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The Trouble With DeSoto

You may have heard of Hernando DeSoto, author of the widely-acclaimed book, The Mystery of Capital. DeSoto's basic point is that the third world poor lack access to capital and that this is a major problem impeding the fight against global poverty and the cause of boosting economic development in the global south. In an important recent Slate article, John Gravois notes one minor problem with the international financial community's Soto-philia -- his policy prescriptions don't actually work. This is, shall we say, something of a shame, since there seems to be widespread agreement that he's diagnosed a very real problem and that we need policy ideas to address the problem. But that means ideas that work, not just the ideas that the diagnostician happened to dream up. Read the whole thing.

February 2, 2005 | Permalink

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The problems that Gravois identify only show that establishing a secure real property regime is not easily accomplished. Formalized title won't help someone get access to credit markets unless the property rights guaranteed by the title can be effectively protected. Gravois may have shown that implementing de Soto's plan isn't as simple as he may have thought, but I don't think he shows that de Soto's ideas don't work.

Posted by: Xavier | Feb 2, 2005 3:16:46 PM

Read it yesterday. Too bad. A smart man of good intent.

Conclusion is that ownership of capital fdoes not create a broad middle class, but only the security of a strong gov't safety net and support system, granting the working man the security to take risks and direct his savings toward higher-yield investments. Like college for his kids instead of a nest egg for his retirement.

Posted by: bob mcmanus | Feb 2, 2005 3:17:45 PM

I want to say that I think MY makes but hides a good point about De Soto that I couldn't name when I read the article yesterday. Gravois, in making an excelent empirical case against De Soto's solution, failed to acknowledge him as a great diagnostician. Any arguments against his ideas needs to give him credit for that.

I have Georgist sympathies myself. Anyone know the extent to which the problems De Soto identifies exist in Hong Kong?

Posted by: Decnavda | Feb 2, 2005 3:28:06 PM

I thought Hernando DeSoto was a Spanish conquistadore who wandered around the southwest and ended up having a now-defunct car company named after him.

Posted by: C.J.Colucci | Feb 2, 2005 3:30:26 PM

The problems that Gravois identify only show that establishing a secure real property regime is not easily accomplished.

The most compelling point seemed to me to be that certain kinds of property have more utility to destitute people than to their prospective creditors, making them useless as collateral.

The second case--you own title to something that is valuable and get kicked out as a result--does boil down to the question of enforcing property rights, so I suppose the idea could work in that case provided it was implemented correctly.

Posted by: Paul Callahan | Feb 2, 2005 3:32:34 PM

Making fundamental changes in a society, such as moving from ill-formed, unenforced property rights to clear, enforced property rights, or from rampant, societal corruption to the rule of law, takes generations. If you try to do development work without that fact in mind, you will make fundamental mistakes and you will be very frustrated. That's not to say that we should just throw up our hands in frustration (Rome wasn't built in a day, but it was built), or that great gains cannot be made in short periods -- but the distance from one pole to the other is enormous.

So, just la de da handing over property rights to squatters and expecting miracles is just plain silly.

Posted by: ostap | Feb 2, 2005 3:50:01 PM

I seem to remember Mark Kleiman had something on his blog about a study of DeSoto inspired reform in Peru that found that a huge problem in implementation is that courts there wouldn't allow banks to foreclose on on those newly titled squatters that used their land to borrow money and then defaulted. As a result, banks stopped allowing people to use these new titles as loan collateral, vitiating the main point of the reform.

Posted by: rd | Feb 2, 2005 4:21:05 PM

Here's the Kleiman link referred to above and a summary:

http://www.markarkleiman.com/archives/_/2004/05/what_ive_learned_so_far_at_the_law_society_meetings.php
"According to Benito Arrunada of the Universitat Pompeu Fabra in Barcelona, 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.

Actual effect: almost zero.

