Slumdogs and Millionaires

Hernando de Soto makes an apt comparison between slumdogs and millionaires in an interview with Barrett Sheridan of Newsweek.

What makes a market economy possible is that people are able to find out facts about each other and about their enterprises in spite of the fact that they don't have direct physical contact. So the question is, how do you get to know things? How do you get facts? You will find out that most of the facts you want are in property papers. One of the things that developing countries miss is that close to 80 percent of their enterprises are actually not fully recorded as property.

….The enormous amount of derivatives that had poured into the market–there are close to $600 trillion of these papers around–are also not recorded in a global or centralized manner, or in a manner that allows you to begin to quantify them. [Former SEC Chairman Christopher] Cox thought that maybe the toxic part of all of these assets was $1 trillion to $2 trillion. [Treasury Secretary Timothy] Geithner told us there's maybe $3 trillion or $4 trillion. Nobody really knows, so in a way [they've created an] informal or shadow economy. This unidentified paper is the source of uncertainty and the credit contraction.

…That shadow hopefully is a temporary condition in the United States and in Western Europe. And it might pass in a year or 10 years, but it will pass. That passing condition that's occurring now in developed countries, that's a chronic condition in developing countries. We're always chronically in credit crunches–because you don't know who owns what, nobody dares lend to somebody else. Bringing the law to emerging markets is possibly the most important measure that can be taken to help these countries become rich.


Possibly one area where the government can be (but is not necessarily) actually useful, eh?

I read this exact argument (bringing property rights to the developing world) by de Soto about 15 years ago when I was a senior in high school, and it still rings amazingly true. Some countries (e.g. Singapore) have taken it to the extreme by making the government the owner of almost all the land. The public housing that 80-90% of Singaporeans live in, created after clearing slums and villages, is leased to them for 99 years. However, most of these apartments are torn down and rebuilt after 15-20 years.

It's quite amusing to learn how the developed world has also created its own shadow economy. The crucial difference is that the 1st world created it despite the presence of a strong & efficient legal framework, while in the 3rd world, it came about because of the lack of the same structures.

It is time to watch out for political forced choices and the fleecing of ordinary people who thought they had actually bought a home to live in

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