1. Executive Summary:

     The bottom-line message that Hernando de Soto presents in the Mystery of Capital is that property ownership is the key to ending poverty-but that it will work only if the poor can use their property to generate further wealth. Capitalism, he argues, has not failed in Third World Countries and the former Communist countries for any of the reasons usually given – cultural differences, lack of enterprise, religion, fecklessness or laziness. On the contrary, the developing world buzzes with hard work, entrepreneurial spirit and ingenuity. As a result, the poor are not really poor at all. They own trillions of dollars worth of assets. In the former Communist countries and developing countries most property is in the hands of the oppressed and the labourers. There is no clear distinction between those who own property and those who provide labour.

     According to de Soto, these assets-houses, land or businesses-are part of what he calls the black economy. They lie outside the established legal framework of enforceable property rights and are, therefore, useless for generating further wealth. In the West, a house is not just somewhere to live, with four walls and a roof; it also has a parallel existence as a producer of capital which one can use to secure credit. In the Third World, because property rights are not adequately documented, assets cannot be traded outside local circles where people know and trust each other, cannot be used as collateral for a loan, and cannot be offered as a share against an investment. It is, in de Soto's terminology, "dead" rather than "live" capital". As he rightly asserted, the lifeblood of capitalism is not the internet or fast-food franchises. It is capital. Only 25 of the world's 200 countries produce capital in sufficient quantities to benefit from the division of labour in expanded global markets.

     De Soto argues that reforming the legal system would free that "dead capital" to become an engine for growth. This is how capital works in rich countries. He recalls that as industries and cities grew in the West, countries such as Britain and the United States drew all their property rights, formal and informal, into a single legal system. This allowed them to participate in an expanded market, made their assets transferable and fungible, accelerated specialisation and division of labour, and allowed them to benefit from economies of scale. Now, although the developing world has also undergone industrial revolution and mass urbanisation, it has not developed the necessary legal frameworks.

     In short, the central insight of de Soto is that to escape from poverty, the Third World need assets-assets which they can put to work. Unfortunately, in these countries individual rights are not upheld. The right of the native people to their lives and property is either poorly upheld or does not exist at all; this results in a culture where the only way to survive is by plunder, and the weak are therefore left with nothing. To bring these cultures out of poverty, it is necessary to begin to uphold and enforce the individual rights. Give them what they produce, and remove the borders to trade so they are free to trade their most important property-labour-with those who want it. So the secret of development is not to get more aid from the West-it is to introduce policies that can unlock the hidden wealth that already exists. In other words, the challenge of economic development is not to facilitate a redistribution of the wealth from the West to the Third World. It is to find a means of integrating the wealth that already exists in the Third World-and is already widely spread among the population-into the formal legal systems and thereby into the global economy. This mystery of capital will always be unpopular and attacked by those who cannot look beyond their own ideologies to see Hernando de Soto's greater message.

2. Introduction:

     Capitalism has improved the lives of millions across the globe. It has solved the problems of feeding large numbers of people and provided unprecedented advances in health and medicine. Despite these achievements, millions of people in the Third World and in the former communist countries remain excluded from the political economic system and still live in dire poverty. A disturbing factor in this exclusion is that a number of entrepreneurs who are engaged in low-income, low growth business activities find themselves outside the formal economy. These people feel that democracy and market-based economy have not brought them the expected benefits. As a result an increasing number of people in emerging democracies and economies are disappointed and disillusioned. The battles fought in their name in the streets of Seattle, Quebec and Genoa by activists and other rent seekers were meant to highlight the problems of their plight and the resulting inequality.

     In this essay, I want to review the work presented in the Mystery of Capital by Hernando de Soto why capitalism has not lived up to the promise of an equal prosperity for all. In the review I will attempt to answer the following issues. Why are the poor in the Third World disenchanted with capitalism, and what impedes it from creating the same wealth as it did in the West? Why do the majority of the former communist-block countries associate their accelerated impoverishment with the sudden and massive invasion of capitalism? Does de Soto also speak for the poor in Sub-Saharan Africa? Is poverty the legacy of their colonial heritage, culture or is it due to their below-average collective intelligence quotient?