Reason: Even with a good set of land titles, mortgage lending only works if backed by the threat of foreclosure. Peruvian judges, hostile to market transactions, simply wouldn't process foreclosures. Ergo, no mortages."

Posted by: rd | Feb 2, 2005 4:26:38 PM

When I read DeSoto book it struck me as a little bit naive and simplistic. Living in the Third World, it seemed obvious that poverty was more complicated than DeSoto imagined. The idea that giving property titles of properties of uncertain value to people without skills or jobs and with extremely low incomes would be the solution to poverty is a bit delusional. What is most striking of these poor people is not their lack of property rights, it's their lack of education, job opportunities and dependable income. It's precisely because they lacked these things that they were forced to live where nobody else wanted to. In the early 20 century two kinds of people arrived into Latin American cities; European inmigrants and displaced peasants. Both were poor and had no property at all. But the former were relatively educated, had good job skills and were prepared for the modern urban society. The latter instead, had very little education, were capable only of the most simple jobs and were poorly prepared. The ability of the European inmigrants to get good jobs, save, educate their children, etc. wasn't dependent on their property rights, but on their cultural habits and education. A property title doesn't make a middle class entrepeneur.

Posted by: Carlos | Feb 2, 2005 4:44:06 PM

Regarding the Peruvian judges "hostility to market transactions", we should bear in mind that we are talking about evicting extremely poor people from the only place they have to live and sending them to live literally on the streets. I'm no surprised at the inability to pay the loans or the judges lack of desire to create new homeless families.

Posted by: Carlos | Feb 2, 2005 4:56:36 PM

"I thought Hernando DeSoto was a Spanish conquistadore who wandered around the southwest and ended up having a now-defunct car company named after him"

That De Soto had earlier been one of Pizarro's lieutenants in the conquest of Peru. The present De Soto is a Peruvian. An ancestor?
(I used to know some Cabeza de Vacas in my youth in New Mexico)

Posted by: rea | Feb 2, 2005 4:59:11 PM

Desota is correct to suggest that lack of access to capital is a huge problem in the developing world, but his solution - making squatters into owners of tiny pieces of usually urban or quasi-urban property in the slums of the developing world - really misses the point. Unless the land is arable, or the people in question have access to education or jobs (neither of which they often do), they're left foraging for their livelihood, just as before. Without education (including an understanding of basic business skills) and with most needed or luxury goods coming from Asia and the west, what sorts of businesses are we supposed to believe that most of these people could conceivably start?

Posted by: Scoop Democrat | Feb 2, 2005 5:16:43 PM

Scoop - that's a bit naive. Many of these people are already street vendors of one form or another, neither of which require basic business skills or arable land. And very few "needed or luxury" goods in these countries that are used by the majority of the population come imported from the west. It would just be too expensive.

BTW, this Hit & Run post about that article is worth reading:

Over at Slate, John Gravois has a piece slamming Hernando de Soto's claim that conferring property rights are key to fighting poverty. Formal property titles, says Gravois, rarely translate to credit access and create incentives to kick the poor off their (newly valuable) land. Even if he has a point, as he may in the case of Cambodia, he completely misses key benefits of land titling. As economist Erica Field has pointed out frequently in her studies of Peru, formal land ownership frees up the urban poor to leave home and go to work rather than keep constant guard of their tenuously held homes. The most dramatic effects seem to be on household labor supply, not credit access, and taking down De Soto means tackling that observation.

http://www.reason.com/hitandrun/2005/01/debating_dead_c.shtml#008242

Posted by: Bob McGrew | Feb 2, 2005 6:10:15 PM

De Soto's book struck me too as pretty simple-minded, but music to the ears of Thomas Friedman as I remember. Not long after I read it I was going over Alma Guillermoprieto's The Heart that Bleeds, where in an article from the mid-80's she brought up de Soto as an political economist who tells the powerful what they want to hear. He reminds me of the pitch that microlenders make to dot-com millionairs -- hey, you pulled yourself up by your bootstraps, why shouldn't they?

