Development economics is a hot topic right now. It seems to baffle everyone, even economist, why some countries fail and some succeed, and why some countries can do either quicker than some. There are many theories out there, all credible in some respect, that try to ascertain one common solution to the problem. It's hard to believe that one solution could fix all developing countries but there is a theory of property rights which goes a long way to identify and solve the problem of development.Hernando De Soto, a Peruvian economist, tries to explain why poor countries are poor and rich countries rich. His theory centers around the legal system employed in those countries and more specifically, property rights.
A major assumption of economics, which is never discussed in economics classes, is that proper legal institutions must exist. For instance, if I wanted an apple from the store I might just take it without paying for it. If there were no legal institutions that provide incentives against theft, what is stopping me from stealing? It is basically impossible to have a functioning market without the correct legal incentives. De Soto brings this to the forefront in The Mystery of Capital in which he discusses the abominable state of legal rights in developing countries versus those in countries that are considered developed.
In developing countries it is not unusual for people to have houses and land. They build houses and cultivate crops on this land, just like in developed countries. But when it comes time to use that land for collateral for a loan, no matter the size, it is nearly impossible. Though many people occupy land in developing countries, very few have the legal paperwork showing that they own the land. It has been passed down through family generation after generation before deeds were issued or it was given to them during a land-reallocation project but the government was too busy to issue deeds. De Soto calls this "dead capital."
Dead capital is "stuff" that can't be used to generate surplus value. This stuff is normally land, houses, tractors, anything of value that is not legally beholden to anybody; in the legal framework, it is essentially community property. One of the big failures of communism is that there are no property rights and therefore, every thing is community property. When things are not owned, you cannot use them for personal gain; in this case, you cannot put them up as collateral.
The solution to this dead capital is to create a system of property rights that allow people in developing countries to use their things for more than just production. But creating a legal framework is difficult and has taken thousands and thousands of years in developing countries. Europe tested legal and political systems for years before settling on one and then refining it. The US lucked out in the our legal system was implanted by European powers but during early American history, property rights were rare the further west one moved.
The moral is, there may not be one cure for developing countries but before any economic solution can be tried and implemented, these countries must first create the correct framework for a market to function on. Without the correct legal foundations no amount of money, aid, or miracle cures can work.
