Economic Systems Book Essay Linh Q.

Nguyen

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I.

Introduction
Over the past few decades, there has been a conventional wisdom and according to it,

capitalism only succeeds in the West. The fall of the Berlin Wall gave communist and Third World countries no rational choice but to make the transition to a market economy. This raised a significant amount of hopes among these countries that capitalism would one day close the gap between them and the West. However, to their disappointment, not only did they fail to rival the West, but these former communist and Third World countries went through a suffering period of economic and political disaster. Nobody really knew why. The Westerners resorted to blame it on the Third World peoples cultures or their lack of entrepreneurial spirit and market orientation. Needless to say, these excuses proved to be inadequate in explaining the tremendous economic suffering of these countries. And this is where Hernando De Soto comes in with his book The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else.

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II.

Body
Raised and educated in Switzerland, Hernando De Soto appears to have developed a

fondness for the Western way of life. As a result, his ideas and arguments may be a little biased; nonetheless they do hold some validity to a certain extent. In the book, the importance of an economic system is stressed from the demise of socialism marked by the fall of the Berlin Wall to the fact that capitalism has somehow only succeeded in the West. Clearly, the message Hernando De Soto is trying to put across is that an economic system is the reason explaining the gap between the West and the rest of the world. In spite of substantial natural resources, high entrepreneurial spirit, and a strong labor force, developing countries seem to have a difficult time making the transition to a market economy. De Soto believes the reason is that they 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. Because the rights to these possessions are not adequately documented, these assets cannot readily be turned into capital, cannot be traded outside of 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. (De Soto, 6) Whereas, Western countries have an established legal system that allows assets to be turned into capital. Throughout his book, Hernando De Soto focuses on one single institution of the economic system: property rights, to explain why capitalism does not work anywhere else but the West.

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In The Mystery of Missing Information, Hernando De Soto criticizes the conventional way economists approach an issue by quoting Ely Devons, an English economist: If economists wished to study the horse, they wouldn't go and look at the horses, Theyd sit in their studies and say to themselves, what would I do if I were a horse? (De Soto, 14). De Soto himself prefers a more pragmatic and hands-on approach. In fact, he and his team of 100 colleagues traveled around the world for research purposes. They discovered that the quantity saved by the poorest sectors in each society is massive. However, there is a problem. Due to the lack of formal property rights in former communist and Third World nations, most of what the poor possess is considered dead capital meaning they cant be used to initiate additional production. In these countries, assets are usually only meant for their physical purposes like houses for shelter, goods being bought or sold etc. However, in the West, assets also act as capital, which means they can be used as collateral for credit. This creates opportunities for the entrepreneurs to finance their venture businesses using a property that they have as collateral. Developing countries face a problem of extracting capital from assets due to government inefficiency. An average person is required to go through a painstaking process to legalize his or her property. De Soto and his research team conducted an experiment in which they opened a new and perfectly legal garment workshop in Lima, Peru. They spent six hours a day at it and finally registered the business 289 days later. (De Soto, 18). The total cost of legalizing the workshop was $1,231 which is thirty one times the monthly minimum wage in Peru. Being a native citizen of another developing country - Vietnam, I can relate to this because Vietnam does face the same issue. We have to go through the same meticulous process which lasts months or even years to legalize a property. Usually, citizens have to bribe

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their way out of the system if they want to get things done much faster at an additional cost. These roadblocks to legality lead to the existence of many extralegal sectors in the Third World and former communist countries because people cannot really afford to abide the law. In The Mystery of Capital, Hernando De Soto proposes to revive the poors dead capital by formalizing property rights. He lists down the six effects generated by the formal property systems of the West that specifically let their citizens produce capital: 1) Fixing the economic potential of assets: the hidden value of assets is represented in writing records like a title or a contract. This opens the door for entrepreneurs in a way that they can now finance their own business by providing security to the loaners in the form of mortgages or other covenants, without having to sell their own house. As a result Legal property thus gave the West the tools to produce surplus value over and above its physical assets. (De Soto, 51) 2) Integrating dispersed information into one system: is a meticulous process that took the West about 100 years to complete. The reason capitalism has triumphed in the West and sputtered in the rest of the world is because most of the assets in Western nations have been integrated into one formal representational system . (De Soto, 53) 3) Making people accountable: basically links people to their property. On one hand, it means people can now be comfortable to make transactions outside their social circles since they no longer need to protect their rights to assets. On the other hand, those who do not pay for goods and services can now be pinpointed and fined.

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4) Making assets fungible: creates an easy and straightforward environment for trading of assets by setting up a standardized system for trade. 5) Networking people: starts when people are made accountable and assets are made fungible. It improves the communication flow of assets. 6) Protecting transactions: is one of the great things that comes with formal property rights to the West. As mentioned above, people are linked to their property. Thus, normal property rights protect the security of both ownership and transactions. As a result from the lack of formal property rights, Third World and former communist countries clearly do not benefit from these above-mentioned effects that the Western nations enjoy. Therefore, receiving or producing more money is not the issue for these countries. Rather, they are in need of a political campaign that is significant enough to induce the much needed formalization of property rights. As stated above, governments inefficiency poses a common challenge faced by many developing countries. This can usually be explained through corruption or bribery.

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III. Conclusion
Hernando De Sotos solution of formalizing property rights appears to be far too simple for such a complicated worldwide issue, one that has caused headache for many economists around the world. However, it makes perfect sense how this simple solution can work in the real world. This is not something that can be done overnight. As a matter of fact, it took the West about 100 years to integrate everything into one standard system. Therefore, it is only a matter of time before we can see if formalizing property rights will actually work and bring all the developing countries closer to the West.

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Bibliography
Soto, Hernando De. The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. New York: Basic, 2003. Print.