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on August 25, 2003
in this book hernando de soto goes againts the conventional view of the socalled vicious circle of poverty which has been at the center of development economics for decades. in this he echoes the great economist peter bauer.
de sotos argument is mainly that capital exists every where but that it is dead due to the lack of proper social institutions (private property). he shows empirically how people living in large parts of the world (the socalled third world) are not able to raise large bulks of capital and also that they are kept from being industrous due to goverment regulations. the bureucratic obstacles as well as the neccessary political connections makes it almost impossible for ordinary people to act as entrepreneurs on any large and visible scale (i.e. to the government).
in his arguments de soto also ecchoes adam smith who always saw economic liberal policy (the end of privileges and the security of persons and property) as benefeting the poor rather than the rich. the influential economic elites are always politically connected and are not the ones most in need of legal protection of property (as the marxists always seem to think).
i strongly reccomend reading p.t.bauers 'from subsistence to exchange' which is much more enjoyable and which contains a world of wisdom in a field of study that often is dictated by political correct social theories rather than sound arguments.
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on June 14, 2003
Hernando de Soto has produced a great book that should supplement anyone's reading list on economic development. His thesis is that developing countries have failed to produce capital, which is the driving force of economic activity and surplus. At the center of this failure is the inability to establish clear ownership of property and to produce a unified system for the exchange and fungibility of property.
For one, Mr. de Soto has provided data on developing countries (collected by his own team on the ground). According to his numbers, the value of the real estate held but not legally owned by the poor in the Third World and ex-communist nations reaches $9.3 trillion. In general, the extralegal sector accounts for about 50 to 70 percent of the workforce in developing countries and from one-fifth to two-thirds of economic output. Alone, these numbers point to a staggering underground economy that does not get accounted for by official statistics.
The statistical lag is only part of his story. The essence of Mr. de Soto's argument is that countries need to think of capital (property in this case) in its value-generating rather that physical form. Establishing who owns what is not simply an engineering or mapmaking task; it is a legal job that unifies informal property arrangements into an official legal code. This legal and political challenge is what much of this book is about, and much of what Mr. de Soto's think-tank does.
More importantly, Mr. de Soto has offered a unifying thesis to deal with the topic of economic development: the conversion of "dead capital" that cannot generate surplus value into live capital that can galvanize an economy. Rightly, Mr. de Soto argues that this conversion is essential as to bring capitalist benefits to those who are now disenfranchised.
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on May 20, 2003
I picked up Hernando DeSoto's book shortly after a trip to South America, and a staunch recommendation in "The Economist", and I found it to be a very well written, thought provoking book with very good ideas on "capitalizing the poor" and thus allowing the third world to generate wealth. Much of what he said resounded very well with me and my first hand experiences in Peru and he has convinced me that his proposals are very much win-win proposals for all involved.
However, he has failed to convince me that he has discovered the linchpin of capitalism that would live up to the title "Why Capitalism Triumphs in the West and Fails Everywhere Else." Is property ownership the critical reason for capitalism's success in the West? One could argue that there are other obstacles to the development of capitalism in the third world, possibly including political corruption and internal strife. These reasons in turn might have stifled both the capitalization of the poor and the countries development.
Nevertheless, these reasons do not detract from what is a great work, and I still contend that this book is a must-read for anyone interested in the Third World.
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on January 23, 2003
There are thousands hacking at the branches of evil to one who is striking at the root. -- Henry David Thoreau.
In his book, De Soto strikes at the root of the developing world's economic problems. For all the books, debate and talk shows dedicated to whether capitalism is good or evil, government regulation necessary or not, people are naturally greedy or generous (for examples see other reviews), few set aside their dogma long enough to address a simple question: why is the standard of living higher in the west than in the rest of the world? De Soto's book provides one explanation.
Although obviously a 'capitalist,' De Soto doesn't preach morality issues but instead focuses his book on the mechanics of capitalism. Using the USA as an example, he examines how capital is created through borrowing, and how the squatter's rights laws in the turn of the century USA reclaimed vast amounts of unused capital in a 'use it or lose it' proposition - land owners who did not develop their land risked losing it to squatters who did. When the squatters obtained clear title to their developed land, it freed up the capital locked up by the previous, dormant owner. Such capital is the basis for investment, which improves the standard of living of the owner (you can live in your house and borrow against it at the same time). Surprised to hear that such socialistic laws were at the heart of what made the capitalistic USA so powerful? So was I.
