The Mystery of Capital

Book Review: The Mystery of Capital – Why Capitalism Triumphs in the West and Fails Everywhere Else
Author: Hernando de Soto
ISBN: 0-552-99923-7
Reviewed by: Nelson Kgwete

What distinguishes Peruvian author and economist Hernado de Soto from the rest is the intensity of his research and the wealth of experience he boasts.

De Soto puts both qualities to good use in his book, “The Mystery of Capital: Why Capitalism Triumphs in the West And Fails Everywhere Else”.

In the groundbreaking book, De Soto explains in detail the pitfalls of Western-style capitalism in developing countries and what needs to be done to change the fortunes of poor countries and former communist nations.

He attributes much of the problems afflicting poor countries to bureaucratic inefficiency, something government officials and those who rely on government services will easily identify with.

In Egypt, for example, the author says his research team has established that: “To build a legal dwelling on former agricultural land would require six to 11 years of bureaucratic wrangling, maybe longer”!

This, according to De Soto, “explains why 4.7 million Egyptians have chosen to build their dwellings illegally.

“If, after building his home, a settler decides he would like to be a law-abiding citizen and purchase the rights to his dwelling, he risks having it demolished, paying a steep fine and serving up to ten years in prison.”

On growing urbanisation and why many developing countries struggle to cope, De Soto says “extralegal ventures [such as illegal occupations of land, unregistered small businesses in the inner cities] have already overtaken government efforts to provide housing for migrants and the poor”.

South Africans will bear testimony to this statement. Just last year during the Limpopo Housing Indaba, commentator after another emphasised the need to prioritise planning instead of occupying land, building and then planning afterwards. Everyone agreed that proper planning is crucial.

To get an idea of how difficult the life of migrants is in cities and other urban environments, De Soto said he and his team decided to open a small garment workshop on the outskirts of Lima, the capital city of Peru, with the aim of creating a new and perfectly legal business.

“The team then began filling out the forms, standing in the queues and making the bus trips into central Lima to get all the certifications required to operate, according to the letter of the law, a small business in Peru,” writes De Soto.

And what did they experience? Well, as the author puts it: “They spent six hours a day at it and finally registered the business – 289 days later.” And, “although the garment workshop was geared to operating with only one worker, the cost of legal registration was $1, 231 – thirty-one times the monthly minimum wage”!

De Soto says many governments in developing countries do not keep credible data of the people and their economic status. In plain terms, De Soto blames governments for not having enough information about the people they are supposed to serve.

To illustrate this, the Peruvian refers to a good example: “In Brazil,” he says, “the construction industry reported a mere 0.1 percent growth in 1995; yet cement sales during the first six months of 1996 soared by nearly 20 percent.”

“The reason for the apparent anomaly, according to a Dutch Morgan Grenfell, was that 60 to 70 percent of the region’s construction never makes it into the records,” writes De Soto in the chapter, The Mystery of Political Awareness.

The author uses numerous examples to show how failure to rapidly legalise small businesses and speed up government processes leads to lawlessness in many developing countries.

De Soto does not condone lawlessness though. Instead, he urges developing countries and former communist nations to stop copying Western laws without due consideration given to unique local realities.

Most South Africans will identify easily with the problems identified by De Soto in his book. If you’re looking for a stimulating read full of new and interesting ideas, De Soto’s groundbreaking offering should come handy.