PRAISE FOR THE MYSTERY OF CAPITAL
“Hernando de Soto…is perhaps the world’s trendiest economist, a genius of property rights.”
—Slate.com
“De Soto has a powerful message not only for the Marxists but also for capitalists…. His revolution cuts several different ways.”
—The Wall Street Journal
“Fascinating…. After reading this book, it is hard not to feel hopeful about the potential waiting to be tapped in poor countries.”
—The Economist
“In his smart new book, The Mystery of Capital, de Soto answers the question why capitalism succeeds in the West and fails in so many other places.”
—Thomas Friedman, The New York Times
“For policy-makers, international investors, and those who care about the challenges of developing countries, this book will offer new perspectives on—and possible solutions for—problems that have existed for centuries.”
—Former U.S. Senator Bill Bradley
“Some books are good, some are bad, but very few are real gems. One of the few gems is the recently published book, The Mystery of Capital.”
—Thomas Sowell, author of Basic Economics
“Fastidious in its search for the facts but passionate in spirit and language…. He turns the tumbledown shacks and rivulets of sewage that are typical of the world’s shanty towns into, as he memorably puts it, ‘acres of diamonds’.”
—The Times (London)
“A revolutionary book…thrillingly subversive.”
—The Independent (London)
“[De Soto] convincingly demostrates, the road to worldwide prosperity requires not restraining capitalism but making it universal.”
—Commentary
“A pioneering book. Following on his extraordinary and highly original The Other Path…this book, too, is another tour de force.”
—Jeanne Kirkpatrick, former U.S. Ambassador to the United Nations
“De Soto’s powerful and immensely readable book is a very great weapon in the armory of freedom.”
—Policy
“Fresh thinking is rare—this book has the capacity to transform the economies of those countries who have hitherto not been able to make capitalism work for their people…. [It] explains how economies fail that have not first created the vital legal structures nor let the ‘black’ economy come into the mainstream economy.”
—David Owen, former Foreign Secretary of the United Kingdom, E.U. Chairman of the Int’l Conference on the Former Yugoslavia
“The Mystery of Capital has put [de Soto] in the pantheon of great progressive intellectuals of our age.”
—New Statesman
“What de Soto has done is to help solve the mystery of poverty.”
—The Times Literary Supplement
“A crucial contribution. A new proposal for change that is valid for the whole world.”
—Javier Perez de Cuellar, former Secretary General of the United Nations
“We must read de Soto for his acute insights and for his great eloquence with which he tells us a few important truths that we ignore at our peril.”
—Jagdish Bhagwati, The New Leader
“A revolutionary book.”
—Neue Zürcher Zeitung (Switzerland)
“The Mystery of Capital has the potential to create a new, enormously beneficial revolution, for it addresses the single greatest source of failure in the Third World and ex-communist countries—the lack of a rule of law that upholds private property and provides a framework for enterprise. It should be compulsory reading for all in charge of the ‘wealth of nations’.”
—Margaret Thatcher, former Prime Minister of the United Kingdom
“A very great book…. Powerful and completely convincing. It will have a most salutary effect on the views held on economic development.”
—Ronald Coase, Nobel Laureate in Economics
“De Soto demolishes the entire edifice of postwar development economics, and replaces it with the answers bright young people everywhere have been demanding…. [The Mystery of Capital] is a significant contribution to understanding how the poorest nations can use their own legal system to manage their way out of poverty.”
—The Globe and Mail (Toronto)
“This book is first class. It makes a very solid case for a way to improve the lot of people in the developing world.”
—Walter Wriston, Chairman emeritus, Citigroup
“One of the most provocative and potentially important works on development to appear in some time.”
—Raleigh News & Observer
“[De Soto] performs a valuable service by highlighting a problem that’s often underestimated: the failure of the legal system to acknowledge and respect the property of the poor.”
—Business Week
“Impassioned and thoughtful.”
—Los Angeles Times Book Review
“De Soto has demonstrated in practice that titling hitherto untitled assets is an extremely effective way to promote economic development of society as a whole. He offers politicians a project which can contribute to the welfare of their country and at the same time enhance their own political standing, a wonderful combination.”
—Milton Friedman, Nobel Laureate in Economics
“De Soto’s book has captured the attention of the establishment…. An extraordinary book…. This is more than an observation. It is the articulation of a tragedy.”
—Liberty
“This book changes our understanding of where capital comes from. The consequences could be world-shattering.”
—William F. Buckley, Jr.
“As de Soto makes bolder assertions and broader prescriptions….[He] defends his main points with convincing logic and documentary evidence.”
