DEBATE: THE DE SOTO THEORY

Hernando de Soto insists that property rights are a solution to global poverty. His theory says each person should be allowed to own their own piece of land to develop, borrow against and generally set a wave of capital on the move.

"The overwhelming majority of citizens may wish to participate in a free market, but without access to property law they cannot access bank loans and are forced to operate outside the law," says De Soto.

With this radical statement, in a recent address at the University of North Carolina, Peruvian economist De Soto at last grabbed the attention of political, institutional and corporate leaders worldwide, especially at a time when industrialised nations are grappling with ways of raising vast amounts of new capital in aid for Africa.

"The amount of 'dead capital" in untitled assets worldwide is at least $9.3 trillion," says De Soto, "a sum that dwarfs the total amount of foreign aid given by developed nations to poor nations in the past three decades. The poor have houses, but not titles; crops, but not deeds; businesses, but not statutes of incorporation."

He meets with heads of state and trudges through the streets and fields to talk with black-market traders, factory workers and sharecroppers in Asia, Latin America and the Middle East.

In Peru alone, De Soto has overseen some 400 initiatives, laws and regulations that modernised and stabilised the nation's economy between 1988 and 1995. His reforms gave property titles to more than 1.2 million families, and brought into the legal system some 380,000 small companies that previously operated in the black market."

What the experts think

Mamphela Ramphele, former World Bank managing director, currently co-chair of the Global Commission on International Migration: "We have to consider what makes Africa not as attractive to investors as other parts of the world, and the comparison was given that only 1% of Africa's useable land is actually registered in terms of ownership.

"The majority of landowners are in the upper income bracket; the vast majority does not have land or property as an asset. I have visited Peru to see how De Soto's ideas have been translated into reality.

"We really need to pay attention to what's happening there. For example, they cleared a slum on the banks of the Amazon and moved people to a new area. The government bought the land and the people contributed a small amount.

"There was then assistance to help them build homes through a facility created through the local banking sector, to make these people bankable. Some of them were informal sector - small farmers, hawkers and low-paid employees.

"It worked wonders. In just 18 months they were able to unlock $500m in capital that is now used by ordinary people to borrow against. So, it works.

"But a further complication in Africa is over the emotional issue of land, and to what extent land is marketable as an instrument.

"What is really important, in view of this, is to have title, whether it is leasehold or ownership which gives comfort to the person using the land, and that it will be theirs to use for a considerable length of time. If that period is long enough, then they will be able to invest in it.

"China is another good example, where government-owned communal land was turned over to families. They weren't actually given title, but they were given the right to use with the confidence that it would be long term. That, in part, was responsible for China moving 200m people from subsistence to surplus producers.

"I believe Africa should move away from the tenure system, quite simply because if people have not risked anything, it's difficult for them to feel the value.

"There are ways in which such facilities can be structured, so that poor people put something into the acquisition on a joint venture, say, and the money is used on creating infrastructure that helps in the growing of crops and on such social projects as education and health services. That also helps to keep the rural population stable."

Niall Fitzgerald, co-chairman of the WEF Africa Economic Summit and chairman of Reuters: "Microfinance is a logical means of economically advancing masses of poor people, but the big issue is to create the asset against which credit can be secured.

"This is a major problem for all developing countries, specifically for Africa. There are not yet the legal mechanisms to create title from the land and people's accommodation the security with which to back it. De Soto makes a very powerful argument. I've read him several times on the subject. You have to have a framework within which to give the land.

"That is not to say it cannot be put in place, of course it can, but that is a precondition of being able to that. The $550m investment climate facility (of the Commission for Africa funding) that will be raised from governments, international institutions and private enterprise should be a mechanism to help countries establish the appropriate framework within which people can be helped through actions like this."

Peter van Dijk, South African Micro Finance Regulatory Council: "There are many issues with land ownership. Some people don't like where they live, for a variety of reasons - security, remoteness, poor area. How do you give these people a sense of ownership and community and promote the value of such properties?

"Financial systems development depends on the security and the wellbeing of a community - trust being a priority. You need a build-up of trust in a community in order to add value to property.

"Another aspect is that if people are not used to land ownership, they might attach a lot of emotional value to it, making it difficult for such people to exploit their property commercially at its realistic worth.

"It works the other way around as well with people living in areas they emotionally dislike because, for example, they were relocated there forcibly and would sell their land at any price, simply to get away.

"In the main, poor people's properties are relatively cheap and the owners are seldom financially literate, making them targets for unscrupulous speculators who buy up plots en masse to resell, develop or rent out - what we call 'house milkers'.

"A good example is what happened in Czechoslovakia after the fall of communism and the privatisation of the economy. People had no idea of the value of their land and were bought out by companies and people with a lot of cash.

"Yes, property is a good way of giving people the opportunity of asset building, but needs to be accompanied by much research and education on financial literacy and management: what is the value of the property and how best can it be used?

"Land ownership should be all about empowering people financially and giving them a role in strengthening the local economy. If it is simply a swapping of debt, there is no added value."

John Gravois, contributing editor at the US Sixbillion Organisation and journalist at Chronicle of Higher Education: "De Soto's ideas for helping the poor have made him a global celebrity. Now, if only those ideas worked. White knight for the cause of property formalisation, De Soto is practically the patron saint of the global elite. For the left, De Soto has formulated the most seemingly practical ideas for reducing global poverty. For the right, De Soto offers the most compelling way to market capitalism to the poor.

"On paper, De Soto's ideas flatter the imaginations and sensibilities of Davos-types (particularly the American ones). But on the ground, it turns out that De Soto's ideas are doing very little to solve the actual problems of poor people.

"De Soto's vision of the Third World is instinctively appealing. He sees industrious, entrepreneurial slum-dwellers, toiling with boundless ingenuity, yet living in homes and owning businesses that are theirs only by de facto possession and jury-rigged local agreements, not by de jure deed and title.

"De Soto calls all this informally held property'dead capital', because it can't be leveraged to produce growth; it can't be mortgaged, because it lacks a proper title to guarantee it as collateral.

"Mindful of the fact that 'the single most important source of funds for new businesses in the US is a mortgage on the entrepreneur's house,' De Soto's plan is, quite simply, to make homeowners out of the world's poor squatters. Neighbourhood by neighbourhood, slum by slum, he wants to formalise the vast extra-legal world by dotting it with individual property titles.

"Once that's done, he promises, the poor will have access to credit, loans, and investment, as their dead assets are transformed into live capital. De Soto is right to point out the importance of legally sorting out who owns what in the Third World. secure property rights probably are indeed, as he puts it, the 'hidden architecture' of modern economies.

"On the level of gee-whiz metaphors and moving rhetoric, De Soto deserves a lot of credit: he's brought an unprecedented degree of attention and funding to the vital and fascinating issue of squatters and informal economies. But he has botched the details, especially by pushing one solution, individual property titles for all different kinds of poor people in all different kinds of poor places."