Tragically, most developing nations fail to realize that these slums are not so much their biggest ailment, as their biggest opportunity. The key to solving global poverty is not encoded in complex econometrics and it does not fit the lock on Uncle Sam’s vault—it is found in the slums and rural farms of the developing world, where economists and policymakers fear to tread.
Ending global poverty requires reforming an oppressive legal apartheid that makes it impossible for the poor to legitimately own their modest homes or obtain official business permits.
The entrepreneurship of the poor has produced assets in the “underground economy” worth over $9 trillion. But the poor are prevented from entering the legal realm by bureaucratic runaround. To document the extent of the challenges, Peruvian economist Hernando de Soto describes in The Mystery of Capital how he tried to obtain legal permits to build a small house and license one sewing machine for commercial use.
Obtaining land title in Peru required 728 bureaucratic steps; the authorization to build required 207 additional steps in 52 government offices over seven years. Registering the sewing machine—including bus trips, waiting in lines, and filling out forms—required six hours per day for 289 days and fees totaling over 2.5 years worth of minimum wage labor ($1,231).
Prohibitive laws plague most developing nations in both rural and urban areas, usually requiring 10-25 years of bureaucratic hassles to obtain property rights. In advanced nations this takes only weeks. Huge underground economies persist from Mexico to Russia, Manila to Cairo, and Haiti to Nigeria.
Contrary to the common assumption that this is due to intentional tax evasion, the poor remain outside the legal sector because complex laws exclude them. In 1990, the Institute for Liberty and Democracy (de Soto’s think tank) helped Peru reduce time and money costs by 99 percent. Since then, over two million Peruvian families have become newly legal homeowners and another 500,000 have registered official businesses.
Extending accessible property rights to the poor and reforming the laws so that they officially recognize—and reinforce rather than undermine—existing informal contracts turns squatters into homeowners, and black-market peddlers into hopeful entrepreneurs.
This simple shift in legal status creates opportunities for economic growth by allowing the poor to leverage their dead assets into live capital. Greater security and official recognition of property title allow new home and business owners to establish credit, take out loans, and make long-term plans and visions for the future. Instead of hiding an illicit underground bakery in a small, unmarked shack, its rightful owners could put a sign outside, advertise, expand, and create lasting partnerships with delivery services, sandwich shops and grain producers.
Enacting policies of accessible property rights—to be based in the extralegal laws of organic communities—would have incredible global implications. The valuation of worldwide underground assets at $9 trillion nearly equals America’s $10 trillion Gross Domestic Product (GDP). De Soto writes that the value is nearly that of “all the companies listed on the main stock exchanges of the world’s twenty most developed countries: New York, Tokyo, London, Frankfurt, Toronto, Paris, Milan, the NASDAQ, and a dozen others.”
That means that if all the world’s major corporations quit business and gave everything to the poor, they could only give the global poor twice the assets they already own. Thus, it is far more important to empower the poor to use and multiply what they already own than to “redistribute” what others own. The burdens of being eclipsed outside the formal economy mean that their assets are used inefficiently and have great potential to multiply.
Bringing these assets into the formal sector would also automatically multiply both recorded GDP and tax revenues. In developing nations, the informal assets of the poor dwarf the valuations of domestic stock exchanges, government assets, and foreign direct investment by large multiples. Turning these assets into capital would unleash new potential for surging exponential growth.
Strangely, considerations of laws and property rights are glaringly absent from formal theories of economic growth. Each theory mixes a cocktail of labor and capital, looking for determining factors like technology, investment, education, or democracy.
Yet they remain confounded.
By assuming or ignoring property rights and laws, economists consistently fail to pull the growth rabbit out of the hat of formal analysis. With an over-investment in impressive sounding equations yielding only marginal returns, economic theories are running a significant deficit of common sense.
Returning from this regression, economists should converge on a growth theory resembling the forgotten discipline of political economy. They should discover the neglected economic insights behind de Soto’s analysis, like those of Friedrich Hayek, Richard Epstein and Peter Bauer.
To fight global poverty, we must help domestic governments write simple laws the poor can use and establish political institutions with positive incentives. Only then will their dispossessed squatters become empowered entrepreneurs.
Richard T. Halvorson ’03 is a philosophy and government concentrator in Pforzheimer House. His column appears on alternate Tuesdays.