—International Affairs
“De Soto has single-handedly been fomenting a revolution in the Third World…. The Mystery of Capital constitutes one of the few new and genuinely promising approaches to overcoming poverty to come along in a very long time.”
—Francis Fukuyama, author of The Great Disruption
“Hernando de Soto has done useful work in alerting the world to the energies of informal economies that are too often ignored or dismissed as disreputable.”
—The New York Review of Books
“Stunningly conceived, compellingly argued, and impressively written: de Soto offers a rare combination of vision and pragmatism is what will stand as one of the most important texts of our era.”
—Kirkus Reviews (starred review)
THE MYSTERY OF CAPITAL
ALSO BY HERNANDO DE SOTO
The Other Path
THE MYSTERY OF CAPITAL
Why Capitalism Triumphs in the West and Fails Everywhere Else
HERNANDO DE SOTO
A Member of the Perseus Books Group
To Mariano Cornejo, who showed me how
to stand firmly on the ground, and to
Duncan Macdonald, who taught me how to
navigate by the stars.
Copyright © 2000 by Hernando de Soto
Published by Basic Books,
A Member of the Perseus Books Group
All rights reserved. Printed in the United States of America. No part of this book may be reproduced in any manner whatsoever without written permission except in the case of brief quotations embodied in critical articles and reviews. For information, address Basic Books, 387 Park Avenue South, New York, NY 10016-8810.
Soto, Hernado de, 1941-
The mystery of capital: why capitalism triumphs in the West and fails everywhere else /Hernando de Soto.
p. cm.
ISBN: 978-0-465-01615-0
1. Cap
italism. I. Title.
HB501 S778 2000
330.12'2—dc21
00-034301
Contents
CHAPTER ONE
The Five Mysteries of Capital
CHAPTER TWO
The Mystery of Missing Information
CHAPTER THREE
The Mystery of Capital
CHAPTER FOUR
The Mystery of Political Awareness
CHAPTER FIVE
The Missing Lessons of U.S. History
CHAPTER SIX
The Mystery of Legal Failure
CHAPTER SEVEN
By Way of Conclusion
Notes
Acknowledgments
Appendix
THE MYSTERY OF CAPITAL
CHAPTER ONE
The Five Mysteries of Capital
The key problem is to find out why that sector of society of the past, which I would not hesitate to call capitalist, should have lived as if in a bell jar, cut off from the rest; why was it not able to expand and conquer the whole of society?…[Why was it that] a significant rate of capital formation was possible only in certain sectors and not in the whole market economy of the time?
—Fernand Braudel, The Wheels of Commerce
THE HOUR OF capitalism’s greatest triumph is its hour of crisis. The fall of the Berlin Wall ended more than a century of political competition between capitalism and communism. Capitalism stands alone as the only feasible way to rationally organize a modern economy. At this moment in history, no responsible nation has a choice. As a result, with varying degrees of enthusiasm, Third World and former communist nations have balanced their budgets, cut subsidies, welcomed foreign investment, and dropped their tariff barriers.
Their efforts have been repaid with bitter disappointment. From Russia to Venezuela, the past half-decade has been a time of economic suffering, tumbling incomes, anxiety, and resentment; of “starving, rioting, and looting,” in the stinging words of Malaysian prime minister Mahathir Mohamad. In a recent editorial the New York Times said, “For much of the world, the marketplace extolled by the West in the afterglow of victory in the Cold War has been supplanted by the cruelty of markets, wariness toward capitalism, and dangers of instability.” The triumph of capitalism only in the West could be a recipe for economic and political disaster.
For Americans enjoying both peace and prosperity, it has been all too easy to ignore the turmoil elsewhere. How can capitalism be in trouble when the Dow Jones Industrial average is climbing higher than Sir Edmund Hillary? Americans look at other nations and see progress, even if it is slow and uneven. Can’t you eat a Big Mac in Moscow, rent a video from Blockbuster in Shanghai, and reach the Internet in Caracas?
Even in the United States, however, the foreboding cannot be completely stifled. Americans see Colombia poised on the brink of a major civil war between drug-trafficking guerrillas and repressive militias, an intractable insurgency in the south of Mexico, and an important part of Asia’s force-fed economic growth draining away into corruption and chaos. In Latin America, sympathy for free markets is dwindling: Support for privatization has dropped from 46 percent of the population to 36 percent in May 2000. Most ominously of all, in the former communist nations capitalism has been found wanting, and men associated with old regimes stand poised to resume power. Some Americans sense too that one reason for their decade-long boom is that the more precarious the rest of the world looks, the more attractive American stocks and bonds become as a haven for international money.
