Theoretical Framework I_Hernando de Soto_The mystery of capital: why capitalism triumphs in the West and fails everywhere else.

 The mystery of capital_book coverSoto, Hernando de

Hernando de Soto’s work theorizes the emergence of extra-legality in the developing and former communist countries. He emphasizes the importance of legitimization of property rights in capital accumulation. Engaging with his work, I try to ground the understanding of Hanoi’s illegal construction on the state-society relation in property rights. The dominance of illegality in the built environment of Hanoi and the interpenetration between state and society questions de Soto’s sharp distinction between state-backed property rights and self-regulation.

 

Three underlying metaphors in the book 

The mushrooming extra-legal sector

It describes the obstacles to legality and the emergence of extra-legality in developing and former communist countries.

“Once governments understand that the poor have already taken control of vast quantities of real estate and productive economic units, it will become clear that many of the problems they confront are the result of the written law not being in harmony with the way their country actually works. It stands to reason that if the written law is in conflict with the laws citizens live by, discontent, corruption, poverty and violence are sure to follow.”  (P95)

Lifting the bell jar

It illustrates the difference between registered and unregistered property rights. Those within the bell jar enjoy state protection of their registered property rights more effectively than community-based, self-regulatory systems.

“In most rich countries, and in the bell jars of developing countries, in contrast, most people have effective rights and expressed duties, whether as workers, businesspeople, tenants or property owners. If their rights are violated, they have recourse to the law; if they breach their obligations, legal action can be taken against them. The knowledge that legal rights and obligations can be enforced, if necessary, guides people’s everyday actions – and this certainty allows them to pursue economic and other opportunities. In effect, rich countries’ prosperity is created through a variety of sophisticated instruments and norms such as limited-liability companies, partnerships and cooperatives, tradable assets, labour contracts, venture capital, insurance and intellectual property – all of which rely on an effective framework of law and functioning institutions.” (P156)

Going out into the streets to listen to the barking dogs

It emphasizes creating “liquid capital” from “dead capital” by “legalizing” or “formalizing” “extra-legal” or “informal” assets through a system of property entitlement through “deregulation, de-bureaucratization and privatization.”

“Most governments of developing and former communist nations are probably ready to recognize that the reason why their extralegal sectors are growing exponentially is not because people have suddenly abandoned their respect for the law but because they have no alternative for protecting their property and earning a living. Once governments come to terms with this fact of modern life, they will have to strike a deal. Although the extralegals are already primed to cross the bridge into legal recognition, they will do so only if their governments make the trip easy, safe and cheap. Asset owners in the extralegal sector are already relatively well organized; they are also ‘law-abiding’, although the laws they abide by are not the government’s. It is up to the government to find out what these extralegal arrangements are and then find ways to integrate them into the formal property system. But they will not be able to do that by hiring lawyers in high-rise offices in Delhi, Jakarta or Moscow to draft new laws. They will have to go out into the streets and roads, and listen to the barking dogs.” (P189)

 

Reference

Soto, Hernando de. The mystery of capital: why capitalism triumphs in the West and fails everywhere else. New York: Basic Books, 2000.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.