Property Wrongs

How weak ideas gain strong appeal in the world of development economics.

Peruvian economist and Third World development guru Hernando de Soto is spreading a new gospel: The meek need not inherit the earth — they already own it. All that the poor in developing nations need is the formalization of individual property rights for their land, and the rewards of capitalism will be theirs. In fervid tones and clever turns of phrase, with slick slide presentations and challenging hand gestures, de Soto offers his pitch: The world’s poor are sitting on $9.3 trillion worth of capital, but they are hindered by Kafkaesque bureaucracies in places like Haiti, where individuals must take 176 bureaucratic steps over 19 years to own land legally. Clear property rights would give the poor access to credit, thus ending the "capitalist apartheid" so prevalent in the developing world.

The cult of de Soto is large and growing, boosted in significant measure by the publication last year of his book The Mystery of Capital. He is courted by prime ministers and dictators, invited to major Washington think tanks, and profiled in media that would normally shun the intricacies of development economics. Even the World Bank has taken up de Soto’s cause: Officials at the bank acknowledge that de Soto’s influence is evident in several antipoverty projects dedicated to opening formal markets to poor people.

Unfortunately, de Soto’s ideas are as reductionist as they are seductive. Indeed, his oversimplification is such that he threatens to undermine the good that could emerge from a more comprehensive push for property rights in the developing world. The allure of his arguments only reflects the paucity and faddishness of the current development economics debate, with the failure of traditional antipoverty programs spurring a search for any quick fix to the problem of global poverty.

First, de Soto offers little evidence that formalizing property titles actually leads to credit access and therefore to poverty reduction in the developing world. Consider the efforts of the Peruvian government and the Commission for Formalizing Informal Property, which de Soto helped create in 1996. Together they formalized the property of millions of rural and urban people. Yet, unsurprisingly, poverty levels in Peru have increased over the past few years as the country remains mired in economic crisis.

Peru is not the only country where such programs have become suspect. "Efforts to convey individual titles to the poor in planned settlements have overestimated the ability of these ‘owners’ to find economic livelihood in the absence of additional support beyond allocation of land," writes Murtaza Jaffer, a legal advocate in the high courts of Kenya and Zanzibar. "The poor soon sell their interests, returning once more to unplanned settlements and despair."

Second, de Soto’s message, for all its trendiness, is hardly new. De Soto himself introduced the idea of property rights as salvation in his earlier book, The Other Path, first published in 1986. Scholars such as Columbia University economist Jagdish Bhagwati have written extensively about the maze of bureaucracies that limit entrepreneurialism in developing countries. And in 1976, U.C.–Berkeley political scientist David Collier wrote about informal settlements and the relaxed enforcement of property law in greater Lima in his book Squatters and Oligarchs: Authoritarian Rule and Policy Change in Peru — a work that de Soto himself references.

Third, de Soto disavows any discussion of culture and assumes that human nature is uniform and that with the same rights to property, everyone will behave similarly — as predictable, profit-maximizing capitalists. Unfortunately, humans do not all share the same belief system, even if capitalism is, as de Soto quips, "the only game in town." Not everyone wants to be saved through individual property rights, and some, like traditional Muslims, are opposed to borrowing money, thus limiting de Soto’s argument for the "capital" power of legally owned property. For many peoples, ownership is a communal affair, one that ensures a certain power distribution and respect for ancestors. Indeed, women and members of some castes, while included in communal property schemes, are often excluded from owning property as individuals and would be left out of de Soto’s emerging capitalism.

Beyond cultural differences lies the deeper and simpler problem with de Soto’s gospel: Property alone will not end poverty. Other factors such as price volatility of agricultural and mineral exports, regional and internal conflicts, debt burdens, and the AIDS pandemic can be potent forces in perpetuating poverty. Governments and lending agencies know that these problems must be addressed, perhaps at the same time as the overhaul of property laws, in order to reduce chronic poverty.

Why then has de Soto gained such currency in development circles? Perhaps because he has become a preacher for weary — or cynical — politicians in the advanced economies who have lost their faith in traditional anti-poverty programs in the Third World. His solution is vague enough to appeal to people of all political stripes. And in developing countries, de Soto’s recognition of the informal economy has elevated the popularity of the man and his ideas. Such branding can prove quite effective in spreading a message but offers little in terms of concrete policy development and antipoverty programs.

"If you don’t oversell it, if you don’t say it cures the common cold, then work on property rights will languish," warns Richard Messick, senior public sector specialist at the World Bank who worked with de Soto in Peru from 1993 to 1997. "But if you oversell it, [property rights reform] will be disregarded if the promised results aren’t produced quickly." As money, effort, and hope go into property rights programs, one can only trust that reformers, media, and politicians can look beyond the hype and treat de Soto’s theories as a reference point for a much larger discussion on the causes of poverty, not as an all-encompassing answer.

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