     Many people have criticised the book as a brave generalisation that has failed to throw light on the riddle of why some countries grow rich while others remain poor1. I as a polio survivor, who was born and raised in the gutters and slums of Gulu town in Northern Uganda, disagree to the criticism. In this shantytown, like countless villages and remote locations in developing countries described in the Mystery of Capital, capitalism appears to have failed to turn the despair of the people into hope and their uncertainty into a promise. In such a community, people with disabilities are one of the most vulnerable and marginalised groups in society. They are excluded from the bounty of the slums' resources. In an attempt to secure a future for me, my mother, Yolanda Atoo, the greatest entrepreneur I have ever known, went through thick and thin to raise money for my education. I was therefore able to migrate from the gutters and slums in Uganda to the glitters of London. The main mission was to prove that I was disabled in the leg but not in the brain and to show that the apparent inherent non-entrepreneurial mindset attributed to the disabled was false. Here the success of the capitalist state made it possible for me to study at the London University for both a B.Sc and a Ph.D in Medical Microbiology, something that was certainly out of my reach if I remained in slums of Uganda. Some years later I moved to Vienna and while pursuing full time work, I studied at IMADEC University on a block-release basis for a Master of Business Administration degree. While studying at IMADEC University I was introduced to the concept of Austrian School of Economics to which I immediately felt in love with ever since. In this essay, I will also use the lenses of my new-found love to review the work of Hernando de Soto but I'll try not to forget my earlier experiences living in the slums of Gulu and Kampala in Uganda.

3. What is the central message in The Mystery
     of Capital?

          The central message in The Mystery of Capital must be that leaders in the Third World and former Communist nations need not seek their fortune through begging the West. In the midst of their own poorest neighbourhoods and shantytowns, there are trillions of dollars. They only have to grasp the means to unravel the mystery of how assets can be transformed into capital. More specifically, the book is about systems to reduce transaction costs and thereby liberating assets so that they can become capital. Hernando de Soto makes a very powerful point based on the results from his team of international net work of researchers. The research found that the poor are not poor because they lack assets. They are poor because they lack access to capital and they are unable to convert their assets into capital because of the failure of property law in their countries. For example, de Soto's research found that in Lima it took 289 days to get the legal approvals required to set up a small textile business. In Haiti, it took 19 years to get legal title to land – and there was no guarantee that one would retain such a title. In the absence of sensible property rights law, people live extra-legally2, outside the "bell-jar" of formal legality. This denies them access to credit and loans and forces them to trade, for important items, only with people personally known to them. All this massively reduces the economic prospects. In contrast, implementation of a well ordered system of property rights fixes the economic potential of assets; integrates dispersed information; makes people accountable; makes assets fungible; networks people; and protects transaction.

     In the West on the other hand, each plot of land, building, cabin and piece of equipment are represented by a document. This document is the invisible symbol of a large occult process through which all assets are connected to the rest of the economy. Such is the power of representation that, via a symbol, tangible assets can lead an existence parallel to their material one. This double life is occult and manifests the true force of capital: that of generating new capital, serving as collateral and thereby providing access to credit. The mortgage on a building, equipment pledged as collateral, a stocked warehouse or a crop, are additional assets that were generated by an initial resource, and already existed as potential within the initial resource. These assets link their owner to a new network where the relationship between his/her personal credit history can be established. In this way, the agent has a corroborated domicile which makes him a potential client for public services (electricity, mail, telephone, potable water and many others) or a citizen with tax obligations.

     The Third World and the majority of former Communist-Block nations neither possess nor fully comprehend the representational system. Most assets do not have a double life since the property rights of the holders are not validly documented. At the same time, said representational system is necessary to make a market economy work. Throughout history human beings have developed several systems of representation: writing, algebra, musical notation, double entry accounting. Said systems allow the human spirit to understand that which is not tangible, and it is within the universe of representations that the most important decisions are made, where capital lives out its true life and where wealth is created and exchanged and what also ultimately determines poverty. Who was the Haitian that said: Konstitisyon se papye, bayonet se fe? [The constitution is paper, a bayonet is iron] Is there a better formula to negate the power of representation and console oneself with the illusion of the tangible? What better way to affirm – as we have been doing for over two centuries now – the supremacy of the consummated act (de facto) over rights? Unfortunately, one forgets that by negating representation we negate rights and wealth to 5/6ths of humanity. Without representation the poor possess things but not property rights, they have dwellings but are not owners, they have tools and skills, but not a business, such is the mystery of capital.

4. Is the persistence of poverty in The Third World a legacy of their colonial heritage, culture, low intelligence or lack of diligence in the workforce?

