David de Ferranti, Vice President of the Bank s Latin America and Caribbean region, provided some introductory remarks. De Ferranti said internationally renowned economist Hernando de Soto not only writes, but carries out his ideas by testing his theories on the ground. He called de Soto more than just a thinker, but a doer as well.
Peter Hakim, President of the Inter-American Dialogue, a cosponsor of the event, said de Soto s strength was that he made his ideas accessible, attractive and appealing. He called de Soto s ideas profound, yet explained to the public in simple and elegant terms.
De Soto started by noting there is no shortage of entrepreneurs in the world. The question was why have entrepreneurs flourished in the West but not elsewhere, where only one out of six billion have benefited. He suggested the underlying reason is that people in the West trust each other. He noted economists Adam Smith and Karl Marx suggested greater division of labor led to specialization which led to increased productivity. Division of labor led to more interdependence among people. In surveys on the issue of trust, people in Western countries had a high level of trust of people in their countries. However, levels of trust were quite low in developing countries. The basis of trust, de Soto said, are the standard forms and legal documents which provided opportunities to uniformly identify people, wealth, and ownership. De Soto quoted Adam Smith who wrote the value of wealth must be fixed before it is realized. De Soto believes Smith referred to fixed wealth as something which was metaphysical rather than physical. De Soto quoted Bertrand Russell who said there is knowledge by acquaintance. In addition, de Soto suggested there is knowledge by description, such as a passport, a driver s licence or another legal document. Philosophers often say truth lies outside the object themselves, outside description.
Economists also operate in a such a world. It is a world about description, where documents tell the economists things about other things. Documents allow one to do things otherwise not possible. For example, there are buildings in both Mexico and the US where people work and live. De Soto said, however, he has counted 100 more things that the US buildings do that the Mexico buildings don t. US buildings are being mortgaged, act as collateral, are places where things are delivered, etc. These sorts of uses are often not available to people in the developing world. De Soto and colleagues for the Institute for Liberty and Democracy (ILD) don t ask the most common development question, which is how many people in the world live for under $2 per day. Rather they ask how much of the world is covered by law, and how many people can represent their assets or themselves, or participate in a market economy.
Capital that can be used for things such as obtaining credit or guaranteeing an investment were called live capital by Adam Smith. Much of de Soto s work revolves around understanding and identifying what he calls dead capital, which is capital outside the law. He used his experiences in Egypt as an example of the extent to which dead capital exists in an economy. Different legal jurisdictions allow people to own assets that are outside the law of other jurisdictions. In Egypt, building on agricultural lands is illegal, yet de Soto estimated 4.7 million homes are built on such land. Public housing has been extended illegally. He estimates 92% of all buildings are outside the law, and 90% Egyptian businesses and people operated and live outside the legal system. 78% of Mexicans fall into the same category, he added. He acknowledge their activities represent enterprise, but not a real market economy operating within the rule of law. De Soto estimates Egypt s poor own $245 billion in dead capital, which is 55 times of all Foreign Direct Investment in Egypt since Napoleon s time or 50 times more than all the bilateral aid include World Bank loans. The wealth, in fact, lies with the poor. Similar statistics can be found in Mexico.
Capital, de Soto said, is the value things have when they can enter the market and be measured. He used the example of the privatization of the Peruvian telephone system. Market agents could not adequately measure the value of the phone service, but when titling for the phone company was adequately done to measure up to Western standards, the value of the company grew 37 times. This was simply done by improving the representation of the form. He noted that many things related to value are invisible things. History showed that documentation of ownership in Western culture was created to protect ownership. In fact, it also launched something not originally envisioned: the start of capital markets. De Soto suggested much of the developing world has yet to learn this. The developing world needs to better understand that law, in addition to providing order, allows people to transport value and trust one another in expanded markets with interdependent specialists in fruitful cooperation.
Creating titling systems of property law is another critical area to fostering capital markets. De Soto used the example of the transition from feudal Japan to a modern society. Laws developed following the Second World War in post-war Japan destroyed the feudal system and created wealth opportunities to the public. The new property laws, giving the public new opportunities to participate, created the foundation upon which Japan became one of the world s leading economic powers. In Haiti, the poorest country in the Western Hemisphere, de Soto and ILD colleagues are now working on property law issues. He said he has found much of the population living in shacks, but the shacks are in fact titled. Not by the government, but privately. This is done because the Haitian poor understand the importance of having some sort of representation of value as the government tries to create a workable market economy. They are trying to create the basis of a market economy revolution. The social part of the revolution is already underway, de Soto said, but the legal reforms have yet to catch up. De Soto calls his book, Mystery of Capitalism, and the ILD s work about creating shortcuts on these processes for developing countries. He said it took 300 years for it to happen in the West, but the Japanese short cut the learning curve, so it can be done elsewhere. He acknowledges as well, much of the information on understanding these social and legal interactions was derived by lessons learned and knowledge disseminated by the Bank itself.
The floor was then opened to questions from the audience.
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