The main idea of the book, as I understand it, is this: capital (either money or assets) is essential to the growth of an economy. With capital, people are more accountable for their business conduct, because they have the capital to lose - so they can take loans and open businesses, leveraging this capital, and banks and governments shouldn't have a problem providing them with loans as long as they own something to be taken in return (think mortgaging a house for a loan to open a business). But this is only true when the capital people hold is formal and legal!
De Soto's main claim is that the population of 3rd world countries (in which he includes all the developing and former communist nations) hold an immense amount of informal, illegal capital, by having property which isn't written down in any formal property system. He does some approximate counting and reaches the conclusion that the populations of these countries hold illegal property that has a value of many trillions of dollars - capital that can not be integrated into the economy because of its being informal (or as he calls it - extralegal).
But why is it extralegal ? Mainly because of the bureaucracy of these countries' governments. De Soto cites a few researches he and his team did of trying to open a legal business in Peru - it took up to a year of bumping between different government agencies and a sum of money that is an order of magnitude larger than the average income.
The solution proposed is:
- Reduce the bureaucratic burden
- Integrate the extralegal property into the formal economy.
The formal property systems of the west produce six effects that allow their citizens to generate and exchange capital:
- Fixing the economic potential of assets
- Integrating disperse information into one system
- Making people accountable
- Making assets fungible
- Networking people
- Protecting transactions
This is what allows me, a citizen of a western country, to just go to the store and buy a TV with my credit card. While living in the West it is difficult to appreciate the amount of economic assumptions that make this possible. In the 3rd world it just can't happen, so it is no wonder the developing countries' economies fail to grow sufficiently.
All in all, I find the author's ideas sound and interesting. Certainly, the main dogma is unusual and makes you think a lot about the actual meaning of property and capital and how they relate to economic prosperity. I'm sure it's not the only explanation, but it is certainly a big factor. Curiously, De Soto managed to institute dozens of reforms in his homeland (Peru) that allegedly improved the economy there. It is an enviable role, to be able to influence global matters in such manner.
That said, I must say that the book is written terribly. The author clearly doesn't have that much to say about his idea. As my wife said, this book would make an excellent 25-page article, but it is a horrible book. The amount of repetitiveness is just disgusting - at times the author rehearses the same examples - using the same words so much that it feels like cut-n-paste. This makes the book very boring and difficult to read. Surfing the web for information about De Soto and his ideas is a much shorter and more pleasant way of learning the same information.
1A piece of trivia: Hernando De Soto was also a Spanish navigator and conquistador in the 16th century, who participated in the conquest of Central America and joined Pizarro in the conquest of the Incas in South America in the 1530s.
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