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Mystery of Capital- Book Review

The Mystery of Capital by Hernando De Soto- Review

How to drive the masses out of poverty is an issue that has affected intellectuals, poets, academics, politicians and anyone who cares about their neighbour for millennia. The growth of capitalism over the last 500 years, especially in the era of globalization is what De Soto has tried to explain as to why it has only happened in the West and not the rest of the world. He brings it down to analysing property as a key litmus.

Using a local peri-urban area called Domboshava, I’ll dissect through the main arguments De Soto makes and how it may be linked to improving developing countries such as Zimbabwe. De Soto’s key notion is the inability to create capital. Capital which is the fuel that moves capitalism and consequently development needs to be constantly produced. The question then is, what is the source of capital? Capital is produced according to De Soto by turning the physical assets of the poor into transferable, fungible assets that can acquire loans, used as collateral as occurs in US and the rest of the west.

This only happens in the west, but in the rest of the world, nations are trying to be build “capitalism without capital.” That is, the majority of people in the developing world hold assets such as businesses, land and houses out of the legal framework from which they are legally recognised. This is exacerbated by the fact that it is close to Impossible to easily legalise a business (as shown by the ease of doing business) and housing statistics in most developing nations.

This fundamental argument is by in large brilliant. In Domboshava, which is 30km from the Harare CBD, more than 25 000 households that could be worth as much as $400-500 million are worth less than 10% of that. That value can be unlocked and used as a new access of development funding that developing countries are failing to currently find. As iterated by De Soto, instead of moving around the world seeking capital, the diamonds we need are home and this can be done by transforming assets into live capital.

As put across already, what the poor lack are the mechanisms that allow them to legally fix the value of their property so that they can gain, secure or guarantee greater value in the expanded market. This is because of their inability to access the pre-requisites of property capital which are legal protection of assets, integration of assets, fungibility of assets, network to link assets, and people being held accountable for assets. The poor and their property do not have these features. This creates what de Soto terms “dead capital”.

This then leaves two camps in the economy, the haves and the have nots. Termed by Fernand Braudel as the “bell jar”. De Soto uses the analogy defining those in the bell jar (the haves with legal protection) and the have nots being outside of it. For the poor, there is an apartheid of formal law against the rural people, migrants and poor people which adds costs of corruption and also keeps them in the informal business with little access to capital markets. This argument is similar to Kanyenze’s argument in his book “Beyond the enclave” where colonialism created white vs black but post-colonialism the political elite (ZANU-PF) have and the rest do not.

Domboshava is 15km from the affluent neighbourhood of Borrowdale but the lack of property protection in the former has made its people disproportionately poorer. By showing the problems, De Soto moves on to detailing how the USA over two hundred years solved this problem since now 70% of businesses in U.S. use mortgages as collateral to start a business. He details how those outside the bell jar (the poor) created systems of “extra legality”, or social agreements/contracts in their community where everyone agrees to upholding them. This was seen in the miners associations during the gold rush in California and the history of Homestead act which gave the masses property rights. Those social contracts are very much alive and functioning albeit inefficiently in Domboshava. The local laws of chiefs and sabhukus keep a semblance of order in Domboshava. The problem then is “the problem with extra-legal laws is that their property is isn’t sufficiently codified and fungible to be used outside their geography.”

How did the aforementioned American associations deal with this? There were efforts from the national, local governments to formally legalise the local social contracts but this was based on the people standing for their social contracts to be kept in place and government. Essentially, “extra-legality can be codified into law by notes of customs.” That isn’t happening in Domboshava or most of the developing countries where the national legal laws disregard local social contracts.

As well argued by De Soto, “There is a gap between what the mandatory law demands and what is needed for the law to work…laws are formed not acknowledging social contracts already in place…(ultimately)…laws must be discovered rather than enacted.” This also includes the issue where the ability to move from the extra-legal situation to a legal one is succinctly called the capitalization process. That process requires three essential ingredients of taking the perspective of the poor, co- opting the elite and dealing with legal and technical bureaucracies. The most important aspect of this book for me was this line, “property is not a primary quality of assets, but the legal expression an economically meaningful consensus about assets.” This harps on the issue that property with no ability to use it in the economic and legal systems is pointless.

Like any good reader, I did have my ideas around this book which de Soto somewhat answered as the book finished. Firstly, is capitalism the only way? He argues yes and actions by China post 1970, the fall of the Berlin wall etc seem to prove that. For me however, its not only that capitalism is bad but its lack of inclusivity. De Soto argues that this does not have to be the case but it is hard to see how not. Capitalism thrives on exclusion, be it by race (apartheid), nationality (colonialism), gender (patriarchy), knowledge or age. So even when the majority as helped into the capitalist system as in USA, the “bell jar” is alive and well as seen by the growing inequality in the West.

The last major critique for me is that in Zimbabwe atleast, dead capital is political capital. De Soto does speak about the fact of co-opting the elite and show them the benefits they have, but what happens if the immediate cost-benefit analysis isn’t in their favour? This is the case I believe with the lack of property rights for land, or peri-urban areas. The system benefits from keeping the status quo as is. But that would be very pessimistic of me to say that cannot be changed.

Conclusively, this book has challenged me ideologically very much. I have had to re-consider some strongly held beliefs on private property and how it works; whether property is best managed privately or co-operatively (I still mainly support the latter) or whether that argument is old school and there really is no difference, just a matter of power and not tangible results. A book that leaves you with questions about yourself is always the best.

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