Peter Bauer talked about it over 50 years ago while Amartya Sen, Bill Easterly, and Jeffrey Sachs still argue about it today.
The question is: How do we extend the benefits of capitalism and globalization to the world’s poor?
The simple answer it to get the right institutions. How we get those institutions is a more complex problem. One of the books that changed my thinking on the subject was Hernando de Soto’s The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. De Soto argued that globalization was leaving the world’s poor behind for a simple reason: they weren’t connected to its institutions. The poor had created their own markets with complex rules and order which allowed them to make a meager living, but because their rules, titles, and contracts were not formally recognized by the government, they could not connect to the outside world of trade and finance. He deemed these activities “extralegal” because while they were technically outside of the legal system, they were nonetheless widely recognized by the market participants themselves.
This poses a problem for many entrepreneurs. For example, a woman in Ghana may run a great business which she would normally be able to expand with the help of outside capital, but with no legal title to her land or a permit that says her business is registered, she can’t get a loan from any legal financial institution. Other development specialists, like Muhammad Yunus, recognize this problem but only put forth band-aid solutions like micro-lending. De Soto has a simpler solution: Legalize entrepreneurship. Not in some top-down scheme, but from the bottom-up.
I highly suggest anyone interested in the subject to pick up the book and read about it for themselves, but in the mean time PBS has decided to make a documentary aptly titled The Power of the Poor:
It airs on PBS two weeks from now on October 8th at 10pm (or earlier for folks west of New York). Don’t miss it.
- Josh McCabe
What do you mean by “bottom up legalization”? Isn’t legalization something that is, by definition, done by an authority.
This is a video on how the life some street vendors in India changed after legalization of their business. I show it to my students in introductory classes to introduce the discussion of property rights.
Nimish: That’s a great video! You’ll really like the PBS documentary too. I suggest you make your students watch it too (even though it gets in the way of their Thirsty Thursdays).
By bottom up legalization, I meant starting from the ground and looking out how property rights really work in these extralegal markets. I going to sound like a sterotypical sociologist, but property rights are a social construction, so there is no one-size-fits-all way to do it.
For example, de Soto uses the maxim of “listen for the barking dogs.” In Peru, there was no map in an assessor’s office telling officials when one person’s property ended and when another’s began. Unofficially, property boundries could often be discovered because people’s dogs would bark when you crossed onto their property. Similarly, a vendor in an extralegal market place doesn’t actually own the rights to their spot, but if you talk to people, you can find that cultural and social norms are used to decide who really “owns” a spot.
A top-down method might come in and define arbitrary property rights then auction them off regardless of the norms that evolved among market participants. Hopefully this is done by the most decentralized authority in the political system (municipal or lower if possible) who knows the people well. It doesn’t hurt to have a non-profit there to oversee everything too.
And as I sit here reading Marx, it hit me that I should also emphasize that such situations reveal the importance of protection of private property and capital for the poor. Corporations may suffer from lower profits because of weak capital market institutions, but the poor risk their whole livlihoods.