The Mystery of Capital

IN HIS FIRST book, The Other Path, de Soto advocated the formalization of informal settlements. In his new book, The Mystery of Capital, he takes this a step further: formal property ownership, he argues, is the reason capitalism triumphs in the West but fails everywhere else. Unfortunately, de Soto fails to recognize in either publication the existence of 40 years worth of work on this issue by Peruvian and other researchers outside his institution, as well as experiences taking place in Peru and in other countries relevant to this subject.(1)

De Soto explains that the poor possess a lot of economic assets, but argues that these assets are “dead capital”, since the “wealth” exists in an incomplete form: houses are built on land without formal ownership and enterprises are not registered. These assets cannot be used in any formal transaction and so cannot be translated into capital. If these assets were formalized, people would gain access to formal credit, be able to invest in home and business, and thereby give a positive boost to the economy as a whole.

In Peru, the work of de Soto and his institute, ILD (the Institute of Liberty and Democracy), has been very influential and has inspired the Fujimori government to start a huge regularization policy. In 1996, COFOPRI (Comision de Formalizacion de Propiedad Informal) was established, a highly centralized government organism created to design and execute a programme for the formalization of urban informal property rights. It removed responsibility and resources from local government and any other public sector institutions and concentrated the power to decide every step in the regularization process in the hands of the COFOPRI. Most of COFOPRI’s staff were former staff members of ILD.

Through the Urban Property Rights project, the World Bank supported the national programme with legal and institutional improvements, training and the development of long-term strategies. The project also provided a substantial loan to strengthen the responsible organizations. According to COFOPRI, the project resulted in an improvement of the legal and institutional framework, the stimulation of investment, and socioeconomic improvements within the target population..

But let us look at de Soto’s arguments in more detail and compare them with the reality in Peru, after COFOPRI. The situation outlined in the book, on which the whole presentation of de Soto’s theory is based, has not been proved in reality and much of the information is vague. For example, de Soto describes 728 steps as being necessary for obtaining a legal title in Lima.(2) This is not accurate, at least it was not when the book was published in Peru in 2000 or even for several years prior to that. But no source or year of publication is given for this data in the book. Another example can be found in the discussion of the value of different types of informal housing in Lima.(3) Here too, calculations lack the substantiation of sources and dates, and there appears here to be some confusion between the terms cost, value and price. Construction costs can be quantified according to a standard; but this is not necessarily reflected in the price, since price depends a good deal on the existence of a true real-estate market and the location of the plot – which cannot be standardized, even if there were a low-cost housing market, which does not exist in Lima. The term value is even more subject to personal priorities and other factors which are difficult to measure
consistently.

So, based on the theories and data used for these arguments, Peruvian society has been confronted with the mass formalization policies of the government, ILD, World Bank and COFOPRI. After six years work and more than 1 million registered land titles, a very small percentage of the people in the target population have credit, which in most cases is from the Banco de Materiales, a government credit system that provides credit to those wi