     Economic development presupposes not just the existence of formal institutions, but also certain norms or social values that promote exchange, savings, and investment. Therefore, the question as to whether some cultures are better than others at creating freedom, prosperity, and justice has been controversial with some social scientists3. Many development scholars have insisted that the thing Third World nations need is to discover the cultural components of economic success and import some. However, when the imported remedies fail, Westerners all too often respond not by questioning the adequacy of the remedies but by blaming Third World peoples for their lack of entrepreneurial spirit or market orientation. If they have failed to prosper despite all the excellent advice, it is because something is the matter with them. They missed the Protestant Reformation, or they are crippled by the disabling legacy of colonial Europe, or their IQs are too low on the Bell Curve. But the suggestion that it is culture that explains the success of such diverse places as Japan, Switzerland, and California, and culture again that explains the relative poverty of such equally diverse places as China, Estonia, and Baja California, is worse than inhumane; it is unconvincing. The disparity of wealth between the West and the rest of the world is far too great to be explained by culture alone. Most people want the fruits of capital – so much so that many migrants from the impoverished nations are flocking to the glitter of the West. Hernando de Soto strongly disagrees that none of these factors are the culprit for the persistence of poverty in the Third World. De Soto reveals that it is neither the lack of energy or entrepreneurial capacity nor an invincible popular stupidity that produced poverty in the Third World. In his view, the persistence of poverty is due, in part, to governments, both national and foreign, that refused to recognise in their own citizens the spirit of entrepreneurship, their efforts to better themselves, their savings, their accumulated property, but rather wrote them off as shantytown riff-raff whose only hope was birth control.

     Support for de Soto's view can be found in the Austrian economic theory. In deed, where has an economic system which can be characterised as respecting private property, maintaining sound money, free pricing, and freedom of contract (including trade liberalisation) collapsed into economic depravation? Certainly the experience we find in the former Soviet-type economies and in the Third World experiments with development planning reflects poorly on the model of collective property, restrictions on trade, and governmental planning of economic life. In this respect Hernando de Soto is right in his support that persistence of poverty in the Third World is not due to the evil intentions of capitalists or capitalistic countries. He acknowledges that certain powerful interest groups in developing countries who benefit from Western-style capitalism resist extending such legal shelter to the poor because they wrongly believe that doing so will undermine their own economic success. He believes that giving the poor access to capital would actually make the nations more free and more politically stable and would give the wealthy elite more freedom to enjoy their own wealth. In his view, the real problem lies in a kind of intellectual or historical blindness, which has kept everyone from seeing what the real source of wealth is-real property, or more exactly well defined and socially accepted property rights. Once a society has this, it has the secret of capital, since these assets can then be used to generate loans, credit, insurance, liabilities and the whole apparatus of capitalism. He asserts that it was through converting informal property systems into formal ones that helped the Western nations moved from the Third World status to their present First World vantage view in the 19th and 20th centuries. The challenge facing Third World countries is therefore to replicate this history. If they fail, then capitalism is doomed as a world system. There is no escape from the struggle except throug the cultivation of the indigenous institutions of a society in a direction more amenable to the rules of private property, freedom of contract and monetary responsibility.

5. How can the poor play their instruments in tune in a capitalistic orchestra?

     The central concept which de Soto employs is that the poor has "dead capital" amounting to more than 9.3 trillion dollars of property – but it avails them little or nothing. No laws or institutions exist by which they may use this capital as collateral for cash or credit. The failure of analysts to recognise just how much capital the poor possess derives, in part, from a lack of technical and imaginative skill, and, in part, from charitable organisations' emphasis on the misery of the poor. The failure of governments to see the existing wealth of their own poor – and thus bring it within the legal system so that it might be multiplied and, not so incidentally, taxed – he blames on the prejudice of privileged elite and on widespread ignorance about the origins of prosperity.

     Is there a solution to this mystery? Are the poor definitely condemned to economic failure? De Soto is not satisfied with merely explaining the problem but he also seeks to explore alternatives to the solutions. He suggests that we should recall how the West developed. By analysing the example of England and above all the United States, Hernando de Soto argues that as its cities and industries developed these countries began to progressively integrate citizen's property rights into a unified legal system. He writes: "We are still far from the tomahawk land claims where in the 19th century US settlers could consolidate their possession of land by marking their initials with a tomahawk in the bark of one or several trees or from the log-cabin rights or corn rights, where the occupier could activate his/her rights by building a cabin or growing corn on the occupied plot". This process developed gradually and underwent more than a century of successive adjustments. The West gives the impression of having come very far; nevertheless the present day situation of the majority of Third World countries and that of the former communist nations is but the West's past.

