Informal Institutions and Property Rights

 Lan Cao

In recent years, the call for strong and clear property rights has grown in law and development circles. In the landmark book The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, de Soto put forth the claim that “strong and clear” property rights, formalized rather than informal, are necessary for economic efficiency and for the protection of the poor, who occupy through squatting, for example, property that they do not own. De Soto believes that for capitalism to work in poor countries, as it does in the West, poor countries must establish a system in which individual property rights are protected and formally titled. A formal land title system empowers the poor by assuring them rights to property critical to economic self-sufficiency. De Soto and the Institute for Liberty and Democracy, which he founded, pushed for reforms to modernize Peru’s laws and regulations, transferring land titles to more than a million Peruvian families who had previously subsisted in an informal land system that gave them no rights over property they worked or occupied. “Until you have universal, well-protected, clear, and transferable private property rights, you cannot have a market economy in Peru, in the ghetto, or anywhere else. And you are going to have all the problems those places have,” de Soto remarked. According to de Soto, unreported, unrecorded economic activity in the informal sector creates a titling void for the poor because they are deprived of access to a formal system that gives them legal ownership of their property. Without legal title, the poor struggle to get credit and engage in economic transactions. Because they lack legal ownership, legal remedies are also beyond their reach should land disputes arise. When the poor are trapped in the informal, extralegal sector, they are excluded from the formal, legal sector and from gaining access to the benefits of law and globalization—their assets, adding up to more than $10 trillion USD worldwide, as estimated by de Soto, languish as dead capital.

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