Some of the most important parts of our modern economy are invisible. You can’t see radio waves. You can’t see limited liability.
And perhaps most fundamentally, you can’t see property rights. But you can hear them.
That’s what one Peruvian economist concluded about twenty-five years ago, while walking through the idyllic rice fields of Bali, Indonesia.1 As he passed one farm, a dog would bark at his approach. Then, quite suddenly, the first dog would stop and a new hound would begin to yap away. The boundary between one farm and the next was invisible to him—but the dogs knew exactly where it was.
The economist’s name is Hernando de Soto. He returned to Indonesia’s capital, Jakarta, and met with five cabinet ministers to discuss setting up a formal system to register property rights. They already knew everything they needed to know, he said, cheekily. They merely needed to ask the dogs of Bali who owned what.
Hernando de Soto is a big name in development economics. His energetic opposition to Peru’s Maoist terrorists, The Shining Path, made him enough of a target that they tried to kill him three times.2 And his big idea is to make sure that legal systems can see as much as the dogs of Bali.
But we’re getting ahead of ourselves. At the time—the 1990s—the Indonesian government was trying to formalize property rights, but many governments have taken the opposite tack. In 1970s China, for example, where the Maoists weren’t the rebels but the government, the very idea that anyone could own anything was seditious, bourgeois thinking. Farmers on collective farms were told by Communist Party officials: You don’t own a thing. Everything belongs to the collective. What about the teeth in my head, asked one farmer. No, replied the official—even your teeth are owned by the collective.3
But this approach worked terribly. If you don’t own anything, what incentive is there to work, to invest, to improve your land? Collective farming left farmers in desperate, gnawing poverty. In the village of Xiaogang in 1978, a group of farmers secretly met and agreed to abandon collective farming, divide up the land, and each keep whatever surplus they produced after meeting collective quotas. It was a treasonous agreement in Communist eyes, so the secret contract was hidden from officials.
But the farmers were eventually found out: the giveaway was that their farms had produced more in one year than in the previous five years combined. It was a tremendously dangerous moment: the farmers were abused and treated like criminals. But as luck would have it, China had just installed a new leader, Deng Xiaoping. And Deng let it be known that this was the sort of experiment that had his blessing. The year 1978 was the beginning of China’s breakneck transformation from utter poverty to the largest economy on the planet.
The experience in China shows that property rights are incredibly powerful ideas, and that up to a point, they can be handled informally, by a community. But, says Hernando de Soto, there’s a limit to what an informal community agreement can do. If everyone in my neighborhood recognizes that I own my house, that means I can use it in certain important ways. I can sleep there; I can repaint the kitchen—or install a whole new kitchen. If a burglar tries to break in, I can call for help and my neighbors will come.
But in one critical way, it doesn’t help me that my neighbors agree that I own my house. It doesn’t help me get a loan.
The standard way that anyone raises a serious line of credit is to pledge property as collateral. Land and buildings make particularly good collateral because they tend to increase in value, and it’s hard to hide them from creditors.
But if I want to use my house as collateral for a bank loan, to set up a business or install that new kitchen, I need to prove that the house really is mine. And the bank needs to be confident that it could take the house away from me if I don’t repay the money I borrowed. To turn a house from a place where I sleep into a place that underpins a business loan requires an invisible web of information that the legal system and the banking system use.
For Hernando de Soto, this invisible web is the difference between my house being an asset—something useful that I own—and being capital—an asset recognized by the financial system.
And it’s clear that a lot of assets in poor countries are informally held—de Soto calls them “dead capital,” useless for securing a loan. His estimate was that at the start of the twenty-first century there were almost $10 trillion worth of dead capital across the developing world, mostly in the form of unregistered land or buildings. That’s more than $4,000 for every person. Other researchers think that’s an overestimate and the true figure is probably $3 or $4 trillion—but it’s still clearly a huge amount.4
But how do assets become capital? How does the invisible web get woven? Sometimes it’s a top-down affair. Perhaps the first recognizably modern property registry was in Napoleonic France. Napoleon needed to tax things to fund his incessant wars, and property was a good target for taxation. So he decreed that all French properties would be carefully mapped and their ownership would be registered. Such a property map is called a cadastre, and Napoleon proudly proclaimed that “a good cadastre of the parcels will be the complement of my civil code.” After conquering Switzerland, the Netherlands, and Belgium, Napoleon introduced cadastral maps there as well.5
In the mid-1800s, the idea of the land registry spread quickly through the British Empire, too: state surveyors produced maps, and the department for land would allocate title deeds. It was swift and fairly efficient, and of course at the time nobody with any power had much interest in the fact that most of the allocations were also confiscations from the indigenous people who had their own claims on the land.6
In the United States, there was a bottom-up approach. After decades of treating squatters as criminals, the state began to think of them as bold pioneers. The U.S. government tried to formalize informal property claims, using the Preemption Act of 1841 and the Homestead Act of 1862. Again, the rights of the native people who had been living there for thousands of years were not regarded as of much significance.7
It was hardly justice. But it was profitable. By turning a land-grab into a legally recognized property right, these land-registry processes unlocked decades of investment and improvement. And some economists—most prominently Hernando de Soto himself—argue that the best way to create property registers and cadastral maps for developing countries today is to use the same bottom-up process of recognizing informal property rights.
But do improved property registers really unlock what de Soto calls “dead capital”? The answer depends on whether there’s a banking system capable of lending and an economy worth borrowing money to invest in.
And it also depends on how smoothly the property register works. De Soto found that in Egypt, legally registering property involved 77 procedures, 31 different agencies, and took between five and thirteen years. In the Philippines, everything was twice as complicated: 168 procedures, 53 agencies, and a thirteen-to-twenty-five-year waiting list. Faced with such obstacles, even formally registered properties will soon become informal again—the next time the property is traded, both the buyer and the seller will decide that formalizing the deal is just too time-consuming.8
But get it right, and the results can be impressive. In Ghana, farmers with a clearer right to transfer their property to others invested more in their land.9 Around the globe, the World Bank has found, after controlling for income and economic growth, the countries with simpler, quicker property registries also had less corruption, less gray-market activity, more credit, and more private investment.10
Property registries occupy a strange place in the political spectrum. On the right, people demand that the government step aside and make space for entrepreneurs. On the left, people urge the government to step forward and involve itself in the economy. Creating and maintaining a property registry is an activity that sits in the overlap of that Venn diagram. If de Soto is right, the government has to act, but it has to act with a minimum of red tape.
Meanwhile, property registries are unfashionable, unloved, and even unknown. But without them, many economies would go to the dogs.