Millions of poor people in developing countries have been put in particular straits by COVID-19. Many of these people own property, individually or collectively. But such ownership is often not legally confirmed. As a result, the people concerned have no collateral on which to invest or obtain loans.
Paolo Aguilar / EPA
On the _occasion of this year’s International Labour Day on 1 May, Guy Ryder, the Director-General of the International Labour Organization (ILO), predicted that COVID-19 would push over half of the world’s working population – around two billion people – into absolute poverty with no work, no capital and no credit access. The highest infection rates are indeed being seen in countries such as Brazil, India, Ecuador and Peru. Megacities like Lagos have extensive poor quarters whose population density is 20 times New York’s. Hundreds of millions of individuals and microbusinesses are seeing their revenues, their earnings and their wages largely dry up. Their opportunities to save or obtain loans have similarly evaporated, and their very existence is under serious threat.
Property center stage
Thomas Piketty, the reputed French economist, has suggested that this growing poverty should be tackled by transferring funds to these impoverished peoples which are financed by raising taxes on the wealthy and by nationalizing capital goods. In Piketty’s view, the accumulation of capital in the hands of the few is an inevitable product of the logic of the system. He is wrong. Because as Thomas Jefferson observed back in 1818 (the year Marx was only born), money – including debt – without resources or productive activities is a fictitious entity. Real capital, by contrast, must always be backed up by property owned.
Poor people in developing countries have little or no money. But many of them have individual or collective possessions, such as a small home or a plot of land. In many cases, though, their ownership of this property has not been legally documented. This means that real capital currently lies unused. It could be monetized, of course; but doing so often faces too many administrative and legal impediments. Yet this would be a key strategic means of fighting poverty effectively, especially in the present COVID-19 times.
Our studies in Peru and in many other developing countries reveal the following findings and potential: taken together, people in the informal economy own large areas of land and thus have extensive potential at their disposal. This state of affairs is the result of many years of mass and generally unregulated migration to previously uninhabited areas, or of agrarian reforms.
In Peru, for instance, poorer groups among the population own tracts of land
for which the concessions for the underlying oil, gas and mineral reserves have already been awarded by the national government to large extraction companies. The resulting conflicts are substantial. As a rule, the poor inhabitants will oppose any attempts at mining or other extraction activities on their land because their livelihoods depend on their arable or livestock farming. According to our estimates, the assets blocked here worldwide amount to around five times the GDPs of the USA and China combined.
Why are these resources unavailable, even though – given the present COVID-19 situation – they would be urgently needed from an economic standpoint to avoid the accumulation of massive debt? Our analysis of ownership rights in Peru provides the following insight, which also applies to many other developing countries.
Numerous laws, legal rulings and government ordinances confirm an informal right to ownership of the land under which these sizeable natural resources lie. But, as was concluded in an ILO report of 2004 on which I collaborated with Joseph Stiglitz and John Sweeney and which was approved by 182 nations, while such informal land and home ownership is vast and varied in most developing countries, it is generally not accepted as collateral for loans or investments because of an absence of the corresponding ownership documents. So to some extent, the informal economy is lacking the requisite practical legal foundation.
Changes to the law are urgently needed to lay a legal foundation that would enable full use to be made of the potential offered by the property owned within this informal economy. This is the only way to ensure that the investments can be made and the loans can be granted which will stimulate the broader economic growth that is so urgently required. All the developed countries and emerging economies have taken such steps. Doing so has enabled them to establish efficient and effective regulatory systems that are based on clear ownership rights. And this in turn enables them to enter into international trade and economic agreements, especially on investments.
Adam Smith and Karl Marx agreed: capitalism is the engine for growth. In the 21st Century, though, we have to appreciate that around two billion of the world’s population still live and work in an informal economy and that, as a result of this, these people are existentially threatened through COVID-19. These people own property, which is often even confirmed by formal ownership documents; but they can do little to take advantage of the assets they own, primarily because any such ownership documents will only be of economic value if they are guaranteed by a long chain of legal certifications. We are well familiar with such certifications, attestations, warranties and similar from the developed world. They ensure transparency, legality, tradability and reliability. Which are all essential for property to grow in value.
Property ownership alone, then, is not enough. The formal legal foundations must also be laid which will make such ownership a genuinely usable tool. Discussions with American and European investors, with banks and with insurers have also revealed a rapidly growing interest in such an approach.
We can only fight COVID-19 swiftly and sustainably if we manage – jointly and to the benefit of our poorer populations – to tap dormant capital and use it to generate and maintain sustainable further development. In this sense, COVID-19 is hopefully a salutary shock that will help lead us all to a fair, efficient and transparent capitalism that permits and promotes growth and greater welfare.
Hernando de Soto is the founder and president of the Instituto Libertad y Democracia, which is based in Lima, Peru.