Posted by: david | Feb 2, 2005 6:19:45 PM

I guess if you live long enough you'll see everything. In this case a North American liberal intellectual lobbing spitballs at a South American libertarian intellectual because the latter has made a mistake that one could be pardoned for thinking had long ago been patented by two century's worth of the former's ideological confreres - to wit, inventing The One Great Idea that will fix everything for everybody if only it can be universally applied. One is reminded mostly of those recent scorched-earth lawsuits by the RIAA in which an indictment is flung on the grounds that the party of the first part has been caught playing the party of the second part's song without permission.

Previous commenters have readily identified most of the shortcomings of MattY's badly aimed brickbat. One could also point out that, if enabling micro-capitalist enterprise by getting the poor some access to capital is the objective, directly making micro-loans, ala the Grameen Bank, seems to be a better way of accomplishing it. A straight shot is always easier to make than a bank shot.

This is not to say that pervasive micro-lending is a "magic bullet" cure for poverty either. Economies are complicated, cultures are more complicated. The factors that combine to maximize the "goodness" of both are many and varied. As the late Albert Einstein famously noted, "A thing should be as simple as possible - but not simpler."

Thus, whatever else "secure title" may mean, for instance, it doesn't mean that Friends of El Exigente can cancel it for their oligarchic benefit essentially at will. Perhaps Mr. McManus might favor us sometime with his explanation of why nearly all majority-Christian countries that are basically non-corrupt and non-oligarchic are majority Protestant, while the majority-Christian countries with long histories of illiberal economics and politics are all majority Roman Catholic or Orthodox?

A bit closer to home on this land title business, we Norteamericanos who value secure property rights weren't exactly jazzed by the liberal invention of "community redevelopment districts" a few decades back. Even some liberals are now coming around to the idea that - however much it may rankle the neatness freaks of the left - "curing blight" is not a reasonable excuse for passing along the state power of eminent domain to Wal Mart or some well-connected local real estate shark who promises to "redevelop" a "blighted area." Said "blight" is typically the homes and businesses of proles whose names appear nowhere on the contributor lists of Hizzoner and the other apprentice kleptocrats one finds on typical city councils. Please tell me the next Big Liberal Idea is not going to be tax farming!

Posted by: Dick Eagleson | Feb 2, 2005 7:09:33 PM

Ugh. Is it your explanation, DE, that Protestantism leads to non-corrupt and non-oligarchic cultures, which are somehow the opposite of illiberal economics and politics? You can stop insulting people for putting forth simplistic ideas.

Posted by: david | Feb 2, 2005 7:35:12 PM

"Many of these people are already street vendors of one form or another, neither of which require basic business skills or arable land. And very few "needed or luxury" goods in these countries that are used by the majority of the population come imported from the west. It would just be too expensive."

I don't think anyone, save the last aging marxists, would object to the idea of land and home ownership among the world's poorest, particularly when it amounts to a government giveaway of land already occupied. But if that were enough to raise the world's poorest out of abject poverty then it wouldn't have been such a failure already in that regard. The point here is not that its a bad thing in and of itself, but that it is an insufficient thing for the world's poorest, and indeed it is naive to believe otherwise.

As for many of the poorest countries not relying on imports, that's nonsense. No small part of the reason countries like Cambodia or much of the African continent have difficulty lifting itself out of poverty is the lack of indigenous natural resources. Trade in goods as a share of GDP for instance in Cambodia has increased from 22% in 1990 to 92% in 2001, and yet the average rate of growth has been about 2.0%, with the rate of poverty remaining about the same over that period of time, in part because of the country's heavy dependence on imports, and in part because the country's gains have been narrowly distributed among a small, urban elite contracting mostly in textiles with foreign multinationals. Most of those textile products (which are among the few things actaully produced in Cambodia) leave the country.

