Earlier this year, I met France Bingham Johnson of Strategic Planning Initiatives in Alexandria, VA. Frances spent 40 years with the U.S. Agency for International Development and its predecessor agencies dating back to the Marshall Plan. At USAID, she served on the Brazil, Turkey, and Afghanistan desks. She recently circulated a response she wrote to an article in the August 24 edition of the Economist called "Of Property and Poverty." As she notes in her e-mail, the length of her response probably means it won't get published. However, she articulately describes so many issues I share firm convictions about that I thought it needed wider circulation. So here it is. Enjoy!
(I have done some slight reformatting and added links for this format. Unfortunately, the Economist article is not available for free online.)
TO THE EDITOR, THE ECONOMIST
SUBJECT: Your Leader, August 24, "Of property and poverty."
It is time for The Economist to call on the West to help at-risk countries create opportunities for every person to prosper. Capitalism is the only system that will do that and the sine qua non for capitalism is a system of national property law that protects the person and property of every person equally.
The Economist in its August 24, 2006, edition writes "Of property and poverty: Land titling is a good thing, but it does not in itself create capitalism." In these days of world turmoil, the journal misses the point. The point is the danger that Hernando de Soto makes known as a central security problem which the West should now focus on. In his Washington Post Outlook article of January 6, 2002, entitled Push Property Rights, he identifies the next challenge for the rich, advanced nations of the West and Japan, which collectively are home to a billion people. It is: to persuade the other 5 billion in the developing and ex-communist world that capitalism can create affluence for them. He asks, "Why has the World Trade Center been struck twice? Osama bin Laden told us why himself: It was the symbol of the West's affluence and economic power. The terrorists, of course, have not offered an alternative. But so far neither has the West.. ."
Rather than get side-tracked by the conclusion of academic studies that poor people who hold title to land are no more likely than others to obtain a loan from a commercial bank, the Economist should focus on the security implications of the near 5 billion people abroad without land titles. Make clear that living without proof of ownership is a prevailing cause of resentment and discontent among the untitled populations abroad who live and work outside of the legal, formal economy. They listen to the radio and watch TV. Without documented property, these people cannot trade with strangers in their homeland because they have no address. Nor, as globalization grows, can they become players who buy and sell products and services overseas, or attract money or partners from abroad for joint ventures.
As Mr. de Soto says, "We may tell ourselves that capitalism is the only game in town, Yet in 80 percent of the world, capitalism is not yet a reality…It turns out that building capitalism isn't so easy after all. In the past 10 years, practically every country has carried out the macroeconomic policies the West recommended. They balanced their budgets, welcomed foreign investment and built stable currencies. Yet from Colombia to Russia, capitalist reformers are derided as apologists for the injustices that plague the poor."
Beyond macroeconomic reforms, capitalism requires the bedrock of property and other legal institutions including property law and enforcement agencies to assure just judicial systems, civil police forces that serve the public, and a free press to assure transparency to combat corruption resulting from egregious regulations and tax regimes. Without these enabling institutions and property law, the instruments that store and transfer capital, such as home titles, shares, patent rights and bonds, cannot be created.
Hernando de Soto continues, "The United States has not yet fully realized the connection between law and the challenges America faces abroad. Worse still neither the United States, nor the West, nor the international financial institutions have any real system in place to help other nations build capitalist institutions."
In his book, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, Mr. de Soto points out that the goal of formal property is to put capital in the hands of the whole nation. The promoters of global capitalism, still arrogant from their victory over communism, have yet to understand that their macroeconomic reforms are not enough. To succeed, a Third World president.. .(not a mere technocrat) has to take charge of a strategy to make property formalization a government policy and capitalize the poor. With the poor on his side, a leader intent on reform has won at least half the battle. At least half the job is about communications. Any opposition will be hard-pressed to take on the head of state and most of the people.
Economic reformers have left the issue of property for the poor in the hands of conservative legal movements uninterested in changing the status quo, Mr. de Soto continues. As a result, assets of the majority of citizens have remained dead capital stuck in the extralegal sector. Having forgotten the crucial issue of property, capitalism's advocates have let themselves become identified as the defenders of the status quo, blindly trying to enforce existing written rule of law, whether it discriminates or not.
"What the West calls 'the underclass' is here the majority. And in the past, when their rising expectations were not met, that mass of angry poor brought apparently solid elites to their knees (as in Iran, Venezuela, and Indonesia).
"As information and communications continue to improve and the poor become better informed of what they do not have, the bitterness over legal apartheid is bound to grow. At some point, those outside the (stockade) will be mobilized against the status quo by people (tyrants) with political agendas that thrive on discontent."
The Economist mentions a few adjustments that might help poor people succeed more readily in obtaining a loan from a commercial bank, such as more competition among banks or the broader reform of legal systems (which Mr.de Soto has campaigned for.) But his Institute for Liberty and Democracy develops and implements strategy, methodology and programs which go far beyond technical adjustments. ILD's approach contains four components: (1) Reforming property law–so that it is accessible to the overwhelming majority of people in the Third World; (2) Using the rule of law to allow poor entrepreneurs to participate in the broad scope of capitalism, including those transactions identified above; (3 ) Providing the Head of State with the tools and political motivation to implement capitalist reform by championing the cause of the largest segment of the population — the poor; and (4) Providing governments with an "A-to-Z" plan for the transition to popular capitalism.
The Economist reports two reasons for the poor's low participation in securing a loan from a commercial bank. One is that informal entrepreneurs tell you that their property is too valuable to put at risk as collateral. Beyond the risk of a failing business, the poor are reluctant to take on debt in view of their vulnerability in case of natural disaster or abrupt political change. On their part, commercial banks abroad worry that judges will fail to seize the homes of poor defaulters. The Economist concludes that, while "land titling is certainly a good thing, it does not provide a single theory of development… Poverty, alas, is itself a barrier to risk-taking and enterprise."
Nevertheless, we must ask why America's pioneers streamed to the Heartland to claim land under the Homestead Act and similar offers. They took the risk to start a new life by heading to the land of opportunity. The impetus and sine qua non was property rights. All they had was the promise of title to their land, once they worked it and stayed the time required. What they produced would be theirs, and they could barter or sell to any willing buyer. They would have stayed home if the arrangement had been to work for some plantation owner back East. For most, all they had were the clothes on their back and what they carried with them. They were met with no motels, or hospitals, or filling stations, commercial banks, or high schools for their children. They faced natural disaster and unexpected changes in provincial governors. They set up pioneer communities with a judge, a lawman, a sheriff, a jail of some kind, perhaps a minister and maybe a school teacher. They responded to the promise of opportunity and the freedom to realize their dream.
In sum, while journalists, scholars and academicians provide useful insights by analyzing what works and what does not work for commercial transactions, we can ask them also to tell us about champions of systemic change who help forge the conditions which underlie individual liberty, freedom and general prosperity. Among these conditions are rule of law, justly applied, and legal property systems open equally to all citizens.
Frances Brigham Johnson
Strategic Planning Initiatives, Co-Chairman
3512 Saylor Place, Alexandria, VA 22304
703-370-2364; gofjohn@comcast.net
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