The Developing World Has an Alternative to Debt


Jul 3, 2020   HERNANDO DE SOTO

Before rushing into another round of borrowing, developing countries should consider another option that has long been staring them in the face. By taking the steps needed to connect untapped sources of wealth to the global economy, the developing world can finally start to accumulate capital instead of liabilities.

LIMA – Faced with the effects of the COVID-19 pandemic, emerging and developing economies have been taking on massive debt backed by no more than governments’ future ability to tax their citizens directly, or to tax them indirectly by inflating away the debt’s value. Already, the International Monetary Fund and sovereign bond markets have provided tens of billions of dollars in emergency financial assistance and debt relief to member states across Latin America, Africa, the Middle East, and South Asia.

In the short term, these countries have no choice but to issue additional debt. Developing and emerging economies are home to most of the two billion people working in the informal economy (“informals”). According to Guy Ryder of the International Labor Organization (ILO), these workers suffered a 60% collapse in earnings just in the first month of the crisis. With “no savings or access to credit,” he warns, “Millions of businesses around the world are barely breathing. … If we don’t help them now, [they] will simply perish.”

But there is a better and more enduring remedy than debt-led finance, or what Thomas Jefferson, in 1819, called “fictitious capital” (a full 40 years before Karl Marx made the label his own). In Jefferson and the classical economists’ view, debt-led finance is “fictitious” because “capital” is not a synonym for debt ownership.

Capital, rather, embodies the property rights to the potential surplus value that resources can generate when they are legally documented. It is this documentation that allows capital to serve as a pledge or security against investments and credit in capital markets. And it is this kind of non-fictitious capital that can shepherd developing and emerging economies out of the current crisis.


Based on three decades of working with more than 30 heads of state throughout the developing world, I have used Jefferson and Marx’s original insight to develop a plan that will enable informals to create more capital from existing resources than whatever governments can hope to raise by issuing debt.

By definition, the world’s poor do not have much money. But they do have potential capital that can be monetized. For example, the existing potential property rights to control the surface access to proven mineral, oil, and gas reserves are worth some $150 trillion – nearly five times the combined GDP of the United States and China. And at their present value, these resources could generate a medium-term return on investment equivalent to $21.7 trillion, which would spill over to government budgets, helping to fight the virus and its consequences.

To realize these gains, one first must understand that capital creation is the result of an invisible chain that links existing property documents – records of who owns what, how, and where – to the documentary requirements of capital markets. Informals need to make that connection by packaging their documents according to law and accepted practices at both ends of the chain. That will give them the leverage to negotiate on equal terms with large-scale extractive firms that need to settle on their land to access the reserves beneath the surface.

In most developing countries, informals already have rights to local titles and financial documentation, which means there is no need for new legislation. The problem is that local titles are not explicitly connected to the haystack of treaties and legislation that link them to the financial part of the global capital-creation chain. But, after years of fieldwork, my colleagues and I have determined how to connect local informal titles to the global financial-documentation regime. All it takes are seven certifications, issued by a credible agency, that can be packaged together and easily recognized in expanded markets.

Once such a package is assembled, it can be submitted at the reception window of a bank as a pledge. Credited in that bank’s books as an asset – abracadabra – it becomes capital. In exchange for that pledge, the bank can then issue money through an exit window, which it will record in its books as debt, and – abracadabra – that money can be invested productively to create jobs.

To be sure, if creating non-fictitious capital is so straightforward, one might ask why it hasn’t already been done. Here, it is worth noting that even in developed economies, where assets are firmly connected to money, people do not necessarily know how to structure titles so that they quickly become capital, capable of generating surplus value that informal title holders could then capture and monetize. The fact that developed-country capital markets collectively know how to convert titles into capital doesn’t mean that they know why the overall process works.

This is the case with countless human activities, from medicine and acupuncture to referendums and navigation systems. Chinese and Europeans explorers knew how to use imprecise magnetic compasses for more than a thousand years before anyone had come up with a satisfactory theory of magnetism to explain why compasses work. It is the same with informal titles to the land beneath which resources lie. Whenever they raise capital, extractive firms must refer to these titles (either explicitly or implicitly) when presenting their offerings. Otherwise, they would be in violation of anti-fraud and security acts that oblige firms to inform investors of any impediment that would block their ability to recover or harvest a natural resource.

In other words, people in developing countries already use property information all the time when they deal with the originators of offerings, underwriters, bankers, regulatory authorities, and the like. But they do so randomly and on the basis of tacit knowledge that does not automatically trickle down to the poor.