De Soto also addresses how the laws of developing countries need to be reformed to allow this process to happen once again. He addresses the concerns of the current legal landowners, and provides a plan in which the squatters and landowners both benefit, knowing full well that any plan that only benefited squatters at the expense of landowners would not be politically viable.
I've heard all the philosophical arguments about capitalism I need to hear, from Ayn Rand to Karl Marx, and one would have to be as blind as Kim Jong Il to deny that capitalism works better in the US and Europe than in South America, Africa and Eastern Europe. De Soto's book is a refreshing glimpse as to why.
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on July 15, 2002
The debate has raged for nearly two centuries: Is capitalism the answer or the problem? Rather than rehashing the arguments of either side of the political spectrum, Hernand de Soto has changed the nature of the debate by asking a different question: Why does capitalism apparently work so well in some places and so poorly in others?
The author and his colleagues didn't treat this question as a mere intellectual enterprise, but went into the field - the burgeoning underground economies of the Third World - to find the answer. And the answer they found was deceptively simple.
The problem, he argues, is not capitalism, per se, but inadequate property systems either through the inability of law to keep up with economic reality or counterproductive regulation. Inadequate recording systems, limitations on commercial activities and barriers to entrepreneurship in developing and former communist countries prevent the use of assets to generate growth capital that is identifiable, transferable and able to grow.
The book is easily approachable and not too overlong (the text is a mere 228 pages, including charts). It spells out the author's thesis clearly in the first chapter. In later chapters he discusses the historical evolution that occurred in the United States that has allowed "dead" capital to be brought to life to the benefit of all and the steps that must be undertaken to achieve such a system in the developing and former communist countries.
Be warned, however, (and this is the reason why the book doesn't get 5 stars) that the second and third chapters are needlessly (and annoyingly) repetitive, covering the same ground over and over again, often using the same words. The first three chapters might easily have been boiled down to one. But persevere. The remaining chapters are worthwhile.
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on July 12, 2002
Why Capitalism failed everywhere but succeeded in the West? This is a question that haunts many politicians and economists in 3rd world countries and in the West as well. Eventually the mystery became a quarrel between the two worlds, having the third claiming that Capitalism is just a hoax for the West to tap into their trifling fortunes, and the first claiming that 3rd world countries are failing to implement Capitalism efficiently.
The author of this book, Hernando De Soto, is siding with the second team in this dispute. And for that purpose he extends a very strong argument, which is that 3rd world countries failed to utilize the most basic element of Capitalism. And that would be Capital itself!
De Soto defines what he calls "Dead Capital" as property and real estate that is not fungible and can serve only in its most basic usage. Capital goes dead when the government fails to establish a real estate system that is accessible to the common public and is appropriate to the people and their property. What De Soto found after years of research and study is that in most developing and ex-communist countries the real estate systems are troublesome, drastically complicated, and out of touch with the real world. These systems nurtured a burgeoning extralegal style of living, where capital and businesses are not adherent to the legal systems of those countries. Instead, they work based on laws and regulations the people developed themselves among their social circles.
De Soto extends many shocking statistical information proving that 3rd world countries posses vast amounts of dead capital in their extralegal sectors. The author describes this capital as dead because property in extralegal sectors cannot serve as collateral for loans, are not fungible, and their transactions are not protected by the law. De Soto believes that the poor people living in extralegal sectors of 3rd world countries are the real entrepreneurs of their countries. They are very innovative in creating jobs and forming their own systems of protecting assets and their transactions. The author says that the biggest mistake of their governments is that they are trying to enforce the legal system on them when they should adopt their systems instead.
But how come the West never encountered this problem, you wonder. Wrong, the author tells you. The West did go through this and had to sort out many extralegal property and real estate into the legal system. But the West didn't enforce the law on extralegal property, instead they adopted the various extralegal systems and integrated them into the law. The author extends a thorough research in the U.S. history to explain in detail what created the problem of extralegal property and how the Americans overcame it.
One thing you'll notice if you read the book to that point is that the book is too long for its topic. And even though it's little less than 300 pages, but by page 150 I felt that the author had said everything he wanted to say. I believe that once an author begins to say "like I said in chapter x" numerous times he should stop immediately.
However this is a valuable book indeed and I learned a lot of lessons from it. De Soto is a man who will not make a claim without being able to back it with intensive and thorough research and study. His arguments are sound and make a great deal of sense.
If you're interested in the economies of 3rd world and ex-communist countries then I recommend buying this book. This book might fail to appeal you otherwise.
