Why Capitalism Has Failed in the Third World

The Third World and economic inequality continues to be a heated issue in international political science.  There seems to be no consensus on how to stimulate economic growth amongst developing nations, especially south of the equator.  Although, in many cases there is a general consensus that there must be some economic liberalization, there is still widespread debate over what type of economic policies these developing nations should take.  Furthermore, there is still widespread belief that poverty in the Third World is of direct consequence of the predatory nature of “Western Capitalism”.  In other words, there is a belief that poverty is of a result of external politics, not internal politics.  There have, fortunately, been several publications written on the topic.  There are some which favor taking another look at these nations’ politics and economic decisions, while there are others who still believe that the factors are almost entirely external.  For as long as the majority of the human population lives in the Third World, poverty in developing nations is likely to remain an important topic.  This is especially true as humankind, in general, begins to take a more compassionate look towards the issue of poverty.  This is a trend which has come into existence almost simultaneously with welfare.  The result has been an increase in foreign aid.  Despite this, the mainstream has done little to judge the internal policies of the countries in question.

If there is one book, on the topic, which stands above the rest, it is Hernando de Soto’s The Mystery of Capital.  De Soto provides a convincing case against Socialism and argues that the root of poverty is the lack of private property rights.  He therefore exonerates Capitalism of all blame for the financial morass in which the majority of nations find themselves in.  It should be remembered that it was not always nations in the southern hemisphere which suffered from poverty; Spain, for example, was a very poor country until the 1950s, during which the “economic miracle” took place under the administration of Dictator Francisco Franco.  One also needs to consider the fact that many Third World governments are in fact extremely wealthy.  It is the people which are generally poor.  The problem is not with Capitalism; if it was, under no circumstances would a country such as the United States become a great industrial power (remember that the United States did not become a welfare state until the early-20^th century).  There is clearly another explanation, and de Soto provides it.

The problem lies with property rights, or the lack thereof.  Easy access to property rights, and the consequent respect of said private property rights, is the key to the investment and creation of capital.  Capital and production, of course, is the keystone to any economy.  But, it is only if the capitalist has the ability to invest that economic growth can come about.  An overarching quality of all first world nations is that they share easy access to property, making it easy for a poorer citizen to invest and generate wealth.  Inversely, this is a quality which is lacking in every single case of the Third World.  Two very contemporary cases are South Africa and Zimbabwe.  These are two very different examples, given that South Africa is one of the wealthiest countries on the African continent.  The problem, as aforementioned, is not unique just to Africa.  One only has to take a look at the complexity of acquiring private property and corresponding permits in Russia.  Hernando de Soto goes through great lengths to find empirical evidence to support his thesis.  He studiously shows that the accumulated and aggregated wealth of the poor is multiple times greater (as in, a hundred times greater) than the aggregated wealth of the rich.  And so, the problem is not a lack of ingenuity or a lack of capital, but a lack of the right to invest said capital in a venue which could produce more.  Indeed, the capital controlled by the poor in Egypt is fifty-five times greater than the aggregate amount of all direct foreign investment in the country (page 34).

Hernando de Soto presents his thesis and then explains it in a very thorough book.  He introduces the topic, and then dives straight into the topic of capital and money.  He takes great strides to explain what money is, and how capital is not money but merely represented through money.  There is ample explanation of what needs to be done to transform what he calls “dead capital” (or capital that cannot be invested) into usable capital.  He then pinpoints the poorly devised regulations on private property which have proven to be obstacles against investment.  One of the most important lessons of his book takes the form of criticizing the negative effects that greater public awareness of worldwide poverty could have.  Some of the regulations that come into place, which were intended to help the poor, provide a barrier to investment and detract from the overall respect of private property.  The Mystery of Capital departs from the definition of capital and the barrier to investment built by the State and takes a look at the early history of the United States, using it as the main example in support of his thesis.   A focus point is the American West, where at first there was no general respect for private property.  The book shows how a respected legal system came into place.  It serves as a case study for nations that have yet to devise their own effective legal codes.  De Soto finishes the book off with a look at legal codes throughout history, and what an effective legal code requires to promote investment and the use of capital.  By organizing the book in such a manner, de Soto makes the path to prosperity extremely clear.

The message may be Capitalistic, but that has not saved Hernando de Soto from receiving flak from other pro-market economists.  Gabriel Calzada, a Spanish economist, published an extremely critical review of the book.  Admittedly, much of Calzada’s argument has a lot of merit to it, but it probably misses de Soto’s ultimate point.  Calzada’s critique begins at de Soto’s opinion that through respect of private property rights individuals can now enter binding social contracts with each other to raise the community’s standard of living.  It is a utilitarian outlook on the benefit of private property rights.  The review then shifts its criticism onto de Soto’s declaration that he is not a “die-hard Capitalist” and the fact that de Soto prefers an active government as opposed to a passive government.  What is suggested is that de Soto does not pass the test of libertarianism.  Admittedly, Hernando de Soto does make the case against an anarchic formation of property rights and makes a clear argument for the role of the State.  Perhaps it is true that the book’s argument makes its case far too much from a legal standpoint, as opposed to from an ethical standpoint.  But, Calzada’s criticism subtract from the overall value of The Mystery of Capital.

Hernando de Soto makes a strong case which favors the formation and respect of private property rights.  His argument, from a purely capitalistic point of view, might not go far enough.  But, it does make great strides towards providing a better understanding towards what brings about prosperity.  Perhaps the books greatest strength is its pragmatism.  Theoretically, an anarchic society would be the most efficient.  It is even possible that in practice the theory works.  The problem is abolishing the State, which today is not a practical objective in the short-run.  Hernando de Soto’s argument is much more relevant to the reality of today’s politics.  In other words, it is much more likely to be taken into consideration.  And, this is where Hernando de Soto trumps Gabriel Calzada.  De Soto’s personal political ideology aside, he makes a case which is marketable to foreign governments.  A parallel anarchic solution would never be considered by the powers that be, and unfortunately it is these powers which have the exclusive ability to change policies and make respect for private property possible.  On the other hand, Gabriel Calzada makes valuable points.  It is oftentimes that the formation of private property is made relatively easy, but at the same time the government lacks respect for it.  Bureaucracy should be limited in both cases.  Not only does the individual need the right to form private property to invest capital, but he must be given the certainty that the property and the fruits of his labor and investment are going to be his in the long-run.

The Mystery of Capital is a valuable addition to any library, whether owned by a Communist or by a Capitalist.  It offers the reader a very good understanding of capital and the utility of property.  It makes a strong case for economic liberalization and offers governments and societies easy to discern steps to achieve these objectives.  It gives a pragmatic solution to poverty in the Third World.