TWO USES FOR CONDOMS Another book I've been reading is William Easterly’s “The Elusive Quest for Growth,” which is basically a history of World Bank and IMF policies toward the developing world. Easterly was a World Bank economist at the time of writing, but his rather critical take on his employer's tactics caused him to be forced out. He's now at NYU. I generally like this book, as it does a good job of outlining the various prescriptions and metrics used in each time period, and evaluating the consequences. I especially like his rant against the "necessary investment" Harod-Domar model used through much of the 60's and 70's.

In other arenas, however, I feel that Easterly draws conclusions a bit quickly. For instance, Easterly has a section about “the myth of unwanted births.” He asserts that most large families in the developing world are intentionally large, and that if women wanted condoms, the market would provide them and they would buy them. Children cost a lot, but they are also sources of pleasure and labor. The failure of condoms to catch on in the developing world must reflect the preferences of the people. Easterly’s arguments appear impeccable. Yet if we have a “myth of unwanted births,” we must also have a “myth of unwanted HIV.” While there are rational reasons a person might want many children, there are no rational reasons a person would want a deadly disease. As a protection against AIDS, condoms could not have failed to penetrate developing markets simply due to preferences. There must be a market failure somewhere along the line. And if condoms are being undersupplied to stop AIDS, they are probably also being undersupplied to stop unwanted pregnancies. Something must be wrong with Easterly’s account.

CAPITAL, MYSTERIOUS OR OTHERWISE So I’ve been very quiet for a while now—I back in school now, and never got around to posting about the last few books I read. So here’s what I’m going to do: post on a few of the more interesting things I read in the last month, then bid this research project goodbye.

One book I found particularly interesting was "The Mystery of Capital" by Hernando de Soto (not the explorer, the Peruvian economist). His thesis is that poor countries are poor not because they don't have enough stuff, but because they lack the legal framework to turn that stuff into useful capital. He and his team went around five large third-world cities (Mexico City, Jakarta, Lima, etc.) and, block by block, painstakingly estimated the value of the property they found there. His rough estimate for the value of property held by poor people worldwide is over $9 trillion. Even if this figure is a bit of an overestimate, the number still dwarfs the amount of foreign aid that has ever flowed into these people’s countries. I wish I had the book in front of me (someone recalled it to the library) but my memory is that $9 trillion is about 13 times all foreign aid ever given. The main point, whether or not you believe this particular figure, is that the stuff that poor people have managed to accumulate by themselves is quite substantial, more substantial than any aid they can expect to get from rich countries.

So given this large stock of stuff, how come poor people aren’t getting much richer? De Soto thinks it all comes down to property rights. The majority of property in the developing world is undeeded. Without a deed or title, a person cannot use their property as collateral. Without good collateral, one cannot get a loan, without a loan one cannot start a business, and so on. In the US, the single largest source of funds for new businesses is home mortgages. Such a thing is impossible in a place without an integrated system of property rights, where claims to ownership are recognized by those within a few blocks, and no farther. In such a situation, people can only reliably do business with those near them, those for whom social ties can make contracts binding. This drastically limits the scope of possible loans and business transactions, and de Soto believes it cripples the developing world’s poor.

This is all an interesting story, but it’s hard to tell how far to believe it. I was emailing about this with my friend Brian Shillinglaw and he had the following comments:

> I think there's a whole school of people who argue along de Soto's lines
> re European history -- that europe took off b/c of getting property right
> incentives just right ... North and Douglas come to mind but I can't
> remember their book. there's a whole program somewhere that does this
> stuff. "new institutional economics" I think they call themselves.
>
> but I've never been too convinced by it all b/c europe was accumulating a
> shitload of wealth when its property rights were still super local and
> changed every 5 miles, a complete mess from a capitalist's or a state
> bureaucrat's point of view. or so it seems to me. read Eric Williams
> *Capitalism and Slavery*?
>
> also there is the whole issue in titling customary assets in that it is a
> power struggle, what is not titled can't be taxed, who gets to title
> assets, etc. You might have a house but 5 people might claim ownership to
> that house, some of them more powerful than you. if it would be a good
> idea to shift the black/grey economy into the formal economy through
> titling, would it work well or equitably given how rare democratic
> governance is in latin america? dunno.

I don’t have number comparing the wealth accumulated in Europe in the era before standardized property systems with the weath accumulated in today’s third world, but it would be interesting to see if what Brian says is true—that Europe really was leaps and bounds ahead even without property law.

One of the most interesting parts of the book for me was de Soto’s account of how the US integrated all its various local property systems into one official system. As the frontier moved west, squatters tended to settle areas first, leading the way for formal government and incorporated townships to follow. They tended to have ad hoc systems for staking their claims, usually by making improvements to the land. In de Soto’s view, government actions like the Homestead Act of 1862, which granted land to anyone willing to live on it, were not so much government altruism as they were efforts to legalize and incorporate claims that had already been made. De Soto lays out many instances where the US government made passed laws, not to change how people settled land, but to bring existing behavior into the fold of legality and so make it compatable with land holdings in the rest of the country.

There are of course many crucial differences between 19th century America and today’s developing world, not least of which is that the US had a seemingly boundless supply of land, and it was just being settled. It may be much easier to incorporate land claims in the context of new, expanding economic space where the rules are just being written. In today’s developing world not only is land, and the material wealth it brings, often at a premium, current informal property systems are not in such a state of flux. Still, the American experience suggests that laws incorporating existing practices may be able to help even there.