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on February 2, 2002
In "The Mystery of Capital," Hernando de Soto presents a fascinating, powerful, and relatively simple (but far-reaching) thesis that, to the extent it is correct, and to the extent that it is listened to by political and economic elites, could have enormous potential for affecting positive change throughout the world. The thesis, in sum, is that the key to creating wealth is turning "dead" capital into "live" capital by guaranteeing property rights, and even more broadly than that, the "right to property rights." To the extent that this is done, according to de Soto, good things begin to flow, as they have in much of the Western world (the prime example being the United States). To the extent that this is NOT done, as is the case in most of the "Third World" (usually referred to, inaccurately, as the "developing" world - inaccurate because the vast majority of this world is manifestly failing to develop!), good things will NOT flow, and the country will remain mired in poverty no matter how rich it might be in raw materials, a stable political system, beautiful beaches, or a benign climate. The issue is that, without secure property rights and a legal system which facilitates capital mobility and "fungibility," poor people (otherwise known as budding entrepreneurs, or as de Soto argues "the solution," not "the problem") will not be able to access their accumulated assets in a way that would "capitalize" those assets, which then could be used to generate further wealth. Thus, millions of people will remain mired in poverty, despite sitting on POTENTIALLY huge assets (trillions of dollars worth according to de Soto's estimates) and regardless of how hard they might work (and I definitely don't believe that people in the "Third World" are inherently "lazier" than in the "developed" world!).
Overall, I find it difficult to disagree outright with most of what de Soto has to say, but as I read his book I did feel somewhat uneasy at times. Perhaps this is because I tend to be naturally suspicious of monocausal, oversimplified explanations for highly complex problems. More importantly, while I believe that de Soto has most likely identified a NECESSARY condition for rapid capitalist development, I continue to have doubts as to whether or not this condition alone is a SUFFICIENT one for development at all. I also worry that this book will be misread or misused by some, who will say "see, all we need the government for is to guarantee property rights, then get the hell out of the way, and everything will be great." While I don't believe this is what de Soto is arguing, his omission of such critically important issues as the place and role of women (a cultural issue?), the role of serious diseases like AIDS, the problem of severe environmental degradation, the prevalence of illiteracy and the lack of education in general in much of the world, overpopulation, etc., implies that de Soto doesn't see these as serious obstacles (or complicating factors) to economic development. One could argue just as strongly as de Soto does in his book, it seems to me, that there is a strong, direct, positive correlation between women's education levels, lower birth rates, and economic development, and that the key to "Third World" economic development, therefore, is making sure that women are well-educated, healthy, and political empowered.
Anyway, the point is that while de Soto is definitely on to something very important in "The Mystery of Capital," he has not told the whole story or completely solved the "mystery" - not even close! One other quibble with the book is that, unfortunately, it's just not very well written - repetitive, didactic, tedious at times, and just plain too long (de Soto's argument probably could be made just as strongly, or more so, in 30 or 40 pages, as opposed to 230 pages). Still, on balance this is an important book, and I definitely recommend it, at the very least for provoking serious thought (and maybe even action) on a problem that, to many people, continues to be just an inscrutable "mystery."
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on September 4, 2001
Hernando De Soto's basic theme is that outside the Western developed countries, none of the countries has a unified system for fixing property rights in a form that gives poor people the ability to effectively establish ownership of property and to use the value of that property to develop capital to build a business, etc. The property systems in the undeveloped and former communist countries are very fragmented and, apparently, designed to protect the elite, making it virtually impossible for poor people, even though, collectively, they have an enormous amount of extralegal property, to obtain sufficiently clear title to their home to get a loan from a bank to enable them to start or develop a business. In the west, the most common way entrepeneurs start a business is to obtain a loan on their home. Poor people in undeveloped and formerly communist countries are deprived of this alternative who must take literally hundreds of steps over months and even years to obtain questionable title to their homes which are on land they don't own. This effectively prevents the poor from becoming a part of the middle class and fosters a Marxian analysis leading to potentially revolutionary consequences, e.g., the developing anti-globalization movement.
The author analogizes this situation with the westward development of the U.S. 200 years ago. Squatters took over government and private lands by simply establishing a home and growing crops. They developed localized extralegal systems of property ownership which were necessarily fluid in nature because they depended on the good will of the extralegal property owner's neighbors. Eventually, the settlers gained sufficient power to force the incorporation of their extralegal institutions of property ownership into the formal legal system and the reconciling the interests of all those who had interests in property through a unified system that fixed the ownership in property. A fascinating point for me was that developing such a unified, easily accessible system of property ownership will not only greatly expand capital, but will also open wide the ability to accumulate capital, helping to offset one of the great "evils" of capitalism, the concentration of capital. This would undermine the Marxian analysis and many of the objections to globalization. It took me a while to get into the book, but it got better and better as I progressed through the book. I recommend it.
