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Why Isn't the Whole World Developed?

By Tom Bethell on 6.20.06 @ 12:05AM

This article is taken from the May 2006 issue of The American Spectator. To subscribe, click here.)

FOR A DOZEN YEARS, GROVER NORQUIST has been holding Wednesday meetings in downtown Washington. The other day, for the first time, I went. It was a lively occasion. About 150 people were packed into a conference room, and a series of speakers discussed a wide range of topics: immigration reform, New Jersey's prospects under Governor Corzine (not good!), the need to resume offshore drilling, reform of the death tax, and economic conditions in Latin America. And there were half a dozen others. The meeting lasted a little over an hour and a half, with never a dull moment.

Norquist founded and runs an organization called Americans for Tax Reform. A Harvard graduate, he is intensely focused on politics, particularly taxation. He chivied and hurried speakers along, intervening adroitly with questions and where necessary cut-offs. He pointedly criticized a Bush administration official who had just spoken about the need for "democracy" abroad. Why didn't he say liberty, Grover wanted to know. African countries have been holding elections for years and what good have they done?

The first and principal speaker was someone I particularly wanted to hear, the Peruvian researcher Hernando de Soto, who was in Washington on one of his occasional visits. Twenty-five years ago, he founded the Institute for Liberty and Democracy in Lima, Peru. He wrote a book called The Other Path, drawing attention to the failures of economic development. Then he published a second, The Mystery of Capital, elaborating on the first.

De Soto illustrates the point that only outsiders are capable of original ideas in fields dominated by credentialed experts. He addresses a profound failure of conventional economic theory. The problem can be put this way (and once was, by the president of the Economic History Association): Why isn't the whole world developed? According to economic theory it should be. The three "factors of production," according to classical economics, are labor, capital, and natural resources ("land" in some versions). They are all readily available. If capital is in short supply, it can always be transported -- now more easily than ever. The problem is that these factors make no claims about political or legal institutions. Property in particular is overlooked. This missing ingredient accounts for the widespread failure of economic development in most countries in the world.

The legal infrastructure in developed countries is "the hidden architecture of capitalism," de Soto says. It is hard to see because it is buried in thousands of pieces of ancient legislation, legal interpretation, and working institutions. No single person would know enough to explain it fully. Western nations take these institutional arrangements for granted and don't understand how fruitful they have been.

They do not exist in most countries and never have. Moreover, the economists who set forth after World War II to remake the world, armed with mathematical models and their own good intentions, had very little understanding of how or why the economic system in their own countries had worked so well. What were the ingredients of success? Labor, capital, natural resources (in the right combination), came the answer. The more mathematically minded began to dream up equations to describe what that combination should be. It was folly from beginning to end.

Some experts went so far as to instruct the heads of state of the emerging countries of Africa and Asia to ignore the methods that had worked well for Britain and the United States. They should embrace central planning -- the socialist model. Budding tyrants such as Julius Nyerere of Tanzania (who studied economics in Britain) were only too glad to hear that coercion would work economic wonders, in addition to keeping them in office. Marxism was meanwhile implemented in the Soviet Union, China, Eastern Europe, and elsewhere. The development experts didn't just ignore private property, they actively opposed it.

In 1998 I published a book (The Noblest Triumph: Property and Prosperity Through the Ages) saying some of these things. Property had not just been overlooked by the economists, it had actually been attacked before it had been properly analyzed. My book had a few pages describing Hernando de Soto's ideas. But at that stage they were in an embryonic state, so I don't think I quite grasped what he was saying. But at the Wednesday meeting he outlined the essence of his discoveries, and he repeated them that evening at a dinner at Grover's house on Capitol Hill.

RECENTLY, HE WAS INVITED by the president of Tanzania to suggest reforms in that country. (Nyerere died in 1999.) Land in Tanzania is supposedly communally or tribally owned, but de Soto's team soon found that in fact it is subdivided. About 90 percent of the population hold extra-legal assets there. This is in line with de Soto's principal discovery -- based on earlier research in Peru, El Salvador, Egypt, and several other countries -- that poor people around the world do control property, but usually "off the books." It is not registered, and taking the steps to record it will take years and may cost more than the land is worth.

Poor people who occupy -- one hesitates to say "own" -- such informal parcels cannot obtain mortgages or easily transfer them, except to close family members. They have no addresses. They are squatters rather than owners. They respect each others' property rights but the state doesn't know or care who owns what and cannot easily be persuaded that it matters. Such informal property rights are partial, attenuated, precarious, and probably temporary. Family members must maintain a physical occupation if they are to scare off other claimants or opportunists and so the squatters are tied to the land almost literally.

De Soto argues that in this way an actual majority of the world's population "has been locked out of the global economy." Poor people "are forced to operate outside the rule of law," and have "no legal identity, no credit, no capital and thus no way to prosper." They would like to participate in a free enterprise system, "but they cannot access the existing property law" and so are forced to operate outside the law. He adds:

Property law is what makes the market economy work. It is property law that provides the framework of rules that organizes the market, the titles and records that identify economic agents, the contractual mechanisms that allow people to exchange goods and services in the expanded market. It is property law that provides the means to enforce rules and contracts.... Therefore, those who are excluded from the legal system, mainly the poor, are also excluded from the legal market economy.

De Soto was invited by the Indonesian government to advise on the 90 percent of Indonesians living outside the legal system. He knew little about the country, but as he crossed the rice fields of Bali he noticed that a different dog would bark as he entered a different property.

The West itself once had a similarly ramshackle legal infrastructure, he argues. But in time its institutions evolved, and governments gradually came to accept the informal arrangements and incorporate them into uniform codes and rules.

Ownership once represented by dogs, fences, and armed guards is now represented by records, titles and shares. The moment Westerners were able to focus on the title of a house and not just the house itself, they achieved a huge advantage over the rest of humanity. With titles, shares and property laws, people could suddenly go beyond looking at their assets as they are (houses used for shelter) to thinking about what they could be (security for credit to start or expand a business). Through widespread, integrated property systems, Western nations inadvertently created a staircase that allowed their citizens to climb out of the grubby basement of the material world into the realm where capital is created.

I don't know of anyone else who has delved so profoundly into the problem of economic growth. We are talking about something as basic as how a country rises above the subsistence level. No one else, as far as I know, has come close to analyzing the problem. The officially approved development economists with their destructive land-reform schemes and their dedication to foreign aid as the answer to all ills haven't come close to understanding their own subject. Yet they have been working on it for 60 years.

WHEN THE FOUNDATION OF ANY FIELD or discipline has been misunderstood for decades, and that field is itself fundamental, as is the case here, then we are onto something interesting. And that is the case with de Soto's work. A related issue much in the news -- illegal immigration -- illustrates the point. There are said to be 11 million illegals in the country. Some say they are essential to the economy, others view them less kindly. I will take no position on their benefits or costs, but ask a more basic question. Why are they here at all? Most of them come across the Mexican border.

Now the truth is that the great majority of people, Mexicans included, would rather live and work in their native country. It is preferable to trekking across deserts, risking death by exposure and thirst, climbing fences and fording rivers in exchange for part-time labor in fields and sculleries in a land where they don't even speak the language. So why don't they stay in Mexico and work there?

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