How Hernando de Soto’s works play into the American economy

by Jason on June 14, 2012

After reading Hernando de Soto‘s The Other Path and The Mystery of Capital, I have been in flux of what it takes to resolve issues of economic development among the poor and informal.

In The Other Path, and to a degree The Mystery of Capital, de Soto outlines the housing, employment/enterprises, and methods of transportation performed by the informal and “extralegal” sector of the population. To define informal – it is everything outside the formal sector: social and market enterprises without legal backing or collateral. Examples are slums or housing without titles, street vendors or employees paid “under the table,” or unlicensed rickshaw drivers.

These sectors operate due to obstacles or shortcomings of policies that inhibit the participation of all members of the population into the formal sector. This includes favoritism of specific industries through policies, to regulations that force out legal participation, whether that is through administrative obstacles or regulations such as minimum wages. De Soto argues on the pretense of the inefficiency of the public sector in maintaining an environment that allows for free enterprise, an argument for a free market in governing economic development.

Reading this has me conflicted on the correct approach to solving economic inequality. However, I am acknowledging the differences between a nation like the United States, and that of Peru, where the basis of study originated.

Favoritism and regulation come in terms of the United States in the form of tax breaks and operations and wage requirements. I can see where both these aspects would not work in de Soto’s recommendations. Tax breaks would not be needed if the industry is already profitable – shifting the market’s natural process of creative destruction. On the other end, operations and wage requirements make it more difficult for those starting new businesses and enterprises, making it more difficult to benefit from economies of scale.

De Soto’s arguments stem from the merchantile characteristics of developing economies, specifically Peru. He notes the great difficulty in operating legally – at costs of much income and years of waiting. This has led to preemptive development, backwards of developed economies with legal backing and enforcement of contracts. So a family who wishes to own a house would first find land to build it, make sure the materials aren’t permanent in case officials decide to clear the lot, and to always have someone at the site to declare that the property is owned. This limits economic potential of the family, as well as the lack of capital a mortgage can bring in developing a business or repay loans. So instead of owning the land and building, it is performed in reverse, and with much uncertainty. The same is said with businesses and transportation. It is more appropriate to ask for forgiveness than permission, since permission is too difficult to obtain.

Some similarities are shared with Peru and the United States, especially in specific inefficiencies of extensive bureaucracy and the artificial maintenance of industries and standards of earning.

However, I wonder if de Soto’s analysis took into account externalities – the human and social cost of poverty, the environmental stewardship and regulation needed to maintain green space, and specific “industries” such as education, which may benefit with taxes from those who gain from an educated workforce. I believe that some regulations need to be trimmed to allow the creativity and innovation of the enterprising and creative class to feel they have the ability to pursue their talents and develop socially and economically. Yet I wonder what the outcomes may be if growth is not managed (by managed, I do not mean curbed), and directed in ways that are beneficial to multiple members of society.

I find slash-and-burn economies as unsettling as over-regulated ones. The former lacks altruistic purpose and a future vision, and the latter is inefficient and potentially corrupt. Subsidies are present currently in many manifestations: corporate tax breaks, affordable housing, highway funding, free parking, public transit, park maintenance. Regulations keep specific standards of safety and quality of life where they are: food safety, minimum wage, zoning, etc. Perhaps the differentiation, and one eluded to by de Soto as Good Laws, are those that promote the enterprise of the people, that allow individuals the ability to own and steward their methods of subsistence. I think of Good Laws as those in Kerala, India – where the state promotes the enterprises of the community, to empower them to pursue capital and community projects that help their families and their communities.

Naturally, what is done in one country does not always apply in another, but it’s helpful to challenge our own perceptions of how communities, governments, and nations may be run to ensure that all members, at least, have a way to take care of themselves – providing them the opportunity to do so until they can progress on their own.

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