Economics 101 & Public Square

Why Private Property Rights Help the Poor

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In his groundbreaking book, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, Peruvian economist Hernando de Soto says that private property rights are crucial to eradicating poverty.

This is consistent with my previous post in which I argued that private property is biblical and necessary to human flourishing.

But de Soto goes on to note that even the poorest nations have more than enough assets to be successful. He estimates that the total value of the real estate owned formally or informally by the poor in the developing world is $9.3 trillion.

If this is the case, why do so many remain so poor?

De Soto argues that the legal status of private property is a barrier to progress in developing countries. Land only becomes property when there are property and titling laws in place that are widely recognized.

In order to be made alive and active, in order to become capital, the land under the feet of the poor—much of which lacks formal ownership—needs to be formalized through property laws that allow these assets to be used for credit like allowing mortgages, loans, etc.

This is the mystery of capital that has allowed so many countries to eradicate absolute poverty and enjoy widespread wealth.

We take these things for granted in the West. Theologian John Schneider puts it well:

In the United States an ordinary teenager lacking all maturity, insight, or any remarkable skill at anything, can slide a credit card into a gas pump slot and draw immediately on the magical mystery of capital. His parents take for granted that they can have a mortgage, or loan on their business, that will enable them to secure among many other things, the requisite four years in college.

But in order to have this kind of credit, one needs secure private property laws, a fixed address for sending bills and collecting taxes, a basis for checking credit history, access to public utilities, and a basis for mortgage based on securities that can be sold. Since we have inherited all these things, we often take them for granted.

In poorer nations, these conditions either do not exist or exist in a very imperfect form. The process to acquire formally owned property can be daunting in these places. De Soto says that the procedure to formalize property in the Philippines could:

Necessitate 168 steps involving 53 public and private agencies and taking thirteen to twenty five years…In Egypt, the person who wants to acquire and legally register a lot on state-owned desert land must work his way through at least 77 bureaucratic procedures at thirty-one public and private agencies…This can take anywhere from five to fourteen years…Total time to gain lawful land in Haiti: nineteen years…Yet even this ordeal will not ensure that the property remains legal.

Starting a business in these countries can be just as difficult and frustrating. For instance, de Soto and his team tried to open a small garment shop with one worker in Lima, Peru. The team worked six hours a day, and it still took 289 days. The cost was about three years’ salary.

De Soto says:

Imagine a country where nobody can identify who owns what, addresses cannot be easily verified, people cannot be made to pay their debts, resources cannot conveniently be turned into money, ownership cannot be divided into shares, description of assets are not standardized and cannot be easily compared, and the rules that govern property vary from neighborhood to neighborhood or even from street to street. You have just put yourself into the life of a developing country or a former communist nation.

Clearly, establishing easy, quick access to clearly documented property rights is a crucial precondition for moving a country from poverty to prosperity.

Ignoring this insight could cause decision-makers to misdiagnose the source of poverty in the developing world, prompting them to try to solve this problem with foreign aid or different trade policies.

These things may do some good, because it’s true that poverty is a nuanced and complicated issue.

Without clear rights to private property, however, the poor as a whole are unlikely to escape poverty.

Are private property rights beneficial to the poor? Leave your comments here.

Photo courtesy of Six in the World.

This post is adapted from Dr. Lindsley’s most recent white paper. You can read the entire paper here.

To learn more about how private property and other factors impact the poor today, check out a copy of IFWE’s upcoming book, For the Least of These: A Biblical Answer to Poverty, coming out this March.

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