Land ownership and microcredit are important parts of a broad-based, intelligent development policy for the poorest of the poor countries - especially I would argue for the rural poor - but so is public investment in infrastructure, education, etc, and research suggests that contrary to neoliberal dogma these public investment funds can come from the taxation of indigenous wealth without harming the economy in question. In fact the most successful of the poorest countries in the developing world have employed precisely this strategy.

Posted by: Scoop Democrat | Feb 2, 2005 8:23:15 PM

"Regarding the Peruvian judges 'hostility to market transactions', we should bear in mind that we are talking about evicting extremely poor people from the only place they have to live and sending them to live literally on the streets. I'm no surprised at the inability to pay the loans or the judges lack of desire to create new homeless families."

You can't effectively mortgage property unless the government is willing to enforce that mortgage and take away your house if you default. That is absolutely essential to de Soto's plan for turning real property into assets that can borrowed against. Alienability is an essential element of property rights. Unless judges are willing to enforce mortgage contracts, they aren't really respecting the property rights of poor landowners.

Posted by: Xavier | Feb 2, 2005 8:30:07 PM

I do think that it's vital to keep in mind that many governments are corrupt and that mismangement of privatization of programs can create significant rents to be captured by officeholders.

Posted by: Kimmitt | Feb 2, 2005 8:50:05 PM

Xavier, the right to mortage your house away is not a property right otherwise you wouldn't have property rights under islamic rule.

Posted by: c | Feb 2, 2005 9:37:07 PM

c: The right to mortgage property is an important property right. That doesn't mean that without that property right a person won't have any property rights. Your argument makes no sense at all. I certainly wouldn't say that Islamic societies have no property rights, but their property rights regime (and their banking rules in general) are terrible.

De Soto's argument is that formalized property rights are important because unless property rights are formalized, they are dead capital. He believes it is important to allow owners of real property to borrow against that property. If the Peruvian property rights regime makes it difficult for creditors to foreclose on mortgages, it will be very difficult for property owners to get mortgages. It's not fair to say that de Soto's ideas have failed if they been implemented that poorly.

Posted by: Xavier | Feb 2, 2005 10:20:00 PM

"No small part of the reason countries like Cambodia or much of the African continent have difficulty lifting itself out of poverty is the lack of indigenous natural resources."

Which explains the endemic poverty in Korea, Japan and Taiwan, or the world-beating prosperity of Nigeria and the former Zaire ...

Posted by: Abiola Lapite | Feb 3, 2005 3:53:46 AM

The problems pointed out appear to be that if you have a corrupt government that doesn't properly uphold property rights (like the Vietnamese government), it doesn't matter if poor people have title to their land or not.

India has had some better luck...12 million people have been conferred ownership rights on 6.32 million hectares of land.

http://www.indianngos.com/issue/rural/land&forest/govt/schemes1.htm

But let's not kid ourselves, it could take 10 years to see these kinds of policies bring real results.

Posted by: Mr. Econotarian | Feb 3, 2005 10:35:50 AM

Xavier, I perfectly agree with you on your argument about the importance of alienability, but if you saw what some of these "houses" are and how some of these people lives (I see them everyday on my way to work), you would understand the reluctance of judges to evict them. I don't neccesarily agree with them, but I find their attitude perfectly predictable.

Posted by: Carlos | Feb 3, 2005 10:43:03 AM

While Gravois points out some ways in which the land titling experiments have come up short, it's a little too ungenerous about the ways they've helped.

Erica Field, now an assistant professor at Harvard, has written a couple of papers on the land titling programs in Peru, suggesting that the more secure property rights led to increased household investments and greater options for people in terms of employment search. Essentially, when you don't feel like you have to spend time protecting the rights to property through squatting, you can look for work outside the immediate neighborhood. People given legal titles were more likely to search for work further from home and find decent jobs.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=347240
http://econ.lse.ac.uk/staff/rburgess/eea/fieldjeea.pdf

joshb

Posted by: joshb | Feb 3, 2005 12:30:14 PM

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