Debating land reform natural resources and poverty No 18 OCTOBER 2005 Will formalising property rights reduce poverty in South Africa s second economy Questioning the mythologies of Hernando de Soto Ben Cousins Tessa Cousins Donna Hornby Rosalie Kingwill Lauren Royston and Warren Smit De Soto s influential book The mystery of capital offers a simple yet beguiling message capitalism can be made to work for the poor through formalising their property rights in houses land and small businesses This approach resonates strongly in the South African context where private property works well for those who inhabit the so called first economy Evidence from South Africa however suggests that many of de Soto s policy prescriptions may be inappropriate for the poorest and most vulnerable in our society and have negative impacts on their security and well being More attention should be paid to supporting existing social practices that have widespread legitimacy Features of extra legal property regimes provide a key to the solutions their social embeddedness the importance of land and housing as assets that help to secure livelihoods the layered and relative nature of rights and the flexible character of boundaries The entire legal and social complex around which notions of formal and informal property are constituted needs to be interrogated more rigorously Introduction High levels of poverty and inequality persist in democratic South Africa despite a decade of government policies and budgetary realignments designed to address the legacies of apartheid and steady economic growth Some policies have been relatively successful access by the poor to clean water electricity and sanitation has improved dramatically and increased numbers receive social grants But South Africa has the second highest level of inequality in the world after Brazil and the gap between the rich and the poor appears to be widening It is increasingly clear that growth alone will not reduce poverty and inequality and that improved social services and grants do not address the fundamental problem entrenched structural features of the economy Government is now developing policies aimed at transferring resources to the marginalised through expanded public works programmes micro credit for entrepreneurs skills development and agrarian reform For some analysts a key problem is the absence of formal property rights to the assets owned by the poor A recent African National Congress discussion document suggests that failure to provide title deeds to land and houses sterilises the enormous value of these existing assets which could so easily be turned into collateral to secure access to capital Government s new housing policy document Breaking new ground complains that the 1 6 million new houses funded by the state since 1994 have not become valuable assets for the poor and emphasises improved access to title deeds as a PLAAS POLICY BRIEF NO 18 OCTOBER 2005 means to helping the poor participate in residential property markets These examples demonstrate the increasing influence of Peruvian economist Hernando de Soto and his book The mystery of capital 2000 De Soto offers a simple yet beguiling message capitalism can be made to work for the poor through formalising their property rights in houses land and small businesses This approach resonates strongly in the South African context where private property is dominant and works well for those who inhabit the so called first economy At the same time international support for de Soto s ideas appears to be increasing A High level Commission on the Legal Empowerment of the Poor was launched this month hosted by the United Nations Development Programme and cochaired by de Soto This initiative is also however generating strong opposition from NGOs social movements and bodies such as the International Land Coalition which contest the singleminded focus on individual title formalisation and credit as solutions to poverty www desotowatch net This policy brief analyses evidence from South Africa which suggests that many of de Soto s policy prescriptions may be inappropriate for the poorest and most vulnerable in our society and have negative rather than positive impacts on their security and well being Bringing dead capital back to life The mystery of capital is a call for a global reform aimed at overcoming poverty and underdevelopment Its focus is Page 1 formal recognition of extra legal property De Soto argues that the poor of the world living in shantytowns and backward rural areas hold assets worth trillions of dollars in the form of houses buildings land and small businesses The problem is that their rights are not adequately documented and hence these assets cannot readily be turned into capital cannot be traded outside of narrow local circles cannot be used as collateral for a loan and cannot be used as a share against an investment Existing legal and administrative systems to register property or set up a business are bureaucratic and time consuming and create insuperable barriers to the formal recognition of property rights As a result the assets of the poor are dead capital In the West by contrast the mysteries of capital have been solved every building and every piece of land and equipment is represented in a document and is part of a vast hidden process that connects all these assets to the rest of the economy injecting life into these assets so they become capital with the potential to create additional value Assets are used as collateral for credit and for the creation of securities and secondary markets but also provide an accountable address for the collection of debts and taxes and thus a firm basis for public services utilities Formalising property has effects that allow its owners to create capital for example it makes assets fungible so they can be used for other purposes divisible in the form of shares and combinable in new business enterprises What is required therefore across the developing world is a programme to capitalise the poor by legalising their extra legal property Extra legal property systems says de Soto are not chaotic rather they are based on local agreements and detailed understandings of who owns what a localised social contract But these rules are not codified or standardised and cannot be applied outside of their area of origin and local systems must therefore be re engineered into one national formal property social contract This involves the reform of
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