[Dean's World] Dave Price: The Mystery of Capital

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Posted by Dave Price:
The Mystery of Capital
http://www.deanesmay.com/posts/1196959462.shtml


   Why are poor countries poor?
   A commenters reference to "dead capital" reminded me of DeSoto's
   [1]excellent book on the subject, which had a profound impact on me
   when I read it several years ago. Here's [2]an essay from DeSoto that
   captures the point nicely:

     Walk down most roads in the Middle East, the former Soviet Union,
     or Latin America, and you will see many things: houses used for
     shelter; parcels of land being tilled, sowed, and harvested;
     merchandise being bought and sold. Assets in developing and former
     communist countries primarily serve these immediate physical
     purposes. In the West, however, the same assets also lead a
     parallel life as capital outside the physical world. They can be
     used to put in motion more production by securing the interests of
     other parties as "collateral" for a mortgage, for example, or by
     assuring the supply of other forms of credit and public utilities.

   Read the whole thing.
   In his book, DeSoto shows the incredibly strong positive correlation
   between GDP per capita and well-defined, well-regulated mechanisms for
   collateralization and capital transfer. The statistic that stuck with
   me was one about the impoverished nation of [3]Haiti, where, after all
   the bribes and forms and required permissions from various
   departments, it takes on average fourteen years to transfer ownership
   of real estate.
   Imagine for a moment you are trying to sell your home, and you have to
   warn potential buyers that it will probably take a decade and a half
   before title can be transferred; it would obviously be a huge
   disincentive, and many potential transactees could not even expect to
   survive the length of the transaction. It's easy to see how the
   prevalence of this kind of barrier could cause an economy to grind to
   a halt.
   In poor countries, the net result of this is to reduce the
   transferable value of the main asset of the poorest -- their homes --
   to near-zero. Imagine the effect on the United States if all property
   values in America suddenly dropped 99%, and you'll begin to understand
   what a crushing burden this "dead capital" inflicts on poor countries.
   Of course, this also means that if efficient capital-releasing
   mechanisms can be established in poor countries, it's highly likely
   they can become wealthy. As we help newly liberated Iraqis and
   Afghanis toward self-sufficiency, this provides hope they will be able
   to build the kind of prosperity (long taken for granted here in the
   West) that helps establish stability and security, if these lesson are
   properly applied.

References

   1. http://www.amazon.com/Mystery-Capital-Capitalism-Triumphs-Everywhere/dp/0465016154
   2. http://www.imf.org/external/pubs/ft/fandd/2001/03/desoto.htm
   3. http://en.wikipedia.org/wiki/Haiti