In surveying the urban landscape in developing countries, Jones (2003) draws attention to three “transitions” currently underway, transitions which he says will set the context for research activity and policy formulation. The first one is increasing urbanisation of the developing countries, the second the urbanisation of poverty and the last one being the greater prominence given to property rights in the development agenda.
The Peruvian economist Hernando de Soto in “The Mystery of Capital” sets out a compelling argument that attempts to links these three issues. In the words of Jones (ibid.) De Soto has placed a largely well‐known discussion of property rights, legal reform and state intervention into an anti‐poverty discourse. The central message in De Soto's “Mystery of Capital” is that the poor in developing countries possess immense resources, but they hold these resources in defective forms. Because the rights to these possessions are not adequately documented, these assets cannot readily be turned into capital, cannot be traded outside of narrow circles where people now and trust each other, cannot be used as collateral for a loan and cannot be used as a share against an investment (DE SOTO, 2000, p. 6).
The key argument in the “Mystery of Capital” is that informal property rights in third world countries prevent the emergence of impersonal exchange systems he sees as necessary to unlock the “dead capital” locked in the immense real estate holdings. He advocates a formalisation of property rights as a necessary condition for fighting poverty in these countries. Formal property rights are predicted to, inter alia, lower the cost of exchange (transaction costs) in real estate markets, thereby facilitating their functioning.
“Demystifying the Mystery of Capital” documents the output of a recently completed research project commissioned by the UK Government's Department for International Development (DFID). The stated main aim of this project, reflected in the title of the book, was to test De Soto's thesis of a linkage between property rights and poverty. Teams of researchers undertook empirical work in Peri‐urban areas in Botswana, Trinidad and Zambia.
The book is divided into two parts and eight chapters. The first part presents introductory themes. Reference here is made to de Sotos ideas, “post‐colonial” land law and customary land tenure. Rather unexpectedly and somewhat in a contrived manner, a discussion of HIV/AIDS, gender and children's rights appear. The second part presents the empirical results from the three country case studies followed by conclusions.
The overall results with regard to the main aim of the research project can be fairly described as ambiguous. While De Soto's ideas have not been given short shrift per se, the tenor of the overall conclusions take a decidedly dim view. The study finds little evidence of market activity in Peri‐urban plots “with plot‐holders more likely to pass their land to relatives … than sell” (p. 146). This finding is consistent with the observation by DOEBELE (1994) that anecdotal evidence suggests that real estate markets in informal settlements are not well developed despite considerable de facto security of tenure. Home and Lim attribute this to “resistance to market pressures”, resulting from the conception of land as a security and welfare support rather than as a tradable asset.
The conclusion here appears to be that de Soto's ideas cannot work because, for social reasons, people will not participate in the market even if they are granted formal property rights. An equally plausible explanation for little market activity on the other hand, which the authors do not or cannot address, either theoretically or empirically, is the possibility of high transaction costs in these markets.
Another major finding of the research is that there is widespread aversion to the use of land as collateral. According to the book (p. 147) land tenure regularisation is supposed to facilitate access to finance but the plot holders in all the three countries were reluctant to pledge title deeds in case they lost their land. This finding is also consistent with results elsewhere and is therefore not novel. It must be noted however that a finding of risk aversion to mortgages is not the same as finding that formal credit is not beneficial to poverty alleviation efforts.
The study could be criticised on methodological grounds. The research adopts an essentially anthropological approach to address a question whose theoretical substrate is in economics. Because De Soto writes in a “popular” style, the fact that his ideas are grounded in a strong theoretical framework remains obscure. De Soto's work is an example of the application of property rights theory, which in turn, and together with transaction cost theory, is a key part of what has been called the New Institutional Economics (NIE).
Those not fully conversant with this theoretical framework are therefore likely to deal with De Soto's ideas rather superficially. The research team of land surveyors, planners, a lawyer and a social anthropologist would have benefited from the added perspective of a land economist. The research thus missed a valuable opportunity to examine the land market process in these Peri‐urban areas, and thereby help to illuminate an area that has not been well studied (Antwi and Adams, 2003; Gough and Yankson, 2000; Kironde, 2000; Payne, 1997).
If the book (and by implication the underlying research) has to be judged strictly according to the stated objective of testing de Soto's thesis, the verdict is that justice has not been done. However in a more general sense the book makes valuable contribution to the stock of knowledge on land tenure in developing countries. In adopting the point of view of “the poor”, the book brings an additional perspective to the debate on whether more formalised property rights are harmful or beneficial to the urban poor.
