Why Do the Poor Stay Poor?
Of the six billion people on earth, two billion try to survive on a few dollars a day. They don’t build businesses—or if they do, they don’t expand them. Unlike people in the United States, Europe, and Asian countries like Japan, South Korea, Hong Kong, etc., they don’t lift themselves out of poverty. Why not? What’s the difference between them and us? Hernando de Soto taught me that the biggest difference may be property rights.
I first met de Soto maybe 15 years ago. It was at one of those lunches where people sit around wondering how to end poverty.
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 got a 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.
Is de Soto saying that if the developing world had the rule of law it could become as rich as we are?
“Oh, yes. Of course. But let me tell you, bringing in the rule of law is no easy thing.”
De Soto says we’ve forgotten what made us prosperous. “But [leaders in the developing world] see that they’re pot-poor relative to your wealth.” They are beginning to grasp the importance of private property.
Let’s hope we haven’t forgotten what they are beginning to learn.
Comment by Robert on 26 February 2011:
State sanction of property rights seems to play into the hands of the exploiting class, as progenitors and caretakers of the “law”. A quick survey of federal and state statutes comprising the law in developed states makes one’s head spin. The role of “property rights”, as a first principle toward civil society, cannot be refuted. Unfortunately, establishing the state as the grand arbiter of ownership claims is fraught with error and severe unintended consequences.
Is it not the “law” driven economic policies that have provided the exploiting class unfettered influence and control over the socio-economic freedoms of “wealthy”, middle-class members of western societies? Is it not the “law” – written by special interests groups (material elite) and enacted by the people’s “representatives” (vulgar servants) – that enslaves the forgotten ones?
Again, private property rights are a first principle of a “good society”. Reliance on the state for official sanction of property rights is tantamount to fashioning one’s own leg irons. Can you say Fannie and Freddie? Give me a break!!
One should rely on first principles to guide thinking. Broad generalizations attributing the “rule of law” with ending the cycle of poverty in statist regimes is rife with tacit assumptions.
Spencer wrote eloquently on the unseen consequences of “Overlegislastion” and the effects on the poor. Generally speaking, unbridled, well-intentioned law making – ostensibly for the benefit of the poor – rarely hits the mark; as a matter of fact, as Spencer pointed out in England, more harm comes to the poor “helped” by prolific law-makers.
John, I don’t believe we can forget something never learned. Economic and political freedom are best served by government administering justice, not proliferating administrative bureaus to legitimize property claims. Thanks for your compelling ideas and open discourse.
Comment by vidyohs on 26 February 2011:
Owning land may not be the key to prosperity, but owning property certainly has to be the main key.
I have no land but I prosper because my camera is my property. Could I get loans based on my financial track record as a results of using my camera? I think so.
Land is not the only property, and property rights are essential.
Comment by Andrei Mincov on 28 February 2011:
Robert,
Class society? Exploiting class? Really? LOL
Comment by BurfordHolly on 8 March 2011:
Stossel got rich by being a very good consumer advocate during the Clinton years, then becoming a total industry sell-out during the Bush era and getting a show on Fox where he tells that the free market will give us clean water and immortality if we just get rid of all public health programs. And apparently he gets paid a a lot more shucking and jiving for polluters than he ever did trying to protect consumers.
I may not know why the rest of the world is poor, but I sure know why Stossel ain’t poor.
Comment by Barry Loberfeld on 10 March 2011:
How to respond when people ask, “What about the poor?”
Comment by Joe Adams on 12 March 2011:
The problem is a Catch-22, you can’t survey until you can pay the surveyor, and you can’t do that until you have tax revenue, so the wealthy have to be responsible for creating the system in which those without wealth can participate. If not, you’ve got the Third World. If we let the wealthy decide who can participate, you have the declining First World.
Comment by Jeffry Erickson on 16 March 2011:
I am puzzled by some of these comments. Sure ‘the wealthy’ will benefit from the rule of law as they may have more influence on what that law looks like. But Stossel’s point is that the POOR will benefit from the rule of law. Think about some of the great (or at least successful) companies in the US – they started on a shoestring funded by credit cards and second mortgages. These weren’t the wealthy creating new and vibrant businesses. They were entrepreneurs willing to take a risk with their small capital, sweat, and hard work, but with the understanding that if they succeeded they would get to keep the fruits of their labor. The very existence of a government with the power to legislate and enforce legislation will bring rent-seekers out of the woodwork, and those rent seekers will include big business and big labor. But what is our alternative? No government? We should limit the scope of government to limit rent-seeking opportunities but protection of property rights seems to be a critical minimal role for government.
Comment by Terri K on 18 March 2011:
The very essence of property rights is ownership of self, and by extension, the ability to own and keep the fruits of one’s labor and do with it what one pleases. These are basic property rights.
Confiscatory taxes, hidden taxes through currency devaluation, regulatory red tape and faux government programs to “help” the poor are fundamental obstacles to the poor having any chance of pulling themselves out of poverty.
Ownership of real estate is a secondary issue, IMO.
Comment by Jon Ogden on 21 March 2011:
@BurfordHolly: I was sorry to see you had absolutely nothing to contribute to the discussion. Stossel is and has been nothing but honest and fair-minded during his entire career. You on the other hand stand revealed as being able to do nothing but hurl ad hominem vituperation, much like a little boy writing dirty words on the men’s room wall.
Comment by Harvard Yard Conservative on 25 February 2012:
The rule of law is part-and-parcel to our Anglo-Saxon heritage.