, white squatters were given legal title to land they settled, rather than evicted.
Just as it is possible to ban legal sharing of software, it is possible to make other activities so difficult, like building a house legally or starting a business legally, that people become `extralegal'.
De Soto argues that the `extralegal' nature of this kind of life does more than cost a person 10 – 15 % of his annual income in bribes and such. It also prevents a businessman from improving his business beyond a certain small point and stops him him from competing with larger, `Western' companies.
Without a reliable, quick, and honest legal system, you cannot settle a dispute with a stranger. Bankers who are strangers to you will not lend. They fear that you will default and they will not be able to recover their money.
Without a good legal system, you must depend on your family, clan, friends, or a criminal gang. For small groups, such help succeeds. But you cannot obtain capital from strangers this way.
Similarly, when it is illegal to share software, programmers develop less. They, and everyone else, remain in the software equivalent of poverty.
The solution is to adapt the formal law to existing, actual social contracts, not to attempt the reverse.
In the United States and Western Europe, such adaptation took centuries. For example, in Germany, formal property registries began to appear in the 12th century, but the Grundbuch system for recording land transactions on a national scale did not begin fully until 1896.
In the United States, during the 1790s and early 1800s, the Massachusetts state government then controlled what is now the state of Maine. The Massachusetts government tried to evict sqatters in Maine and burn their houses. The state government hoped to generate revenue by selling large blocks of land to real estate speculators. However, the people in Maine resisted and eventually Maine became its own state.
Likewise, after failing to prevent pioneers from settling on lands in the West, the United States Federal government accepted their claims. (It goes without saying that the native American Indians lost both from formal government actions and from the encroachments of squatters.)
A different, contemporary example of the actual social contract is the way children share music. Now that children have the ready ability to manufacture copies of music by copying it from one disk drive to another, they share even more than in the past. The big record companies are trying to make this illegal.
De Soto focuses on real estate and other rivalrous assets, not software. But what he says about property in general is true:
... property law and titles imposed without reference to existing
social contracts continually fail: They lack legitimacy.
Property is not a primary quality of assets but the legal
expression of an economically meaningful consensus about
assets.
Indeed, de Soto makes the point that property is metaphorical, although he does not use that word:
Property is not really part of the physical world: its natural
habitat is legal and economic.
Capitalism fails when businesses are forced to stay small because they are outside the law. They cannot grow unless they become legal and they cannot become legal unless the government permits existing extralegal but legitimate relationships "to supersede official laws" [p 173]. De Soto does not expect much from efforts that lack legitimacy:
In Peru ... the government ... tried to formalize property at
least twenty-two times in the four hundred years since the Spanish
conquest. Their success rate: zero.
In addition to talking about real estate, de Soto talks about the process of getting a permit to run a business:
... in Peru in the 1980s, every major law firm that I consulted
assured me that setting up a formal business to access capital would
take only a few days.
But when de Soto investigated how long it would take a poor person, he found that "to become legal took more than 300 days" [p 189].
Under those circumstances, what poor person is going to become legal? This, he says, is the cause of economic failure.
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