Today, “randomly” is no longer sufficient. Over the past 30 years, more than a dozen new international conventions have cumulatively empowered informals to obtain strong titles. The most important are those stemming from ILO conventions. I know this from my work on the ILO’s 2004 report, A Fair Globalization: Creating Opportunities for All, which I spent three years drafting, along with 20 other commissioners, including my “S” tablemates, the Nobel laureate economist Joseph E. Stiglitz and the American Federation of Labor and Congress of Industrial Organizations’ then-president, John Sweeney.

Approved by 182 countries, the report established that though informals own enormous sums of capital, “notably in land and housing,” it is “dead capital,” because their property rights “cannot be used as loan collateral, discouraging credit and investment.” The report’s recommendation that this dead capital be converted into live capital has been concretized in hundreds of multilateral conventions, bilateral investment treaties, and free-trade agreements, and many developing countries have gradually incorporated these codifications into national legislation.

In Peru, for example, we have identified 1,469 laws, 15 Constitutional Court decisions, ten Supreme Court rulings, 594 legislative decrees, and 680 executive orders that confirm informal owners’ right to control areas where most of the country’s renewable and non-renewable resources are located.

To see how informals’ control can be monetized, it’s enough to focus on energy – a controversial economic sector, to be sure, but one that features a fundamental abstraction useful for explaining how the creation of non-fictitious capital works. Like capital, energy is real but cannot be touched. Both energy producers and miners, whether they realize it or not, are transforming low-value resources into high-value outputs. They do so by intuitively following a protocol that certifies information about the potential surplus value of putting these resources to work, as perceived by various stakeholders in a value chain.

Because energy producers and miners are already in the business of creating surplus value on the basis of measuring an abstraction, they are in a good position to understand protocols for transforming property into non-fictitious capital. Moreover, empowering them in this way would have benefits for sustainable development.

For example, the ongoing ecological destruction in the Amazon can be stopped by giving informal miners who are also Amazonians the means to create non-fictitious capital. The informal worker who discovers gold but lacks the means to monetize it and install a proper refinery will instead resort to the “poor man’s refinery” and antiquated methods that rely heavily on mercury, which poisons the local ecosystem.

In Peru, more than 400,000 informal miners and over 800,000 informal loggers, lacking titles and therefore the capital to preserve and re-forest their worksites, end up having a damaging effect on the environment. Yet these trends could be reversed by capitalizing artisanal miners, inserting them into the global economy, and making them legally accountable.


How would this process of capitalization work? Consider the placid waters of Lake Junín, which Peruvians recognize as the source of energy that powers their towns and industries. Water tumbling down from the high-altitude lake eventually becomes light shining from an electric bulb.

Engineers follow a protocol for certifying the potential energy of the water by measuring its usable height and available volume, along with the kinetic energy generated at the end of its gravitational fall, which is transformed into mechanical energy as it moves turbines and generators to produce electric energy. Ultimately, the lake’s realized value is thousands of times greater than it would be if it were used only for fishing and canoeing.

The protocol that we have designed for transforming property titles into capital resembles this hydroelectric model. Requiring no changes to existing laws, and amenable to implementation by either the public or private sector, our protocol consists of seven certifications to establish the connection between informal-property documents and capital markets. Specifically, these certifications verify:

  1. The location of the resources, the identification of the owners, and the presence of laws and local authorities that can determine the validity of titles and enforce them;
  2. That existing laws allow titles to serve as pledges to raise capital in any given jurisdiction;
  3. That the title holders have or are prepared to adopt a business organizational structure that allows them to be recognized and protected in the global market;
  4. That existing laws allow those owners to adopt corporate tools and limit their liabilities so as to protect themselves from decisions that go against their personal interests;
  5. That existing laws also allow them to choose their partners and own property via shares and stock, and thus to appropriate surplus value and become owners of high-productivity, large-scale industries;
  6. That titles comply with local ordinances govern the forming of capital;
  7. That titles comply with the rules, amendments, practices, interpretations, and prohibitions governing global financial markets, including anti-fraud laws such as the US Securities Act of 1933 and the US Securities Exchange Act of 1934. as well as international conventions such as fair globalization provisions, free-trade agreements and bilateral investment treaties.

This list would seem to entail a significant amount of due diligence. But the certification process would play out in much the same way that it already does in global financial markets.

We tend to treat titles and financial instruments as if they pertain to two separate worlds, when in fact they are part of the same invisible value chain that protects the interests of people who want to own, exchange, and transform appropriable resources. Property titles (deeds, leases, easements, mortgages, and so forth) protect owners, buyers, financiers, and all stakeholders against the local risk of interference and fraud. Likewise, the financial documents that create capital (pledges, offerings of securities or token securities, guarantees, and the like) protect them from global risks as defined in existing exchange and anti-fraud acts and by the practices of capital creation.

