QUESTION: IF the construction industry in Brazil in 1995 was reporting no growth, why did sales of cement increase in the same year by more than 20 per cent? Why do peasants at the source of the Amazon take huge risks by growing coca for the international drug market when they could make six times as much money, medium term, by legally growing oil palms?
Answer: Because cement was being bought by the - mainly urban - poor to build flats, buildings and businesses which are outside the formal legal system, have no permits, and never find their way into official statistics. And because the Amazonian peasant can never use the land he tills as collateral to borrow the money he would need to make the five- year investment necessary to make a success of oil- palm growing.
These are among scores of examples which illuminate the central thesis of a revolutionary new book to be published next week: that what the overwhelming masses in the developing and post-communist worlds lack above all is a legal system that allows uniform property rights, which in turn mean that the poor can convert their actually huge collective assets into working capital.
Not many economists need the protection of armed police in their own country. But then the Peruvian Hernando de Soto was for several years top of the hit-list drawn up by the Maoist Shining Path guerrillas. Although he brings a neo-Marxist, demystifying, rigour to his analysis of the rapidly growing inequalities between the small numbers of rich and the vast numbers of the poor in the developing world, he dared to suggest that they existed because the masses are being prevented, by the deficiencies of their countries' legal systems, from participating in what we call capitalism.
De Soto's The Mystery of Capital may not be in the class of Das Kapital, Adam Smith's Wealth of Nations or Keynes's General Theory. But if the criterion for joining that exclusive club is a capacity not only to change permanently the way we look at the world, but also to change the world itself, then there are good grounds for thinking that this book, subtitled "Why capitalism triumphs in the West and fails everywhere else", is surely a contender.
Essentially, what de Soto has done is to document the extraordinary vitality and scale of what he calls the extra-legal economy in the developing world and the former communist countries and then suggest ways of demolishing the barriers which still exclude its billions of protagonists from sharing in the spoils of conventional global capitalism.
De Soto is no mere theoretician. He has now been retained as a consultant to the new Mexican presidency. In Peru, where 90 per cent of the agrarian land is untitled, he helped to draft laws to bring both the rural and the urban extra-legal sector - massively expanded by migration from the countryside - into the economic mainstream.
And his book comes at you from the favelas of Brazil, the shanty towns of southern Africa, the barrios marginales of Mexico, the pueblos jovenes of Peru, everywhere in fact where local economies flourish but without the legal rights which would allow them credit and the right to transact in the formal market place. It isn't that the poor in the developing or post-communist world own nothing. Haiti is a classic example - in which de Soto estimates that the assets of the poor are 150 times greater than the total of foreign investment over the last two centuries. And for the local economies to function at all the poor have well-developed local informal trading practices and unwritten laws. But because their property rights are not recorded, and because they cannot rely on the legal systems which global capitalists take for granted, those assets can't be grown in the way those of the conventional global capitalist can. …