WHY THE INVISIBLE HAND HAS FAILED THE THIRD WORLD

By Lorne Gunter
The Edmonton Journal

The world's wealthiest nations could all double their foreign aid contributions. They could triple or even quadruple them. They could forgive the debt of the 40 or 50 poorest nations. They could honour the crank solutions to "globalization" proposed by every window-smashing anarchist in Seattle, D.C. and Prague, and by every United Nations commission ever.

And poor countries would still be poor.

What separates the rich from the poor among nations is something the increasingly militant global left has never considered, and never will. The alleged "income gap" is not the result of a lack of assets -- lack of money and property -- nor lack of entrepreneurial spirit, nor genetic impairment among the poor.

The gap results almost entirely from a lack of secure property rights.

Where it is difficult to secure title to one's home, business, ideas and investments it will be difficult to secure mortgages, working capital and buyers for one's shares, according to Peruvian economist Hernando de Soto, in his stunning new book The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else.

In Lima, registering title to a home involves 207 separate steps, and that is a breeze next to opening a legal business. A team of de Soto's assistants "spent six hours a day at it and finally registered the business -- 289 days later." The cost of registering the one-worker garment shop was $1,231, the equivalent of 31 months pay for that lone worker. It's small wonder that most Peruvian entrepreneurs choose to operate their businesses illegally when doing it the "right" way takes 10 months and consumes nearly three years wages that could be paid to a worker whose labours would generate income for the entrepreneur.

In the Philippines, simply registering a title on a home or parcel of land would "necessitate 168 steps, involving 53 public and private agencies, and take 13 to 25 years." If the property is in an area deemed "agricultural" by the Philippine government, add 45 steps, 13 agencies and another two years.

De Soto and his colleagues found the same to be true in Haiti and Egypt. Nearly one in 10 Egyptians lives in an illegal home -- is, in effect, a squatter -- because building a legal home to which one may obtain title takes five to 14 years of bureaucratic manoeuvring, after which time the next government, or even the next minister within the same government, can revoke ownership when the policy breeze shifts direction.

"In the West, by contrast," de Soto writes, "every parcel of land, every building, every piece of equipment or store of inventories is represented in a property document," and almost instantly.

While one might marvel at the technological triumph involved in buying a stock online, only after reading Mystery of Capital is it driven home that the true marvel is a legal one. No one but the residents of nations with firm, equal, democratic property rights would consider buying a stock instantly via the Internet.

Where property rights are not universally understood and respected, buying from an online trading house would involve two distinct risks, rather than one: The risk of the investment itself, and the risk of one not being able to prove one's ownership of the stock being purchased.

Poor countries are poor because their people, while prepared to risk their homes and standards of living for a chance at a better life, are unprepared to risk their homes and standards of living and their claim to any profits or gains on assets that arise from the first risk.

They are also poor because, nearly always, they could not risk their homes and lifestyles even if they wished to. "They hold these assets in defective forms," de Soto explains. Because title is sketchy or because property rights are mostly disregarded where title can be secured, the assets of the world's poorest people are "located where financiers and investors cannot see them."

They are what de Soto frequently refers to as "dead capital."

Mystery of Capital could be the modern Wealth of Nations; that is, the seminal book for an era of revived thinking about free markets, except for its insistence that the failure of capitalism outside the West is not cultural in origin.

De Soto spends much of his book arguing that the West has so completely imbibed reverence for property rights that it no longer even sees its own reverence. People in the West respect each other's property by rote. That seems the very essence of a cultural tradition to me.

Yet that's a small point. If Mystery succeeds in changing Third World and former-Soviet bloc thinking on the centrality of property rights to economic freedom and development, it might yet become an economic landmark on a par with Adam Smith's famous work.