Extra Legal Markets

Description

The Mystery of Missing Information

• 80% of the population in Third World and former Communist countries are considered poor

• Surprise Revolution
  1. For example, between 1950 and 1988, the population of Port-au-Prince, the capital and largest city of Haiti, rose from 140,000 to 1,550,000. Almost two thirds of these people live in shantytowns. The new inhabitants of Port-au-Prince faced an impenetrable wall of rules that barred them from legally established social and economic activities. The laws barring them from legally established activites led to the developement of extra-legal activity.

• Misconceptions of the "extra-legal" sector

• Invisible Resources

• Entrepreneurs

Illegally built housing in Brazil's extra-legal sector

Shanty homes in Haiti

Procedure

The Mystery of Capital

Capitalism

• Capitalism stands alone as the only feasible way to rationally organize a modern economy. Capital is the force that raises the productivity of labor and creates the wealth of nations. Many of the inhabitants of Third World and former Communist countries already have the assests they need to allow for the success of Capitalism. Even in the poorest of countries people save. The reason why these countries fail is because they hold their resources in defective forms. Because the rights to these resources are not adequetly recorded, these assests can not be readily turned into capital. The difference between assests held in the U.S. and assests held by poorer countries is representation. Without representation, their assests are dead capital. Because of this problem extra legal markets, or activities outside the relm of recorded legal economic activity, dominate the economies of many of these countries.

• For example, unrepresented assets, or dead capital, CANNOT:

• Be used as collateral for a loan.

• Provide link to owner's credit history.

• Be an accountable address for the collection of debts and taxes.

• Be a foundation for the creation of securities like mortgage-backed bonds.

• "The single most important source of funds for a new business in the United States is a mortgage on the entrepreneur's house." This is clearly not possible if the house is not properly represented and accounted for.

• How much is Dead Capital Worth?

Dead Capital Worldwide

Egypt: How much dead capital?

The Missing Lessons of U.S. History

• The United States has had similar issues in history as these Third World and former Communist countries are having today.

• The "Wild West" of the 19th century is a prime example.

• Pioneers built houses, farms, and towns on land that they technically had no ownership of.

• They were essentially sitting on dead capital; their assets were not recorded and technically illegal.

• U.S. government went through a lot of trouble to finally record claims of these western territories. The pioneers believed that simply building a house or farm on a piece of land entitled them to the claim on that land and did not believe any further recording was necessary. They would not move from their illegal land because of what they had built on it, and thus there were instances where the government actually went through and burned down their houses and farms in an attempt to force them to leave.

• This example in our history goes to show that while at first it is very difficult to turn a "Wild West" society into an organized and accounted for capital-friendly society, it is definitely possible over time.

• Countries like Egypt are having nearly the same issues today as the U.S. had in the 19th century, where people are illegally building on unclaimed desert land.

• Third World and former Communist countries need to look at how Western society has integrated its extralegal sector into the law.

• "Preemption" was a very important method used by the U.S. to integrate the squatters. If they made significant improvements, which were determined by court, to the land that they illegally owned, then they were allowed to purchase the land for a set amount per acre before it was put up for public auction.

• Politicians began to realize that these squatters and extralegals were potential voters, so some began to advocate for such laws like preemption.

• Instead of fighting against the extralegal sector to preserve the old economic order, countries should integrate it to create a new one.

The Mystery of Legal Failure: Why Property Law Does Not Work Outside the West

• The formal property systems of the West produce six effects that allow their citizens to generate capital. The incapicity elsewhere in the world to use capital comes from the fact that most of the people in the Third World and former Communist countries are cut off from these essential effects.

• Fixing the Economic Potential of Assets

• Integrating Dispersed Information into One System

• Making People Accountable

• Making Assets Fungible

• Networking People

• Protecting Transactions

Conclusion and Solutions

• You cannot have Capitalism without capital. Third World and formerly Communist countries have billions of dollars of assets, however they are essentially dead capital and useless in the Capitalist markets because they are not properly represented.

• In addition to simply non-representation, the process for proper, legal representation of assets in many Third World and formerly Communist countries is so complex and time-consuming that most people choose to ignore it and turn to the extralegal sector.

• In taking hints from United States history, the broad solution for these countries is to try to integrate their immense extralegal sector into their legal world and in turn restructure their economy rather than striving to keep old ways and continuing to shun them from lawful ways.

Sources

The Mystery of Capital by Hernando De Soto