The Mystery of Capital

I recently read The Mystery of Capital (2003), written by Hernando De Soto. The subtitle of the book is “Why Capitalism Triumphs in the West and Fails Everywhere Else.” Following the fall of the Berlin Wall and the global collapse of communism, what ensued was the greatest economic experiment in history.  During this period the Soviet Union’s global power and influence over smaller countries was relinquished and it became profoundly clear that capitalism is the most widely successful and legitimate type of economic system in the world. In light of this fact, many countries saw adopting capitalism as the path by which they could enact economic prosperity.

De Soto explains that the majority of non-western countries that have attempted to implement a capitalist economic system have not experienced the same growth and prosperity as western countries such as the United States and Germany. De Soto argues that economic growth can only be enhanced in capitalist countries that have a highly developed system of property rights, something that many non-western countries lack – especially those in Latin America.

Hernando De Soto himself is a Peruvian economist and as such he uses Peru as one of the main subjects of his argument. De Soto notes that during their time spent in Lima, the capital city of Peru, he and his colleagues found that: “To obtain legal authorization to build a house on state-owned land took six years and eleven months, requiring 207 administrative steps in fifty-two government offices.”  He explains that the inefficiency in Peru, largely caused by a lack of regulation and legal infrastructure, has led to the creation of “extralegal” or informal markets. People cannot afford to and do not want to take the legal road and as such they go out on their own and build houses and buildings and such on their own accord. The result is a multitude of properties that are not recognized by the government, not measured by GDP, with no potential to be used by the owner to create more capital in the future – something De Soto refers to as “dead capital.” These trends are something I was entirely unaware of prior to reading this book and I would strongly recommend it to that anyone interested in Latin American economics.

I will conclude this post with a few startling facts: De Soto estimates there are 9.3 trillion dollars of dead capital in countries throughout the world. According to this article, there is 1.2 trillion dollars of dead capital in Latin America alone. Bolivia is a Latin American country with access to plentiful natural resources that encourages free trade, foreign investment and the privatization of major industries. However, Bolivia is the poorest country in South America and its dismal economic situation can be attributed in part to the fact that the informal – or in De Soto’s terms “extralegal” – portion of the economy accounts for more than two thirds of the country’s GDP (source).  It seems that Bolivia and many other countries Latin American countries could learn from De Soto’s findings and perhaps use them to majorly improve their economies.

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About ebenwebber

Aspiring business professional focused on the South American business climate. International Business major - University of Nevada, Reno.

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