Riches for the poor

Guest Columns by Sauvik Chakraverti,

The Newindpress on Sunday, 2007-2008

Riches for the poor

I raise just one cheer for Grameen Bank and its founder Muhammad Yunus getting the Nobel Peace Prize. It must be admitted that advocacy of microcredit in poor countries is a considerable advance from the idea that has dominated development economics for the last 60 years: that the governments of poor nations should receive copious amounts of foreign aid. It was that great dissenter, Peter, Lord Bauer, who said foreign aid meant money transfers 'from the poor of rich countries to the rich of poor countries’. Bauer was honoured with the Milton Friedman Prize for Advancing Liberty by Cato Institute. This biennial prize carrying a purse of a whopping $500,000 has become the liberal alternative to the Nobel Prize. After Bauer, the Cato prize went to Peruvian economist Hernando de Soto, whose book, The Mystery of Capital, has raised an important point about poor people in poor nations. And that is: the poor possess property; what they do not possess is legal titles representing these assets, which could be used as collateral.

In various interviews, Yunus has maintained that he started the Grameen Bank to give credit to the poor because the existing banks refused, saying the poor are not creditworthy: in other words, they have no collateral to offer. His own approach was to extend small loans based on ‘trust’. That these small loans are profitably invested in small businesses is testimony to the entrepreneurship latent in poor people. However, this manner of operations by a ‘bank’ cannot ever unlock ‘the mystery of capital’. If the poor had legal titles to lands and buildings they owned, regular banks would vie with each other to lend them money. Only then would the ‘capital’ in ‘capitalism’ happen in poor nations.

The word ‘capital’ indicates a measure of supremacy for the idea it embodies—as in ‘capital city’ or ‘capital punishment’. Both de Soto and Grameen Bank are talking about ‘capital’ for the poor. But while the Nobel laureate is in the business of loaning the poor extremely small amounts of capital, the Cato laureate is talking of regular, ‘macrocredit’: huge amounts of collateral-based capital for the poor to invest in capitalism. De Soto estimates that the total assets of the poor the world over are worth nearly $10,000 billion: all this is ‘dead capital’ without legal titles. In contrast, all the loans of the World Bank to date amount to less than $500 billion.

To appreciate de Soto’s point my reader has only to walk around any ‘unauthorised locality’ in his city or town. These extra-legal urban properties of the poor imply a life not just without legal title; this also means no legal address, and hence no legal way to get postal services, tap water, sewage, electricity and phone lines. This creates a ‘bell jar effect’: those lucky enough to have titles get capital; the unlucky ones don’t. The lucky few live within the bell jar; the unlucky ones outside it. De Soto advocates getting everyone into the bell jar. Grameen Bank is not speaking this language of capitalism.

De Soto’s book is subtitled Why Capitalism Triumphs in the West and Fails Everywhere Else. The example he has studied is the USA, where poor white settlers established homesteads, farms and ranches, laid claims to gold in California and so on, all within the ambit of laws protecting private property. Possessed of legal property titles, these poor settlers found in these titles something ‘representative’ of their property and their creditworthiness. These legal representatives of property—that is, property titles—empowered collateral security and unlocked the ‘mystery of capital’ for every single US citizen. It is this approach that de Soto advocates for poor nations.

My own research reveals that the existence of legal property titles (and this includes legal leases for tenant-farmers) under the common law in feudal England is the principal reason why capitalism emerged first in Britain. The primacy of the ‘law of the land’ was asserted as early as 1215AD in the Magna Carta, in the term lex terrae. It is simply because writ protection was granted to all properties, contracts and debts from the 13th century onwards that London’s Lombard Street became the world’s greatest banking center. The East India Company was set up in 1600, and its ventures could successfully raise capital only because the rules of the game were very good. Poor whites who migrated to the US, Australia, Canada and New Zealand founded capitalism there because they took the common law on property along with them. Poor people in poor nations need to be able to play the game of capitalism according to good, universal rules.

De Soto has investigated property matters in many Third World countries, from Egypt to the Phillipines to Mexico and Haiti. In Cairo, he found a total absence of property titles to real estate in the desert. In Haiti, which is as poor as Bangladesh, it was found that many important government buildings, including the official residence of the head of state, did not have property titles. Over 70 per cent of the people in these countries live outside the bell jar. Their properties possess no ‘representative titles’. These people and their properties lie outside the scope of capitalism.

In India, with 15 years of ‘voodoo liberalisation’, it has become abundantly clear that property is the name of the game. Private builders and real estate developers have drastically altered the skylines of every city. In villages close to urban areas, unlettered peasants have come to appreciate that their mustard fields have more value than they could ever have imagined. The socialist Indian state with a constitution that does not recognise private property rights as absolute operates a dual monopoly – on ‘legal’ land to build on as well as on roads that could colonise more land—and it is this dual monopoly that has caused urban land values to skyrocket. With good roads into the surrounds, land values in cities would come down, those in villages would rise, cities would decongest and ‘unauthorised colonies’ would not happen! This planned destruction of our urban habitat, which is the destruction of our civilisation itself, has made many of us owners of hideously expensive properties in hideous cities and towns. But the plight of the poor, without legal titles, is far worse. For their sake, we must champion property rights, the basis of capitalism and the very antithesis of socialism, which deifies collective property. Microcredit is just symptomatic treatment; property titles are the cure.

The writer is the author of Antidote: Essays Against the Socialist Indian State, and its sequel, Antidote 2: For Liberal Governance. He can be contacted at sauvikc@epmltd.com