On the mystery of capital and the myths of Hernando de Soto: what difference does legal title make?

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ABSTRACT

Hernando de Soto's new bestseller, The Mystery of Capital, attributes the failure of capitalism in the Third World to the lack of property titles. Most development agencies in Washington are in favour of improving legal rights. As the World Bank puts it: "The registration of property rights in squatter settlements is... important in making land and house transactions possible and giving occupants legal protection. It encourages the buying and selling of housing and makes it possible for households to move to a dwelling that suits their needs and their budgets. It also increases the choice of tenure available to households, allowing them to own or rent as they see fit."

Most Latin American governments, and no doubt those elsewhere, have taken this kind of advice seriously and have distributed legal titles to self-help families in large numbers. They have recognised that most self-help households are pleased to receive a title deed.

My question in this paper is to ask what difference the 'gift' of a title deed actually makes to the life of the poor? Does it permit them to borrow money from the formal sector as de Soto and the World Bank claim? Does it open up a new world of capital accumulation because it now allows property to be transferred legally from one 'owner' to another? Or does it in fact make so little difference that the whole argument about legalisation is a sham?

Using data gathered in the now legalised self-help settlements of Bogotá, I will question each of the main benefits of legalisation. I will show how sales are more common when people lack legal title, how informal finance is available at the commencement of an illegal settlement and how little formal finance is forthcoming after legalisation. Most importantly, I will show that there is little sign of a secondary housing market. And, if there is little possibility of selling a house, home ownership in the self-help suburbs can offer little in the way of capital accumulation. It is hard to make money from a house that cannot be sold.

The limited development of a secondary housing market in the legalised self-help settlements also has major implications for the distribution of wealth. Rich families are able to speculate in the housing market and some make large capital gains. If the poor are prevented from playing this game in the self-help suburbs, the distribution of wealth will worsen over time. According to de Soto, the distribution of title deeds is meant to overcome this problem. In practice it does not.

Hernando de Soto does not provide an answer to the mystery of capital. What he offers is the myth of popular capitalism: he fans the delusion that anyone can become a fully-fledged capitalist. He offers little evidence in support of his assertion although that has not stopped Washington from, once again, rallying to his call. Without wishing to deny the advantages to be derived from home-ownership in a self-help suburb, I want to demonstrate that de Soto's argument is dangerously flawed and needs to be shown up for what it is: a populist dream.

ESF/N-AERUS: International workshop - Leuven and Brussels, Belgium, 23-26 May 2001

N-AERUS: Network-Association of European Researchers on Urbanisation in the South
http://www.naerus.net