     De Soto therefore develops his theory of how the West grew rich. He argues that American property systems flourished because they incorporated legal rights to allow people to use their property to create capital. He cites occupancy, pre-emption, homesteading, miners' laws, and other mechanisms for bringing informal property rights into the legal arena as examples of how Western systems created a new economic order providing the right incentives for massive growth to occur. De Soto writes that extralegal notions of property are crucial because they dominate most economic transactions in the Third World. To progress beyond underdevelopment, it is not necessary to visit the chancelleries of developed nations nor to wait to be received at international financial institutions. The poor possess large amounts of assets, but these are "zombied" by an ineffective bureaucracy and by inadequate laws that hinder all possibilities of transforming them into wealth. It is necessary to follow the same path the West took to success and this means giving citizens the possibility of transforming their assets into property rights and to producing capital. De Soto is not saying that this is done to transform the world into a vast territory unified by capitalism, although a said proposition could be implicitly contained in his line of thought.

     To resolve this dilemma, de Soto addresses the development of economic thought by demonstrating how the notion of capital evolved in the West to encompass incentives for transforming property into productive assets over time. In so doing, de Soto seeks to provide a comprehensive solution to the dilemma haunting the Third World-how to create a system of rules to put proper economic incentives in place while respecting existing institutions that currently drive economic behaviour. In the book, de Soto passionately argues that it is the inability to produce capital, rather than a lack of respect for private property or the rule of law per se, which inhibits rapid economic growth in the Third World. He notes that there is a difference between protecting property rights and producing capital. Specifically, he states that over time in the West, mechanisms were developed within systems of property rights to produce capital very quickly. He asserts that many Westerners are oblivious to these mechanisms, and that they "...view them as parts of the system that protects property, not as interlocking mechanisms for fixing the economic potential of an asset in such a way that it can be converted into capital." He defines property as a mediating device that captures and stores the mechanisms necessary to run a market economy. He states that it "...seeds the system by making people accountable and assets fungible, by tracking transactions, and so providing all the mechanisms required for the monetary and banking system to work and for investment to function." He relates the idea of property to capital by pointing out that - rather than a mere representation of assets on paper-it is a process through which a society extracts value from those assets. Therefore, property is not the assets themselves but an expression of how those assets should be used.

     The insight that a formal system of property helps improve the use of dispersed knowledge is reminiscent of Hayek. Other observations, as well, have a Hayekian ring. He writes about the unintended nature of the process by which capital produces wealth noting that 'its origins are obscure and its significance buried in the economic subconscious of Western capitalist nations' (p. 8). He observes that the expansion of the market relies on a system of accepted and enforced rules leading to trust in transactions with strangers. It emphasises that without formal property systems, trading is localised and that 'like computer networks, which had existed for years before anyone thought to link them, property systems become tremendously powerful when they are interconnected in a larger network' (p. 72).

6. Conclusion

     Among the key contributions of The Mystery of Capital is a convincing explanation that the arguments for and against globalisation that led to street battles in Seattle, Quebec and Genoa miss the point. All things being equal, freer-or better managed, trade is good. Unfortunately, it is only a minority in developing countries that can reap the benefits of capitalism while many people still linger at the periphery. The true challenge for the Third World is to discover the mysterious factor that hinders them from playing in tune within the capitalistic orchestra. In concrete terms, the true challenge lies in increasing productivity from available resources, in increasing the value of things that they possess and in reducing transaction costs that these things are subject to. This would facilitate access to the right to wealth by a greater number of citizens presently marginalised by an inadequate legal and institutional infrastructure.

     What political power has the nobility to take on such a challenge and face it without demagoguery, beyond political parties, and to forge a new social contract that will give the majority of these citizens better opportunities to participate in the economic life of a country? Hernando De Soto has argued that governmental restructuring would be better than foreign aid as a way of bringing the poor into the capitalist system in many countries (p. 385). Removing the legal obstacles that keep the poor out of the market and thus appealing to their aspirations can drive a wedge between terrorists and the poor.