Hernando de Soto - Key Concepts

Poverty Eludes Definitions Poverty is not so easy to define. Nor is it a simple matter to understand what the varied indices of poverty represent. What is categorized as “poor” in the West, for example, might be considered “middle class” in a developing nation.

“The world’s poor” is shorthand for a vast and diverse swath of people who have low incomes, to be sure. They struggle with problems like hunger, ill health and what would be considered inadequate housing by Western standards. They live in remote villages and urban shantytowns. They have problems finding enough to eat and clean water to drink. Many poor children don’t go to school, but rather work — as household service providers, subsistence farmers, casual laborers and street vendors.

Bell Jar A bell jar is a piece of glassware with a rounded top and open bottom. It’s designed to protect something – whether delicate plants or objects – from a harsh environment. So, for example, by keeping a plant warm and protected, the bell jar ensures its survival and hastens its development.

Informality and Extralegality When international agencies jet their consultants to gleaming glass towers in the most elegant sections of town, they’re dealing with only a fraction of the entrepreneurial world. In the developing world, the emerging economic powers are not just in the high-rise offices, but teeming in the streets below. Garbage collectors, bus operators, shoemakers, appliance repairmen, and even construction companies are working and creating value. But these emerging entrepreneurs are part of the informal, extra-legal economy.

Capital: It’s All in Your Head Capital is unleashed by representing in writing – via a title, a security or contract – the most economically and socially useful qualities about the asset. “The moment you focus your attention on the title of the house,” says de Soto, “and not on the house itself, you have automatically stepped from the material world into the conceptual, where capital lives. Formal property forces you to think about the house as an economic and social concept. It invites you to go beyond viewing the house as mere shelter – known as a ‘dead asset’ – and to see it as living capital.”

Crony Capitalism/Mercantilism “The private sectors of most developing world countries are not really capitalist. They exist largely on the basis of competing for government favors, contracts, and privileges, and their economic approach is to try to exclude or marginalize competitors — not by out-producing them in quantity, quality, or prices, but through political means.”

Dead Capital “Dead capital” is Hernando de Soto’s term for an asset that cannot easily be bought, sold, valued or used an investment. Despite obvious poverty in the informal sector, de Soto’s work shows that even those who live in slums possess far more capital than anyone realizes. These possessions, however, are not represented in such a way as to make them fungible assets. Dead capital cannot, therefore, create value for the poor.

Bureaucracy & Corruption People in the developed West are familiar with bureaucracy — at least they think they are. But they have no idea just how stifling bureaucracy can be. By contrast, Third Worlders would find what we in the West experience as bureaucratic inefficiency as something tolerable and relatively well-organized. We in the West have little experience with the needless, mind-numbing procedures that smother most chances of economic advancement in the developing world. It’s on such bureaucracy that corruption is built.

The Law In the 19th Century — out on the American frontier — pioneers were miles and miles from governmental courts and land offices, yet they still needed a way to sort things out between themselves if they were going to live in peace. Though they were far from official law, they invented their own ways of determining who owned what. Federal and state governments saw how they were regulating themselves out on the frontier and, bit by bit, over several decades, adopted and synthesized the laws formally.

Documents That Empower Documents are symbols. They represent reality. Whether in ink and paper or bits and bytes, documents create a virtual world unto themselves. Most societies use documents to some degree. But in the developed West, says Hernando de Soto, they’ve become a sophisticated and vital component of wealth creation.

The Corporation We often hear about the bad things corporations do — that they trash the environment or buy off legislation. It is true. There are some excesses. But on balance, the corporation has had a far more beneficial impact on humanity than most people realize or are willing to admit. In fact, the corporation has played a central role in our prosperity—including enabling the emergence of the middle class.

Globalization To Hernando de Soto, globalization is on one hand the best path to broad prosperity. On the other hand, it is an exclusive club for the West and elites in the developing world.

Because it rewards economies of scale and theoretically can involve everyone, globalization is a source of broad based prosperity. It is the extension of the network of laws, documents, and rights that has developed in the West and which has resulted in unprecedented wealth — including a sizable middle class.

Benefits of Trade Trade has many overall benefits. The law of comparative advantage says that even less productive countries will benefit from trade with more productive countries because stronger producers can trade in order to free up resources that will enable them to specialize (which creates even more value). If you could sum it up, the rule of thumb for comparative advantage would be “Do what you do best and trade for the rest.” The result will be more productivity and more economic benefit for everyone. Consumers, for example, benefit from the lower prices that specialization and economies of scale engenders.