Exporting the Ownership Society: A Case Study on the Economic Impact of Property Rights

Abstract

Peruvian economist Hernando de Soto is a favorite of the World Bank, numerous world leaders, and politicians in both parties in the United States. His work has been so influential that he has been considered for the Nobel Prize in Economics. Perhaps de Soto's prescription for the ills of developing economies is so influential because it seems so simple. He claims that if poor people in the Third World are given formal title to the assets they currently hold extra-legally, they will be able to generate capital, the surplus value that produces wealth. This article raises some cautionary notes, concluding that things are not so simple. It examines whether poor people who have formal title to their homes in the US, the country de Soto uses as his paramount example, experience the benefits that de Soto attributes to formal ownership. The article finds that the expansion of the ownership society to include the poor does produce many of the benefits de Soto claims. The greatest benefit is increased access to the markets for both residential real estate and mortgage loans. However, much of the wealth accruing from poor people's participation in these markets goes to market participants other than the poor. For example, many poor homeowners who seek to enhance their wealth by accessing more credit are victimized by predatory lenders who capture the wealth. For many also, the conversion of debt into long-term improvement of welfare is an uncertain and difficult process. For those who epitomize de Soto's hypothesis by using their formal title as an aid in starting small businesses, the path is especially complex and uncertain. In the end, there is no clear connection between property formalization and greater social welfare. This lesson in turn provides useful information about what it is reasonable to expect from rule of law reforms.