Though these documents are drafted according to different bodies of law, they are part of a single process that reinforces and expands the safeguards needed for people to trust one another when seeking more useful and profitable applications of their talents and property. All that the process needs is a form of certification to allow people to use what they already own.

If their property claim can be identified, located, locally enforced, and globally sanctioned, it can be combined, collected, and concretized in negotiable documents that are easy to recognize in expanded markets. Hence, there is no need for even governments to do due diligence; the market and existing legal frameworks take care of it.

A key first step is to give the poor the means to adopt corporate tools – that is, the ability to incorporate. This would not require any deregulation or changes to existing law. Indeed, millions have already pursued this path using the World Bank’s Doing Business program as a guide.

Once incorporated, these enterprises would need to be connected to capital markets through the seven certificates, which neatly comprise all of the thousands of rules and instruments spread willy-nilly across international conventions, free-trade agreements, and bilateral investment treaties. This process involves learning by doing – and we have already made significant progress with trials in Peru over the last few years.

Once informal workers and enterprises have been furnished with the legal means to defend their incremental wealth gains, they can decide for themselves how to monetize it, whether as surplus capital – following the model of Lake Junín – or as collateral for credit. That’s how the broader financial system already works. Credit comes from the Latin credere: “I believe in you because you have something to lose.”


I credit Aristotle with being the first thinker to provide us with the tools to understand that capital is not money created ex nihilo, but rather a potential value and power that most resources hide. This potential is far greater than the actual resource itself, provided that one has a protocol for combining random, disparate pieces of information and inputs productively.

Heeding that basic insight, with the help of friends and former colleagues, I have designed and successfully tested a protocol that resembles the hydroelectric model explained above. It enables “placid” property titles in developing and emerging markets to power an economy by generating capital. It does so by providing the certified knowledge that all parties involved in creating capital need to comply with locally enforceable property titles and the rules and practices required by global capital markets.

The construction of this protocol derives from previous successful experiments around the world. Among many other examples, we have studied the shortcut techniques that Eugen Huber used to turn Switzerland around with the Civil Code of 1907. We have examined how the US used preemption acts to settle the American west in the nineteenth century. And we have considered how US Army General Douglas MacArthur opened the door to titles and capital creation in post-war Japan.

These and countless other historical precursors evolved into the current global economic and financial system, in which insurance firms, investment banks, real-estate developers, and many others document titles and package them for wider use every day without actually knowing why the process works. They are acting on a body of knowledge that now must be adapted for use in developing countries.


This spring, as the COVID-19 pandemic was wiping out earnings and savings across Peru’s informal economy, we introduced our capital-creation protocol through newspapers, television, and social media, calling on the government to replace its debt-financing effort with our protocol for capital creation. We showed that by using the seven certifications listed above, formal and informal miners could unlock upwards of $1 trillion worth of potential real capital that would generate 70 times more money than the government budget allotted to fight the virus.

The response has been positive, to say the least. Within three days of its publication, our plan had been viewed by seven million Peruvians, and was soon followed by the publication of a manifesto from small mine owners representing 400,000 families and a million workers – urging the government “to support de Soto’s plan to reactivate the economy without debt.”

To implement and scale up our plan, we have started a dialogue with those who are in the business of authenticating statements: investment banks, title insurers, securitizers, certification companies, and a few law firms familiar with the rules, amendments, practices, and interpretations that govern anti-fraud acts. We are also talking to leading impact investors and advocates of stakeholder and democratic capitalism, all of whom share a commitment to supporting bottom-up development. Some have already expressed an interest in operating these projects through various public-private models.

For most observers of developing countries, the informal economy is a phenomenon rooted in local history and idiosyncrasies. Now, thanks to COVID-19, we have concrete evidence that informals share four common traits: they need more, not less, capital; they already own the resources to create it; they constitute the overwhelming majority of the world’s economically active population (two billion people); and, as the ILO warns, if they cannot save or access credit, they “will simply perish.” But before that happens, they will rise up in anger and despair, with unknowable consequences.

Fortunately, we have a plan to avert this worst-case scenario. If scaled up and applied to other natural resources, a capital-creation protocol for informals could prove to be globalization’s missing link, finally bringing sustainable development to many who have been left behind.
Hernando de Soto


Writing for PS since 2016

Hernando de Soto is President of the Institute for Liberty and Democracy in Lima, Peru, and author of The Mystery of Capital.

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