Policies for developing countries – are property rights the answer?

Peruvian economist Hernando de Soto sees a main obstacle to the development of markets and capitalism within developing countries being linked with the lack of property rights. The result of this is that most people’s resources are commercially and financially invisible. Below is a video clip from the excellent Commanding Heights series about poverty and property rights which includes de Soto as well as Jeff Sachs.

Nobody knows who owns what or where, who is accountable for the performance of obligations, who is responsible for losses and fraud, or what mechanisms are available to enforce payment for services and goods delivered. Consequently, most potential assets in these countries have not been identified or realized; there is little accessible capital, and the exchange economy is constrained and sluggish. However in the West, where property rights and other legal documentation exist, assets take on a role of securing loans and credit for a variety of purposes – building capital with capital. De Soto estimates that about 85% of urban parcels in Third World and former communist nations, and between 40 and 53 % of rural parcels, are held in such a way that they cannot be used to create capital. The total value of the real estate held but not legally owned by the poor of these countries is at least $9.3 trillion. However, in reality, it cannot be seen as the panacea. Titling must be followed by a series of politically challenging steps. Even in a relatively advanced country such as Argentina, title is not enough in itself to arouse the dead capital present in land and property. Furthermore, Argentine banks tend to lend only to workers with high wages and a stable job. Also there were those that, even if a loan were available, would not take it for fear of losing their own property.