Make Trillions With No Money Down!

Peruvian Economist Hernando de Soto has a simple idea that he believes could flood trillions of dollars into the poorest sectors of the world economy: by giving poor people clear legal title to the land they live on and the homes they’ve built, he says, we could give them the collateral they would need to get bank loans that could help them build businesses and enter the formal economy. The concept has made De Soto a star in the international development world. He’s the toast of the World Bank and the darling of Davos, and if his theories worked, he’d be one of the greatest friends that the poor of the world have ever known.

Unfortunately, like a lot of things that seem too good to be true, de Soto’s plan doesn’t pan out well in the real world.

John Gravios outlines a few of the financial reasons why the plan won’t work in an article in slate.com. He focuses on two problems.

First, if you are an unemployed poor person who owns a home in an undesirable neighborhood, no bank is going to give you a mortgage no matter how clear your title is, because they know that you won’t be able to pay it back. In the places where De Soto’s theories have been applied, not much money has actually flooded into the bank accounts of the poor. (It’s barely a trickle.)

Second, if you are an unemployed poor person who owns a home in a desirable neighborhood, chances are good that someone who has political or criminal connections will come along and push you off the land, or grab the land before the title gets legalized, or buy you off your land when you need to pay for school books or medical treatment or food to eat. Then you’re a poor, unemployed person with no home. Of course, that could all happen without the prospect of legalizing the title, but formalizing land ownership rules is one of the things that makes the land attractive to an investor, as opposed to a homeowner.

One rule of thumb we like to follow here at Grassroots is to ask the people you’re hoping to help what they need, instead of telling them what you’re going to give them. Groups like the Landless Workers Movement (MST) in Brazil are obviously concerned with the question of land title and ownership rights, but for them, one of the most important things is the recognition that a community is not just a collection of individual land owners. The MST has been researching the question, and is working with the Brazilian government to find ways to legalize some form of collective ownership of the land that both acknowledges the role that the community played–building schools and other infrastructure–and protects the community from the possibility that they will lose what they have built, piece by piece, as it is sold out from under them to the highest bidder.

None of this is meant to suggest that poor people shouldn’t have clear, legal title to the homes that they live in or to the land that they work. Those are obviously good things in and of themselves, but they aren’t going to fix all the other things that are wrong with our global economic system.