Book Review: The Mystery of Capital (Rating: 3/5)
It's been three years since I did my last book review! Not that I haven't been reading, just that I haven't been posting. I have lots of ideas about what to do with this blog (going forward :P) and I guess I'll write them up slowly as I go along. In the mean time, I present you:
The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, by Hernando de Soto, President of the Institute for Liberty and Democracy.
This book explains how a legal framework for property ownership that is easily accessible to the people unlocks capital (i.e. more value) for the individual and therefore the state. For example, being the legal owner of your house allows you to create more value by using it as collateral to apply for a loan to set up a new business. Developing and communist countries (the non-West) do not have this because their legal frameworks are more concerned with protecting the rights of property owners than allowing easy access to legal property. The author's studies show that it takes too much time and money to legally start a business or own property in many of these countries. The tables showing the number of steps (smallest example: 77) and the time taken (shortest time: 289 days) to register various types of properties in these countries was jaw-dropping. Because of this, the poor tend to be "extralegal": they squat on land, build their own houses without permits and run unregistered and unregulated businesses.
The ghettos consist largely of small networks by which property is only recognised in small circles. For example, if you were to buy or sell your house, you'd need to sell it to someone in your small circle where your neighbours can vouch for you that you own/built that house. Beyond that, no one would have the trust to buy it off you. Governments need to respond to this by integrating extralegal property into the legal system so that the small extralegal networks could be integrated into the national system. Taking us back to the house-selling analogy, you could then present your title deed and sell the house to anyone in the country. This needs to be done easily and cheaply so that all, not just the wealthy elite, are able to benefit. It also has to be done speedily since the non-West needs to catch up soon.
The most obvious route is for the non-West to look West for how to do it. However, the West took a gradual evolution over 100-300 years to reach the current state of affairs, i.e. regulations in place to quickly transfer and acquire property. Because of the slow evolution of ownership laws in the West, it is not immediately apparent what exactly they did to produce today's robust system. A lot of it was slowly reacting to changing environments and circumstances and experimenting with new laws (trial and error). Therefore, it is difficult to draw lessons from its history in this respect. In addition, the non-West has a whole different set of circumstances that will make it difficult to apply these same lessons.
He notes that despite the difficulties in applying lessons, one pattern remains the same:
- Extralegal communities have their own rules and markers for recognising and protecting property. E.g. walking through the padi fields in Bali, you can tell where one property ends and the next starts by following the barking dogs (different dogs for different fields/owners).
- Laws will only work if they follow the will of the people. I.e. the only laws that work well are those that the people want in the first place.
The author argues that capitalism will thrive in the non-West once this legal framework is put into place. He argues that culture does not factor in very much and spent only two pages dismissing culture as a reason why capitalism isn't thriving in the non-West.
He gives lots of examples, making this dense topic easier to understand, but it is still tough going at points, especially for a non-economics major like me. It's informative and helpful for understanding the world, giving another perspective on the imbalance between the developed and developing world.