Part I: Why poor countries remain poor

In everybody’s life there comes a book which is a revelation; a book that explains simply and beautifully a complex process which one finds perplexing… and if (like me) you are a lucky wanderer in the vaults of human knowledge and wisdom, then you are sure to have experienced many such ‘a-ha’ moments.

The book which prompted this post is ‘The Mystery of Capital’ by Hernando de Soto – respected Peruvian economist, political adviser, and reformer. Published in 2000 (a decade into the era of liberalisation, privatisation and globalisation), and based upon extensive field research in Asia, Africa and Latin America; the book poses a simple question – why does capitalism work only in the rich countries of Western Europe and North America?

The reason, according to de Soto, is that the poorer countries simply fail to generate capital. He goes on to show that even in the poorest countries, the poor save – for instance, in Egypt the wealth that the poor had accumulated at the time of publication, was 55 times as much as the sum of all direct foreign investment ever recorded there, including the Suez Canal and Aswan Dam.

However, these assets of the poor are not fungible assets – they cannot be turned into capital, cannot be traded, cannot be used as collateral for a loan, and cannot be used as a share against an investment.

The heart of de Soto’s theory is that the poor countries remain poor because they lack a representational system which documents every parcel of land, every building, every piece of equipment, every store, every inventory, thus making it visible so that it can connect to a larger formal economy, thereby making the vast hidden assets of the poor and informal sectors fungible. But unfortunately, developing such representational systems takes time, resources and a much longer time-frame than a government on a 5-year run can afford.

Take the case of land titles in India.

In the prevalent system, a registered sale deed does not confer title ownership and is merely a record of the transaction. The current system of 7/12 extracts are no more than a caveat emptor or ‘buyer beware’ type of document, conferring only presumptive ownership, which is liable to be disputed.

A proposed amendment to the Registration Act, 1908 would convert land registration into a ‘guaranteed title certification’ and would affect a paradigm shift in India’s land titling system, bringing it in line with other Commonwealth countries which follow the Torrens system of land titling. Under this system, a registered transaction would extinguish all previous rights and become sanctified as a formal title transfer to the purchaser, as prospective land buyers would only need to examine the land register, and purchase from the recorded owner.

However,  such a system is only as good as the Land Register supporting it.

The creation of a land-holdings register requires that land parcels be identified, with clearly demarcated boundaries, through maps of individual land parcels and their location within an area’s land grid. This has to then be correlated to undisputed, litigation-free ownership rights. Both these records then have to be publicly notified before they take effect. But the devil is in the details of course.

As in most developing countries, the land record systems in India are archaic with no provision for regular systematic updates. In fact the terms used in land records (and the Act itself)  hark back to the British colonial era, or even further back to the Mughals! No register, which reliably confirms title, exists anywhere in India; and small experiments in some states to build such registers have not succeeded in achieving comprehensive coverage.

How do you build up a land register in a country where rural land has moved from one power elite to another over thousands of years, and inherited land is often partitioned within the family, without any formal registration?

The situation is much worse in urban areas where the chain of ownership is impossible to trace too far back, and most real estate developers take recourse to unregistered power of attorney transactions, when they build houses for the average middle-class buyer. Such a buyer is naturally kept totally in the dark about any title disputes or encumbrances attaching to the land where he dreams of owning a penthouse on the twentieth floor.

The repeated fragmentation of lands generation after generation, with intractable boundary and ownership disputes can lead only one way – to the courts. It is not surprising, therefore that a vast majority of cases pending in Indian courts deal with land-related litigation, and most of the rural undertrials in Indian jails are there as a result of land disputes violently settled.


So as it completes a year in office and is worried that the economy is not really taking off as expected, the Indian government would do well to listen to de Soto. After all, if 68% of the local economy of Mumbai – India’s commercial capital – is estimated to lie in the informal sector, just imagine what a boost the national economy would receive if the assets of the poor were looped into the formal system. Not to mention the assets back home in a city of migrants, which will come into play for procuring credit for housing and business. The entire country can be rejuvenated, city by city and town by town…

But that will take more than five years, so who’s interested?

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2 thoughts on “Part I: Why poor countries remain poor

  1. People across globe from poor to rich country creates assets depending upon the ability, skill, opportunity, enabling environment and other factors. Hernando de Soto rightly commented that poor countries they fail to convert the assets into capital, in some of the countries capital is becoming asset. In this context financial literacy (education dimension) is the underlined issue which helps to convert assets into capital at individual or at national level. Financial institutions, financial markets, financial services are key ingredients of financially strong States. In poor countries leave alone poor even middle class population are very weak in financial literacy, this was well exemplified Egypt case cited in the blog.

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  2. This is interesting and very informative.
    Surely defining ownership, individual, or communal, brings order to relations within the community.
    Monetization of the defined properties, however, is loaded with fundamental questions.
    1. What is money and its value. Is its value the same as the value of property?
    I built for a client a house 1967 for $42,000. 2015 it is valued over a million, 20 to 30 times more. At the same time period a senior engineer earned $20,000 and 2015 likely around $76,000 to $120,000 in Canada, i.e. 4 to 6 times bigger number.
    This to me indicates that money has only value as much as two parties in a transaction are ready to exchange. I think this demonstrates that money itself really has no value, but it is used as a tool to suck value away from ordinary folk to the upper crust.
    This owner who had the house built has increased his buying power in engaging working people out of nothing by means of value assigned to money.
    2. After collapse of USSR a 25 sq-km farm was purchased for rbl 10,000, about EU100. Its value now is about EU25,000,000, or even more because it contained valuable buildings and abandoned equipment as well.
    This absolute robbery of value that was lost by people who lost their livelihood in such transaction was only caused by monetizing this property.
    The value of peoples’ livelihood under our monetary system cannot be assigned the same monetary value as the inanimate objects, yet why do we try to have an economy at all: surely it is to allow us all to participate in “living”.
    Our present economy based on the attempt to assign value to money does not seem to be adequate to accomplish it. All it does: It splits the society to HAVES and HAVE-NOTS.
    I guess, we need some more creative thinking to do in this regard.
    Lembit Maimets,
    Engineer.

    Liked by 1 person

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