Bound to fail in developing nations?

Bound to fail in developing nations?

Marco Kusumawijaya, Contributor, Jakarta

The Mystery of Capital -- Why Capitalism Triumphs in the West and
Fails Everywhere Else;
By Hernando de Soto;
Basic Books, New York, 2000,
275 pp.;
US$27.50.

To the question posed by the book's subheading, de Soto -- author
of The Other Path, president of the Institute for Liberty and
Democracy (ild.org.pe) in Peru, adviser to the country's
president and initiator of its economic and political reforms --
offers an answer using freshened-up old facts and seasoned new
perspectives.

Because, outside the West, the five-sixths of humanity living
in developing and former-communist nations have not been able to
"globalize" capital within their own countries. Worse, they are
embarking on globalization without the means to produce capital.
They are looking less and less like the United States -- the
presumed successful role model of capitalism -- and becoming more
and more the same as, say, Indonesia, with its informal sector
that has caused its city governments to lose their patience.
Witness the shambles in Argentina today.

The path to prosperity is, therefore, to build a populist
capitalism. Those five-sixths of humanity must be able to
capitalize on their assets. Capitalism must not be kept -- not
even for smug, good intentions to protect the poor -- as a
privilege only for the elite.

De Soto believes the key to this is a legal system that could
absorb the majority of what is currently extralegal into the
capitalist system. "Extralegal" is used to refer to a more
specific, definable state of being of the informal sector that
collectively is not poor at all, as de Soto shows in his book.
This specific term is of utmost importance, when currently there
is so much misunderstanding about "the informal sector", as to
automatically bracket it together with "the poor".

Extralegal arrangements have been the basis for the majority
of the population of developing and former communist countries to
do their business. Such arrangements need to be understood by
politicians, and taken as sources for a new legal system that is
responsive and which allows the "extralegal" to have rights to
property and hence to capitalize on it.

It is important to make the point that de Soto is not
proposing a blindfolded agrarian reform to either simply
redistribute to the poor all the land of private holdings and
public control, or expropriate all holdings back to the state.
This is important as, despite his attempt to go "beyond right or
left", de Soto's ideas can be understandably misunderstood by a
generation of Indonesians with a phobia of communism. Ironically,
de Soto has, as well, been accused by some leftists as being "too
hopeful" of capitalism.

De Soto is concerned more with "meta rights" -- access or
rights to property rights -- than the property rights per se. His
book aims at proposing that billions of extralegals in developing
and former communist countries should be able to convert their
assets into productive capital. Legality is a means to
capitalization. The principal problem of developing countries is
neither the lack of assets nor entrepreneurship. They have plenty
of assets, but "dead" ones, and no "capital" yet .

Extralegals, many of whom are indeed poor individually, have
accumulated trillion of dollars of real estate during the past
forty years. But they are either unacknowledged by the market or
rejected by the state, such as in the case in Jakarta recently.
What they lack is easy access to a property mechanism that could
legally "fix" (a term borrowed from Adam Smith) the economic
potential of their assets so that they could be used to produce,
secure, or guarantee greater value in the expanded market, or
simply the market at all.

De Soto and his team believe that by their calculation, the
total value of the real estate held but not legally owned by the
poor of the Third World and former communist nations is at least
US$9.3 trillion. This is twice as much as the total U.S money
supply in circulation and very nearly as much as the total value
of all the companies listed on the main stock exchanges of the
world's 20 most-developed countries.

According to most estimates, the extralegal sectors in the
developing world house 50 percent to 75 percent of all working
people and are responsible for one-fifth to more than two-thirds
of total economic output of the Third World.

Imagine all those assets being capitalized, potentially used
as development capital! These assets not only far exceed the
holdings of the government, the local stock exchanges, and
foreign direct investment; they are many times greater than all
the aid from advanced nations and all the loans extended by the
World Bank. As such, relieving the poverty of the extralegal
sector will no longer be a charitable cause to be undertaken only
when it is fashionable or politically correct. The future of the
extralegal is the future of nations and is the source for growth!

De Soto argues it is therefore more important to establish a
(legal) system that would allow assets to be readily used by the
majority of the world's population to create a surplus of wealth
by taking advantage of the expanding market economy, than to
simply deliver property to them.

De Soto suggests that the consensus-based extralegal
arrangements that have been prevailing in developing and former
communist countries should be made the source of legitimacy in
laws that would legalize extralegal arrangements. "Law must be
discovered before it is enacted", he wrote. He recalled his time
in Indonesia, and wrote that one source of law should be the
"Jukum Adat". He means "hukum adat", the traditional arrangements
among many Indonesian ethnic communities.

More than just legal confirmation of ownership per se, a legal
system that de Soto argues for must include a mechanism that
allows the population at large to fix economic rights over their
assets in representations protected by law in a way cheaper than
their competitors in the extralegal world. His argument comes in
the form of a rediscovery of the history of capitalism in the now
advanced nations.

His reading of miners, squatters and settlers in the U.S.
during the 18th and 19th centuries is, for example, relevant to
the problems faced by Indonesia everywhere. A current example is
Palu, Central Sulawesi, where local lawmakers have to decide to
whom to give mining concessions: the traditional individual
miners, who have been there for decades, or big corporations that
are only now requesting a concession.

Even if Indonesians do not agree with this book's main
proposition, it points to one issue that all would probably agree
upon. This is that whatever legal reform we wish to make, the
crucial change is to adapt the law to the social and economic
needs of the majority of the population. In other words, our
lawyers and lawmakers need to take a much more progressive stance
and work hard from that. Otherwise, they will simply prolong the
frustration that many of us have felt about a lazy, uninspired,
positivist attitude among many of them.

With the advance of capitalism itself, we might wonder if the
concept of property should not be expanded to include other
properties, such as intellectual property, upon which people in
developing nations have much to capitalize if only a good legal
system were in place. Intellectual property rights are as
important to the rich as the poor, especially within the context
of multicultural Indonesia, where people have for centuries
collectively invented many crafts, techniques and medicines not
represented in modern records -- hence not easily capitalized.

Moreover, perhaps a detailed study of Japanese history of
capitalism would have been perceived as closer to home than the
American and European examples. It is curious, therefore, that de
Soto did not include such a study. But his argument is
essentially an anticulturalist approach. He does not believe that
the failure of capitalism outside the West has to do with native
cultures. However, does he include Japan when he referred to
"everywhere else" outside the West?