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on August 1, 2001
...and it is also fair to say, bringing death to old, trite economic theories on poverty and blinkered, narrow, views about the Third World. THE MYSTERY OF CAPITAL has bolstered De Soto's reputation as an original and independent thinker on the causes of Third World poverty. This book was endorsed by Margaret Thatcher, Milton Friedman and the American Enterprise Institute (AEI) for its whole hearted support of the market economy. Lest anyone mistakenly think that as a Third world economist, he is slavishly, and typically, tied to the theory that poverty is due solely to colonialism and exploitation, and that he hankers for the good old days of socialism and economic revolutions; De Soto says plainly that "capitalism stands alone as the only feasible way to rationally organize a modern economy." The premise of this book then is based on a committment to the conservative, pro-market, open economic system that has long been the mantra of the West. This is in fact part of the mystery. How is it then, De Soto asks, that having adopted capitalism and pursued it with vigor and enthusiasm, the Third World nevertheless still remains poor. In identifying a cause De Soto disagrees with many of his conservative colleagues and we see his independent thinking. Many argue (David Landes, Samuel Huntington and Thomas Sowell for instance) that culture and religion play predominant roles in keeping the poor poor. De Soto says "I humbly suggest that before any brahmin who lives in a bell jar tries to convince us that succeeding at capitalism requires certain cultural traits, we should first try to see what happens when developing and former communist countries establish property rights systems that can create capital for every one." In dismissing the "culture is key" school of thought, De Soto puts forward his own theory. Property rights, and in particular, the ownership of capital, is the critical missing ingedient in the Third World.
De Soto carefully lays out his argument with facts and figures. There is an estimated $9.3 trillion in capital potentially available in the Third World. The problem is that it is unowned. The poor have no legal title to the land and their homes, so they remain unable to use it as collateral. The poor exist in the informal economy and as such can not enter into any legal contracts with the mainstream economy. For the poor, their capital is dead.
De Soto illustrates this with examples from the informal economies of his native Peru, Egypt and Haiti and develops on the point by comparing this situation with the early days of land settlement in the US when there were no property rights in existence. It is here where his argument falters slightly, because although property rights were not yet in existence in the US, small farmers and land holders were nevertheless able to secure credit. The US government accomodated early settlers. In the Third World De Soto shows the opposite is true and argues that governments and their bureaucracies are major impediments. This argument certainly puts him back in good stead with Western conservative thinking on the virtues of small government, but as a blanket approach to the Third World, it is a bit simplistic. Unfettered markets can certainly solve most economic problems, but they are not the panacea to all that ails the Third World.
This book is a good read and an interesting examination of the informal economy in the Third World with a very original economic theory thrown in. It however probably remains impractical and impossible to implement. Who owns the land and how would the sale and redistribution be achieved? Further, any book that proposes a single solution to the intractable problem of global poverty has to be regarded as theoetical and does not really offer the answer.
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on March 22, 2001
This is an important book if it encourages economists and policy makers to look again at the resources the poor of the world already have at their disposal - far more than ever received in aid payments.
However there is a real problem with de Soto's insistance that formal property rights will give the poor access to their 'dead' capital. When the property rights of the poor are formalised they are usually taken away and given to the rich. De Soto can give no guarantee that this will not happen again. In Churchill's words, the price of freedom is eternal vigilance. There is an ambiguity in de Soto's rhetoric on this point. He writes: 'In Haiti, for instance, no one believed we would find documents fixing representations of property rights. Haiti is one of the world's poorest countries; 55 per cent of the population is illiterate. Nevertheless, after an intensive survey of Haiti's urban areas, we did not find a single extralegal plot of land, shack or building whose owner did not have at least one document to defend his right - even his 'squatting rights'. (p. 167) This would be reassuring were it not a contradiction of his earlier point about Haiti and its problem of 'dead' capital; 'In Haiti... according to our surveys, 68 per cent of city-dwellers and 97 per cent of people living in the countryside live in housing to which nobody has clear legal title' (p. 26). When it suits de Soto's argument, Haitian squatters 'own' their land; when it doesn't suit him, they don't. While this ambiguity is merely problematic for de Soto's argument, one can only imagine what the eagle-eyed legal representatives of rich property developers might do with it.
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