In the business community of the West, there is a growing concern that the failure of most of the rest of the world to implement capitalism will eventually drive the rich economies into recession. As millions of investors have painfully learned from the evaporation of their emerging market funds, globalization is a two-way street: If the Third World and former communist nations cannot escape the influence of the West, neither can the West disentangle itself from them. Adverse reactions to capitalism have also been growing stronger within rich countries themselves. The rioting in Seattle at the meeting of the World Trade Organization in December 1999 and a few months later at the IMF/World Bank meeting in Washington, D.C., regardless of the diversity of the grievances, highlighted the anger that spreading capitalism inspires. Many have begun recalling the economic historian Karl Polanyi’s warnings that free markets can collide with society and lead to fascism. Japan is struggling through its most prolonged slump since the Great Depression. Western Europeans vote for politicians who promise them a “third way” that rejects what a French best-seller has labeled L’Horreur économique.
These whispers of alarm, disturbing though they are, have thus far only prompted American and European leaders to repeat to the rest of the world the same wearisome lectures: Stabilize your currencies, hang tough, ignore the food riots, and wait patiently for the foreign investors to return.
Foreign investment is, of course, a very good thing. The more of it, the better. Stable currencies are good, too, as are free trade and transparent banking practices and the privatization of state-owned industries and every other remedy in the Western pharmacopoeia. Yet we continually forget that global capitalism has been tried before. In Latin America, for example, reforms directed at creating capitalist systems have been tried at least four times since independence from Spain in the 1820s. Each time, after the initial euphoria, Latin Americans swung back from capitalist and market economy policies. These remedies are clearly not enough. Indeed, they fall so far short as to be almost irrelevant.
When these remedies fail, Westerners all too often respond not by questioning the adequacy of the remedies but by blaming Third World peoples for their lack of entrepreneurial spirit or market orientation. If they have failed to prosper despite all the excellent advice, it is because something is the matter with them: They missed the Protestant Reformation, or they are crippled by the disabling legacy of colonial Europe, or their IQs are too low. But the suggestion that it is culture that explains the success of such diverse places as Japan, Switzerland, and California, and culture again that explains the relative poverty of such equally diverse places as China, Estonia, and Baja California, is worse than inhumane; it is unconvincing. The disparity of wealth between the West and the rest of the world is far too great to be explained by culture alone. Most people want the fruits of capital—so much so that many, from the children of Sanchez to Khrushchev’s son, are flocking to Western nations.
The cities of the Third World and the former communist countries are teeming with entrepreneurs. You cannot walk through a Middle Eastern market, hike up to a Latin American village, or climb into a taxicab in Moscow without someone trying to make a deal with you. The inhabitants of these countries possess talent, enthusiasm, and an astonishing ability to wring a profit out of practically nothing. They can grasp and use modern technology. Otherwise, American businesses would not be struggling to control the unauthorized use of their patents abroad, nor would the U.S. government be striving so desperately to keep modern weapons technology out of the hands of Third World countries. Markets are an ancient and universal tradition: Christ drove the merchants out of the temple two thousand years ago, and Mexicans were taking their products to market long before Columbus reached America.
But if people in countries making the transition to capitalism are not pitiful beggars, are not helplessly trapped in obsolete ways, and are not the uncritical prisoners of dysfunctional cultures, what is it that prevents capitalism from delivering to them the same wealth it has delivered to the West? Why does capitalism thrive only in the West, as if enclosed in a bell jar?
In this book I intend to demonstrate that the major stumbling block that keeps the rest of the world from benefiting from capitalism is its inability to produce capital. Capital is the force that raises the productivity of labor and creates the wealth of nations. It is the lifeblood of the capitalist system, the foundation of progress, and the one thing that the poor countries of the world cannot seem to produce for
themselves, no matter how eagerly their people engage in all the other activities that characterize a capitalist economy.
I will also show, with the help of facts and figures that my research team and I have collected, block by block and farm by farm in Asia, Africa, the Middle East, and Latin America, that most of the poor already possess the assets they need to make a success of capitalism. Even in the poorest countries, the poor save. The value of savings among the poor is, in fact, immense—forty times all the foreign aid received throughout the world since 1945. In Egypt, for instance, the wealth that the poor have accumulated is worth fifty-five times as much as the sum of all direct foreign investment ever recorded there, including the Suez Canal and the Aswan Dam. In Haiti, the poorest nation in Latin America, the total assets of the poor are more than one hundred fifty times greater than all the foreign investment received since Haiti’s independence from France in 1804. If the United States were to hike its foreign-aid budget to the level recommended by the United Nations—0.7 percent of national income—it would take the richest country on earth more than 150 years to transfer to the world’s poor resources equal to those they already possess.
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