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“The Mystery of Capital” by de Soto Analysis Report

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Updated: Sep 8th, 2021

Hernando de Sato, the Peruvian diplomat, in a thought-provoking book on capitalism, analyzes the reason why capitalism seems to work in some nations, mainly the ones in the West, and fails miserably in the rest of the world. This book’s analysis of the disparity of the wealth among the World economies and how the Western world has managed to consolidate its hold on the Third world is welcome. The West in its bid to thrust capitalism on the erstwhile communists has its repercussions. The very survival of capitalism in the West is now threatened unless all the other countries also implement capitalism. The business community argues that if this does not happen, then the West will be hit by the recession. Millions of investors are painfully learning that their emerging market funds are evaporating and that globalization is a two-way street and not a cul-de-sac. The relationship between the West and the Third World countries has to be reciprocal and commensalism has no place in this current scenario of globalization. It goes by the adage: You scratch my back and I scratch yours. Any other form of relationship will be detrimental for both.

It is not that capitalism is being met with strict resistance from the have-nots. The 1999 riots at Seattle at the IMF/World Bank meeting in Washington, D.C., and before that at the World Trade Organization in December 1999, highlighted the anger that spreading capitalism inspires. Whether we like it not, capitalism is spreading everywhere and even hardcore communists (read China) have understood that it is the only instrument that will spur economic growth. Even India which had closed its door for a long time has now realized that it cannot be left behind and is now wooing the entire West.

Hernando de Sato argues that the reason why developing economies are not flourishing is the lack of formal property rights for the poor. He argues that without the legal ownership of properties, the poor live in a shadow economy, subject to a very high risk of expropriation, bureaucratic arbitrariness, and political corruption. In a similar review, Gary D. Libecap writes that “The absence of title thwarts investment, limits markets, dampens incentives, and retards economic growth all round. The comparatively poor performance of many Latin American, African, and Asian economies stems not from cultures that are alien to commercial activity, from the legacy of past colonialism, or from low savings rates among the poor. The urban poor are entrepreneurs, and formal property institutions are needed to free their energies and expand their opportunities, allowing them to accumulate desperately needed capital. Currently, the urban poor are forced to hold their wealth in defective forms. This misallocation cripples developing economies. According to de Sato, the potential gain is huge. He argues that despite their lack of affluence, the poor still save, and in the aggregate the amounts exceed by perhaps 40 times all of the foreign aid sent to developing countries since 1945. Freeing up these savings and entrepreneurial energy could lead to a second industrial revolution, and end the disparities of wealth and well-being that differentiate the developed and developing worlds”.

The fall of the Berlin Wall has not ushered in capitalism in most of the countries where communism thrived. Hernando de Sato argues that it is due to the “mindset” of the people who think that capitalism is not a saleable commodity. In most of these countries where communism was ruling the roost, people do not have entrepreneurial skills. Most of them were dependant on the State for their livelihood; also, their non-entrepreneurial mindset has further been exacerbated by them not owning any assets. Due to this, capitalism has not made any inroads in their country. He also argues that it’s not that the poor, post-communist countries don’t have the assets to make capitalism flourish; on the contrary, as he points out, in Egypt, the wealth the poor have accumulated is worth 55 times as much as the sum of all direct foreign investment ever recorded there, including that spent on building the Suez Canal and the Aswan Dam.

Then what exactly is ailing in countries where capitalism has failed? The real problem is that all countries have natural resources that have to be capitalized on. In turn, this could also lead to very grave environmental problems. But do we have a choice? If the developing countries have to have guaranteed employment for their citizens, then capitalism should flourish. Hernando de Sato, with his set of knowledgeable researchers, has got the right information from every corner of this world. He writes with such authenticity that the reader is at times baffled by the plethora of information he provides.

In the Western countries, where capitalism flourishes, the citizens are permitted to sell or mortgage their house or assets to create wealth that can be pumped into any entrepreneurial venture. It also permits the value of a company to be broken up into so many publicly tradable shares and makes it possible to govern and appraise property within the State or National/Federal laws. This sort of thing is taken for granted in the West and asset management has been the norm and the key ingredient for capitalism to succeed, insists Hernando de Sato. He also points out through examples from 5 cities in the developing world that most people’s resources are commercially and financially invisible.

Ever since the birth of the Industrial Revolution in the West, the poor farmers have migrated from their rural setup to more industrialized cities in seek of employment. Capitalism has spurred a mass exodus of people to cities and capitalism has become “city-centric”. In China, since 1979, 100 million rural people have moved to the cities. The question is will the gap be bridged shortly or will it only make a big divide between the “haves” and the “have-nots”. Only time will answer this rhetoric. Hernando de Sato has got detailed evidence from all the “emerging” or “developing” economies of this world to give us a wonderful book. His radical and convincing arguments provide us a wonderful insight into these countries and convince us “why capitalism triumphs in the west and fails everywhere else.”


Libecap, Gary D. “The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere: Book Review.” The Journal of Economic History 61 (2001) : 1166-1168.

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