Fighting Poverty with Property
A proven method for improving economic malaise in the developing world

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By Sebastian Puerta

This article was originally published in GPR’s Spring 2017 Magazine

If you leave the Hilton Hotel in Cartagena, Colombia a sudden rush of the senses will hit you. As you walk toward the beach, the smell of diesel will smother you as you swim through a sea of motorcycles flooding the streets. As the tires of traffic slowly progress atop the cracked concrete, their constant rumbling produces a dissonance that is as paradoxically sweet as the mangoes that grow nearby. A woman wearing colorful garb and carrying a rainbow of fruit in a basket heads to market. Salt, brought by a cool breeze from the ocean, is tasted in the air. The humidity makes the air almost swimmable. The sun’s sharp and hot rays scorch any uncovered skin. As you approach the beach, a stream of merchants swarm to sell their goods, offering sunglasses, sandals, and cellphones with a charming vigor. The merchants may pester often, but only because if there is no money from sales this week, there will be no food on the table next week.

When you left the Hilton, you did not just cross the barrier between air conditioning and no air conditioning; you traversed a border that is preventing the developing world from joining the rich. Although the vendors’ entrepreneurship is admirable, herein lies the malady of poor economies around the world. Most of these merchants lack the proper documentation for their business, as well as for their homes. The root cause of this is not to avoid taxes, but a growing bundle of suffocating regulation that effectively bars often uneducated property owners from taking on the monumental task of filling out headache-causing paperwork. This crime robs not only emergent nations of economic prosperity but also their people of the most important right that gave rise to the modern world: property.

What sits at the core of capitalism is the idea of the self as property and as property as a right on par with the right to free speech. According to retired University of Georgia Associate Professor of Legal Studies Lee Reed, “[Property] is the legal right recognized by society and adequately enforced by the state to exclude all others from some object.” In the developed world, this means if you leave your keys in your car, someone cannot drive off in it without legal consequence. There lies the seeds of a revolution which sprouted to give the world the fruits that form the foundation of our world– individualism, due process, democracy, and capitalism. Without property, productive enterprise cannot emerge. Or, as Professor Reed often says, property is “the goose that lays the golden wealth of nations.”

Imagine the woman from earlier, carrying the basket of fruit upon her head as she went to market. If there were no system of property, what is to stop a passerby from simply taking the fruit by force? She has no right to exclude others from the fruit because there are no property rights. Thus, if the risk of her being mugged is sufficiently high, she may not go to the market in the first place. This analogy can be applied to all business, and in doing so, one can see why property is the bedrock of all commerce and why the lack thereof has stymied developing economies around the world. Without property rights, people must guard their resources from others, leading to a system in which the poor are preyed upon by the powerful and there is no incentive for exchange. As businesses either continue to wither or are unable to form and homeownership goes unrecognized, the result is a tragic loss of capital that otherwise could have been used to better standards of living.

What can be done to solve such a persistent problem that has plagued countries for centuries? This question has been tackled by Peruvian economist Hernando de Soto Polar. Born in Arequipa, Peru and educated in Switzerland, de Soto formed a team known as the Institute for Liberty and Democracy (ILD), which has advocated for an expansion of property rights to aid the fight against poverty since its inception in 1980s. Their work has been met with success.

In 1987, ILD concluded that Peru had about $70 billion in extralegal real estate assets that were essentially “dead capital”–unable to be used to obtain credit or to add to one’s personal balance sheet. ILD began holding public hearings to increase awareness of the issue and to determine what socially recognized property rights existed in order to transfer them into formal law. After this process, ILD drafted the “Property Registry Law” and presented it to the Peruvian Parliament in 1988. It passed unanimously. The time necessary to obtain a title for land plummeted from about 21 years to a maximum of 15 days. For comparison, obtaining a land title in Los Angeles takes about 20 days. In Lima alone, where 300,000 titles were issued, the value of the land doubled by 1998. De Soto’s reforms have helped 1.2 million families and 380,000 firms in Peru emerge from the shadow economy and into the formal economy.

ILD’s work became so successful and renowned that de Soto gained recognition from such distinguished leaders as Margaret Thatcher and Bill Clinton. He has been awarded so many prizes that to look through them all requires a few flicks of the mouse wheel.  He was invited to conduct similar programs around the world, from Haiti to Egypt to the Philippines, all of which were successful. De Soto’s countless prizes, recognitions, and calls for counsel from presidents and prime ministers are testament to his strategy’s success.

However, an improvement to the structure of property law is not the silver bullet: it must be done in conjunction with other reforms contributing to the legal, political, and economic empowerment of those that live outside the current system. As a start, his calls for improving the judicial systems’ efficiency, ensuring proper enforcement of the law, and rewriting financial regulations.

Where shall de Soto take his red tape-cutting scissors next? Perhaps he may assist the woman in the Caribbean dress in Colombia where 64 percent of the urban workforce is informal? Or will he continue his recent work with Amazonian indigenous peoples? The far more difficult task may lie in the East, where the command economies of Russia and China feature frequent abuse of the rule of law. Both countries are on the United States Trade Representative’s “Priority Watch List” for intellectual property rights violations.

The key to this aforementioned strategy is that it unlocks wealth that already exists. By shining a light on the shadow economy, developing nations can become the next beacons for capitalism. Property rights will incentivize foreign investment as firms’ legal risk decreases, allowing homeowners to borrow using their homes as collateral and permit businesses all the advantages of operating within the legal system. If a country does begin the monumental task of reform, there will be immense prosperity from fighting poverty with property. Were Colombia to enact these reforms, the country’s streets will become no less beautiful nor less delicious to the senses; merchants may even badger you less over buying their trinkets due to their newfound wealth.

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