Change Through Ownership

Last week brought the announcement that Cuba's new president had granted property rights to his citizens.

In a major change in Cuba's state-controlled system, Raul Castro is allowing thousands of renters to gain title to their homes, AP is reporting. It's his first formal decree since he succeeded his brother Fidel as president in February.  Cubans — especially military families, sugar workers, construction workers, teachers and doctors — will be able to pass their homes or apartments to family members.

It's a start, but a key step.  I've always been fascinated by the power of ownership, and am a big fan of Hernando de Soto.

Rare is the economist who finds himself the target of terrorist bombings and assassination attempts, but Hernando de Soto is no ordinary economist. Beginning in his native Peru, de Soto has focused on a revolutionary concept that is having repercussions throughout the world's poor countries: the lack of formal property rights as the source of poverty in poor countries.

In 1999 Time magazine chose de Soto as one of the five leading Latin American innovators of the century.  Forbes magazine highlighted him as one of 15 innovators "who will re-invent your future."   The New York Times Magazine wrote, "To the leaders of poor countries, de Soto's economic gospel is one of the most hopeful things they have heard in years." The Economist magazine identified his Institute for Liberty and Democracy as one of the top two think tanks in the world.   

Perhaps it's because I spent over seven years in Peru during the late 1970's and witnessed first-hand the poverty that also touched de Soto, but most likely because he embraces a solution that flies in the face of the traditional "throw money at it" approach of most bureaucrats.

Why are some countries rich and others poor? De Soto knew that Peruvians did not lack entrepreneurial energy. The bustling informal economy of Lima was testament to that. Nor did they lack assets, per se. From countryside to urban shantytown, ownership was governed by a system of informally evolved and acknowledged property rights.

But as de Soto explained in his 1986 book The Other Path, these de facto owners were locked out of the formal, legal economy—and that was the root of the problem. "They have houses but not titles; crops but not deeds; businesses but not statutes of incorporation."

The opportunity of ownership is huge.

De Soto tells these heads of state that their poor citizens are lacking formal legal title to their property and are unable to use their assets as collateral. They cannot get bank loans to expand their businesses or improve their properties. He and his colleagues calculate the amount of "dead capital" in untitled assets held by the world's poor as "at least $9.3 trillion"—a sum that dwarfs the amount of foreign aid given to the developing world since 1945

And when unleashed, ownership can create rapid change.

While many scholars have pointed to and explained the importance of property rights to rising living standards, de Soto has asked the hard question of what it takes to get the state to recognize the property rights that function within the communities of the poor. Can they transform the mere physical "extralegal" control of assets into capital, a key to sustained economic development?

De Soto affirmed that they can attain legal status and developed a guide to the "capitalization process" for poor countries. In his activism and in his books The Other Path and The Mystery of Capital, Hernando de Soto has done much more than apply the lessons of economics to old problems; he has asked new questions and provided both new understanding and new hope for transforming poverty into wealth.

Which creates change that extends past simple economics.

For his efforts, the Peruvian Marxist terror group Shining Path targeted him for assassination. The institute's offices were bombed. His car was machine-gunned. Today the Shining Path is moribund, but de Soto remains very much alive and a passionate advocate. Delivering formal property rights to the poor can bring them out of the sway of demagogues and into the extended order of the modern global economy. "Are we going to make [capitalism] inclusive and start breaking the monopoly of the left on the poor and showing that the system can be geared to them as well?" That's de Soto's challenge and his life's work.

Cuba may be the next country to find out.

 

Comments

[Andy Wagner]

I'm continually amazed at how many similar ideas, outside manufacturing, that the lean community holds in common. I've been a big fan of deSoto myself for several years.
Along those lines, (and your recent post on Kiva) reading Muhammed Yunus' book "Banker to the Poor" I found a definite lean streak. Traditional banks were unwilling to help with micro loans to the extremely poor simply because their administrative costs per loan were too high. This is completely analogous to set-up time in manufacturing. In essence, the banks were "batching" their loans to spread the adminstrative costs across higher value loans.
Yunus solution was a banker's equivalent of "SMED." There was more to it than that, of course, (respect for people was pretty key) but by changing the assumptions about how to "set-up" a loan, Yunus made it possible to make hundreds of smaller loans at an affordable cost.
I always love making these connections!
Thanks for the post.

[Ken]

I agree with Andy - there is a definite confluence between the lean mindset and some of these more innovative programs. Andy made an excellent point about how some of the underlying processes, such as loan approval, benefit directly from lean thinking. Keep up the great posts - I like the thought-provoking variety.