For the first part of the article, go to:
https://www.publish0x.com/real-world-assets/the-mystery-of-capital-xddoxdn
Dead capital
Contrary to what you might think, the poor of the Third World save. A lot actually. Per de Soto’s and his research team’s estimates the value of savings among the poor is forty times all the foreign aid received after the World War II. 40 times! Even though the book was published in 2000, we don’t have any reason to assume that the reality nowadays is much different. Even in Haiti, the poorest country in Latin America, the total assets the poorest hoarded have value more than 150 times greater than the amount of foreign aid received since Haiti’s independence in 1804. Researchers observed this pattern in most developing economies: in almost all Third World countries even the poorest save, and they save a lot.
If this is the case, then why these countries don’t seem to be able to generate capital? If they have assets worth trillions of dollars, what hinders them to create capital? What does the West, the developed economies have that Third World countries lack in order to generate capital? What is the mystery of capital?
The reason why Third World countries (developing and former communist economies) cannot create capital as efficiently as the West is that most of the resources in the hands of the poor are in defective forms. What does this mean? Their houses are built in places where land ownership rights are not meticulously and adequately registered. Industries in these poor regions are located in places inaccessible to foreign investors and financial institutions. Even their businesses are not incorporated according to legal procedures accepted in the West. As de Soto puts it, these countries have “houses but not titles; crops but not deeds; businesses but not statutes of incorporation.”
That’s why the majority of the assets in most developing countries cannot be easily converted into capital. It is dead capital, an asset that has potential but cannot be put to use as capital. Assets in these economies cannot be used for purposes other than their direct physical uses. For the poor in the Third World, the house is a shelter only; it isn’t and cannot be used for business purposes or for taking a loan unless its ownership rights are accurately recorded. Resources cannot be used as a collateral for a loan; they are traded in the narrow circle of trading partners; they cannot be used as a share against an investment. What this means is that since businesses are mostly unincorporated, they cannot offer share of the venture to investors seeking to put capital in these businesses.
The exact opposite is what happened in the West. They have what de Soto defines as a “representational process”. Almost all resources – equipment, every parcel of land, every inch of real estate, stores of inventories – are represented on paper. This property document integrates these visible, tangible resources to the rest of the economy. Thus, in the West assets can be and are used for purposes other than their direct uses. Here resources live invisible lives which are separate from their physical lives. This representational process makes it possible for assets to be used as addresses for collecting and taxes and owner’s credit history among other uses. Not only this but assets can also be used as a foundation for the issue of securities, such as mortgage-backed bonds.
