The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. By Hernando de Soto. New York: Basic Books, 2000. Pp. 276. $27.50, cloth; $14.00, paper.

Extract

In this provocative book, Hernando de Soto argues that the reason why transitional and developing economies have had such limited success with adopting capitalism is the lack of formal property rights for the urban poor. Without legal ownership of the homes they inhabit or the businesses they operate, the poor live in a shadow economy, subject to high risk of expropriation, bureaucratic arbitrariness, and political corruption. The absence of title thwarts investment, limits markets, dampens incentives, and retards economic growth all round. The comparatively poor performance of many Latin American, African, and Asian economies stems not from cultures that are alien to commercial activity, from the legacy of past colonialism, or from low savings rates among the poor. The urban poor are entrepreneurs, and formal property institutions are needed to free their energies and expand their opportunities, allowing them to accumulate desperately needed capital. Currently, the urban poor are forced to hold their wealth in defective forms. This misallocation cripples developing economies. According to de Soto, the potential gain is huge. He argues that despite their lack of affluence, the poor still save, and in the aggregate the amounts exceed by perhaps 40 times all of the foreign aid sent to developing countries since 1945. Freeing up these savings and entrepreneurial energy could lead to a second industrial revolution, and end the disparities of wealth and well-being that differentiate the developed and developing worlds.