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Wednesday, December 15, 2010

Stossel: Why Do the Poor Stay Poor?

Hmmm, this syndicated column from John Stossel reminds me of something:
I go, but I'm skeptical. There sits de Soto, president of the Institute for Liberty and Democracy in Peru, and he starts pulling pictures out showing slum dwellings built on top of each other. I wondered what they meant.

As de Soto explained: "These pictures show that roughly 4 billion people in the world actually build their homes and own their businesses outside the legal system. ... Because of the lack of rule of law (and) the definition of who owns what, and because they don't have addresses, they can't get credit (for investment loans)."

They don't have addresses?

"To get an address, somebody's got to recognize that that's where you live. That means ... you've a got mailing address. ... When you make a deal with someone, you can be identified. But until property is defined by law, people can't ... specialize and create wealth. The day they get title (is) the day that the businesses in their homes, the sewing machines, the cotton gins, the car repair shop finally gets recognized. They can start expanding."

That's the road to prosperity. But first they need to be recognized by someone in local authority who says, "This is yours." They need the rule of law. But many places in the developing world barely have law. So enterprising people take a risk. They work a deal with the guy on the first floor, and they build their house on the second floor.

"Probably the guy on the first floor, who had the guts to squat and make a deal with somebody from government who decided to look the other way, has got an invisible property right. It's not very different from when you Americans started going west, (but) Americans at that time were absolutely conscious of what the rule of law was about," de Soto said.

Americans marked off property, courts recognized that property, and the people got deeds that meant everyone knew their property was theirs. They could then buy and sell and borrow against it as they saw fit.

This idea of a deed protecting property seems simple, but it's powerful. Commerce between total strangers wouldn't happen otherwise. It applies to more than just skyscrapers and factories. It applies to stock markets, which only work because of deed-like paperwork that we trust because we have the rule of law.
OK, I suggest you read the whole thing.

What you see at work here is the tenants of "classical liberalism". The main thing here is the rule of law. Also sanctity of private property and recognition of who owns that property or in this case land. I think another point made here is the usage of contracts, of course that's under the tenant of private property.

Furthermore, I still remember the debate over whether or not Africa should get more or less aid. Stossel did a segment on this before he left ABC many years ago. I saw a hut getting demolished by a bulldozer and it only brought home the point being made.

Many African nations are in the situation they're in because they don't recognize private property. Therefore those with businesses are afraid to expand because they may fear that government may instead destroy them instead of allowing them to flourish. Another thing about this is how to gain recognition. You might have to go in front of various regulators in order to gain recognition. That could be a discouraging prospect in and of itself. You could wear yourself out before you're good to go.

And you know Stossel also note that the upstarts in many developing nations are getting it faster than we are. We take it for granted as we are a wealthy nation anyway. However, Americans do tend to look at businesses or business people as a bad thing. Look no further than the current economic crisis with the financial industry.

In Chicago, there are stories of having to go through hoops in this city in order to startup an innovative business. There was a debate over allowing food service vans recently. In this post a start-up had a very unfortunate visit from city inspectors who didn't ask any questions just meted out some justice.

Anyway, one parting though. I also noted in another post my thoughts on capitalism. Not that I'm a hardcore capitalist or anything, but what makes sense to me about capitalism is that one must make the most of the system. If you make something of capitalism, you will gain the benefits.

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