I just finished reading Hernando Desoto's Mystery of Capital. Although it is not a new book it was new to me and quite timely in this era of spreading freedom through culture and military force.
In my day job I spend significant amounts of time with microfinance organizations, the most well known of which is the Grameen Bank of Bangladesh. Microfinance, and microcredit, is a powerful tool in battling poverty worldwide. It is amazing how poor people -- mostly women -- are turning US$150 loans into successful businesses that provide a path out of poverty for their families. Microlending programs worldwide have been so successful and the total outstanding loan portfolio of this group is so large (~US$15 billion) that many organizations are beginning to to tap traditional commercial capital markets to finance the loans. The great thing about these loan portfolios is that they are characterized by low risk -- turns out these people are extremely low risks for default -- and high return.
Desoto takes a look at this same issue of issuing credit to poor people, but from a more macro level. His hypothesis is that capitalism's success in western countries is due to their formal property ownership structures. People with property leverage the value inherent in the property, through credit, to create more value. Owning property in the US is fairly straightforward: find the property, negotiate a price, arrange financing, and file the appropriate documents. Boom. You own property. What you may not realize is that this simple system in the US is the result of over a hundred years of formalizing different extralegal structures and processes into one unified legal system throughout the 19th century.
If only it was this easy in the Philippines or Haiti, or Egypt. In these places, buying property is so cumbersome that only very small numbers of people are able to do it. In the Philippines for instance, it takes over 15 years and 168 bureaucratic steps to gain formal ownership of property. This, of course, protects current land owners; who would buy property through the formal system when it is cheaper and easier to gain property through less-than-legal-but-informally-recognized means? All is fine and dandy then, except that it is impossible to raise credit against property you don't own. Without credit, capitalism fails.
All this makes me wonder if this "spreading freedom" thing is happening in the most effective way. I am aware enough of my naivety on the subject to know that creating peace in Iraq is not as easy as imposing simple, friction-free property ownership processes and then easy credit to property owners. Still, I cannot stop thinking that focusing a few of the hundreds of US$billions we are spending winning the hearts and RPGs of Iraqis to build a catcher's mitt for capitalism there might be a good thing to consider.
