Property rights as an institution .. and an intangible asset

I have long respected the work of Hernando DeSoto and recommend his books highly. His work on the importance of property rights, especially the property rights of the poor, the excluded and the dispossessed, in economic development has had a major impact. He has pointed out that a major barrier to development in many countries is the inability of the poor to document, control and financially leverage the assets they have. In many ways, the poor are richer than they seem, but are unable to build on that wealth. They remain locked in the informal economy.
However, I’ve always had trouble reconciling DeSoto’s work with what I know about the importance of intangible assets in economic development – not just physical property and financial assets.
At a speech yesterday at New America Foundation, DeSoto helped me understand the connection. (Click here for a webcast of the conference, including the session with DeSoto’s speech at the end of the conference.) His main message is that what counts with property rights isn’t just the property. It is the commitment to the rule of law in economic transactions and the sense of inclusion within and under that rule of law. It is about the social contract, not just about the real estate.
In contrast to many, DeSoto does not believe you can create a middle class and reduce poverty simply by creating a market system. Nor can you create markets by fiat. Building markets is very difficult. Markets are legal institutions as much as markets. For example, you need property rights and contract law to allow for market transactions. The market institutions, as Noble-laureate Douglass North argued, are key. These must be developed from the ground up, not imposed from top down, so that they actually work out in the field.
During the question and answer period, De Soto acknowledged the importance of the standard types of intangibles: human capital, education, reputation as a factor of creditworthiness. (His comments on intangibles come at 1 hour and 4 minutes into the session – including his answer to my question on human capital.)
But, in essence, he had already pinpointed the key intangible: that social contract – the respect for the rule of law and the myriad of social organizations and institutions that make the economy work.
Without all the intangibles wrapped up in those institutions, which we in “developed” countries take for granted, economic development is simply not possible.

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