ESM 803: COMTEMPORARY ISSUES IN REAL ESTATE FINANCE

LECTURER: DR. T.O. NUBI

ASSIGNMENT ON THE SUMMARY OF HERNANDO DE SOTO’S WORK: THE MYSTERY OF CAPITAL

MATRIC NO: 109053011

ABSTRACT The aim of this work is to examine the mystery of capital, a book written by Hernando De Soto with a view to summarizing it. Hernando De Soto embarked on this work to reveal that the major stumbling block that keeps the rest of the world from benefiting from capitalism is its inability to produce capital. In this book, Hernando De Soto identified that the essential component of the western economic advance, “capital” has received least attention and neglect has shrouded it in a series of five mysteries. They are the: The mystery of missing information, The mystery of capital, The mystery of political awareness, The missing lessons of US history and The mystery of Legal Failure. The book also bothers on fundamental history of today’s world powers: US, UK, China e.t.c; with a view to examining how they once struggled with the challenges of breaking off the shackles of poverty. A lot of research work that involved collecting facts and figures from block by block and farm by farm from at least one country from all the continents of the world was carried out by Hernando and his team to give credibility to some of the argument put forward in the work. He opined that the west injects life to assets by representation and land titling which makes them generate capital. Finally, the work showed that the governments of developing nations should be willing to accept changes in their perceived system of capitalism if they want to succeed the way the west did.

INTRODUCTION: The foundation of economies of the world has always been laid on capitalism, socialist or communism forms. Whichever option espoused by a government is based on the needs of its people and the economic focus of its government. Developed economies have chosen capitalism as a way to organize their economy. Western nations have adopted capitalism which has enabled them to create wealth. The sustenance of this wealth is by the inter play of the market forces in existence. Contrary to this, most developing countries espoused the communist and socialist forms of organizing their economy. Some of these countries have barely struggled to survive from this form of governance. Hernando noted that capitalism stands alone as the only feasible way rationally to organize a modern economy. He initiates it by establishing the idea that Capitalism has not achieved its highest potential in developing nations, and that is because developing and centrally planned nations have been unable to “globalize” capital within their own countries. In his book Mystery of Capital Hernando De Soto summarizes years of research into the reality of economic life in places as disparate as Haiti, Egypt, the Philippines, and his native Peru, and he arrived at certain conclusions that have caused the failure of their economies. It is the attempt to unravel why capitalism only thrive in the West that Hernando De Soto sought out a series of mysteries that has been shrouded by neglect. The five mysteries are: 1. The mystery of missing information, 2. The mystery of capital. 3. The mystery of political awareness. 4. The missing lessons of US history and; 5. The mystery of Legal Failure. The above listed summarized De Soto’s idea of how capital can be formed.

The Mystery of the Missing Information According to De Soto, although five-sixths of the world is poor, the poor own these houses, crops, and businesses, but they are all extralegal. Without titles, deeds, and articles of incorporation, the poor cannot use their extralegal property—it is what De Soto terms “dead capital,” capital that cannot legally be used to generate more capital. This dead capital is the invisible potential that cannot be used because it exists as the result of implicit, rather than legal, infrastructures. Without formal property laws that establish who owns what, it is impossible to verify addresses, force people to pay debts, divide ownership into shares, acquire legal housing, get a legal job, or enter a formal business. The poor have businesses but not statutes of incorporation, houses but not titles; crops but not deeds. These essential representations are not available that is the reason people who have adopted every other Western invention, from the paper clip to the nuclear reactor, have not been able to produce sufficient capital to make their domestic market economy work. The fact that there is a government is not a problem. Many governments have adopted the paraphernalia of western governance. But they have attached meaning and substance only to the paraphernalia rather than building structures that fulfill the needs of a market economy. As an example it takes 77 bureaucratic procedures, 31 agencies and 5 to 14 years to acquire a piece of land in Egypt with no guarantee that the deed will not be revoked by the next ministry to process the paperwork. It is in Hernando’s opinion that that result these bureaucratic steps makes peoples resources commercially and financially invisible. The Mystery of Capital This is the key mystery and the centerpiece of the book. De Soto made mention of classical economists like Adam Smith, Karl Marx definitions of capital. The history of capital was traced to the medieval period where in Latin capital appears to have denoted head of cattle or other livestock and how it is related to money. Hernando was able to deduce from Smith’s definition of capital that capital is not the accumulated stock of assets but the potential it holds to develop new production. Capital has hidden potentials that need to be harnessed in the similar way electricity is harnessed from water.

The west has been able to create capital because they have created formal property systems. This process of creation involves collecting and preserving information about assets in a recording system. The formal property system according to De Soto represents shared concepts of what is economically meaningful about assets. Formal property system is where capital is born, in property related transactions; the formal property system gives authenticity to such transactions in the west. The third world nations have been blamed for their lack of entrepreneurial spirit or market orientation. De Soto found that the real problem is actually the inability to produce Capital. The west is unaware of how these system works for them because it is hidden in legislations, statutes, regulations and institutions that govern the system. It was De Soto’s opinion that the beauty and workings of this system can only be appreciated by the extra legal sector. It was observed by Hernando that the inability for developing nations to access the formal property system and the access of the west to the system is the reason for the difference in their ability to create wealth. The Mystery of Political Awareness In his work, Desoto that rural-urban migration of the non-Westerners is not the fundamental problem but it is the delay in recognizing that the disorder occurring outside the west is the result of a revolutionary movement that is more full of promise than problems. The easiest way to resolve the problem of insufficient infrastructure, garbage piling up e.t.c is to exploit the potential value of the migration. Hernando opined that the real problem has been missed because there are two blind spots. Firstly, it is not seen that the surge of the world’s extra legal populations over the past forty years has generated a new class of entrepreneurs with their own legal arrangements. The governments just sees problems and threats of disease and crimes but no one notices that the real cause of the disorder is not population or poor minority but an outmoded system of legal property. Secondly, only a few recognize that the problems faced are not new. The west has gone through this phase during their industrial revolution. The west tried to solve the problem in piecemeal but this measure were not enough. The way forward was to reform the law and create property system to facilitate the division of labor.

The Missing Lessons of U.S. History The west over 150 years ago was a third world country saddled with the problems faced today by the developing nations. Unfortunately, people have been so mesmerized by the failure of so many nations to make the successful transition to economic growth that they have forgotten how the successful rich nations actually did it. The Mystery of Legal Failure: De Soto presents evidence of how every nation in the world at one time went through the transformation from extralegal ownership to a formal unified legal property into wealth he uses the United States as an example of how the west had forgotten about its own struggle to arrive to this transformation. He does, however, point out that the absence of this legalization in the poorer regions of the world, where five sixths of humanity lives, is not the consequence of some Western monopolistic conspiracy, but rather because Westerners take this mechanism so completely for granted that they have lost all awareness of its existence. Conclusion: De Soto concluded the mystery of capital by arguing that: government must be willing to accept the under listed if a desired change is expected.

The poor exist in an extralegal sector, the ability to accumulate wealth is high, these poor need to be better documented

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Not only the elite have ability to save, everybody is capable of saving The major way that the property of the poor can be converted into capital is through proper legally integrated property systems

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