Slate Calls Hernando De Soto a Chump

I've never heard anything but glowing reviews of Peruvian development economist Hernando De Soto, from the left, right, NGOs, government, and business. We've talked about his work here before.

John Gravois wrote an article in Slate today saying that De Soto's ideas are crap. That they are great in theory, but don't help poor people, and often make them worse off.

Here are Gravois's reasons for punking De Soto:

First, the merely useless:

In various parts of the Third World, newly legalized squatters on the outskirts of cities are discovering that a property title supplies little of the benefit de Soto projects. Government studies out of de Soto's native Peru suggest that titles don't actually increase access to credit much after all. Out of the 200,313 Lima households awarded land titles in 1998 and 1999, only about 24 percent had gotten any kind of financing by 2002—and in that group, financing from private banks was almost nil. In other words, the only capital infusion—which was itself modest—was coming from the state.

Reports from Turkey, Mexico, South Africa, and Colombia suggest similar trends. "In Bogota's self-help settlements," writes Alan Gilbert, a London professor of geography who has done extensive research on land issues in Colombia and other parts of Latin America, "property titles seem to have brought neither a healthy housing market nor a regular supply of formal credit."

This is probably because banks realize they don't stand to gain much from repossessing shanties in rotten locations. Faced with a massive surge in legalized but tenuous properties owned by poor people, banks have simply adjusted their criteria for lending, and in some cases care more about stable employment than a land title. Not only that, but the actual real estate markets in many of these shantytowns on urban outskirts are stagnant, which puts a serious damper on any potential gains on capital—live or dead.

"You cannot accumulate capital if there is no market in which to trade your asset," Gilbert writes.

Now for the downright harmful:

In places where real estate markets are buoyant, titles turn out to be quite a hot commodity. Too hot, in fact. In June of 2002, for example, the World Bank kicked off a several-year project to distribute over a million titles throughout Cambodia. In Phnom Penh, the capital, untitled land near the city center has been selling for about $20 to $30 per square meter over the past few years. Titled properties nearby have been selling for around 10 times that much. For a poor squatter in the middle of the capital city, the promise of a title would seem to be a road to riches. In practice, it's more like a sign taped to his back that says, "Kick me."

In the nine months or so leading up to the project kickoff, a devastating series of slum fires and forced evictions purged 23,000 squatters from tracts of untitled land in the heart of Phnom Penh. These squatters were then plopped onto dusty relocation sites several miles outside of the city, where there were no jobs and where the price of commuting to and from central Phnom Penh (about $2 per day) surpassed whatever daily wage they had been earning in town before the fires. Meanwhile, the burned-out inner city land passed immediately to some of the wealthiest property developers in the country. (Prominent among them was this guy, Cambodia's richest thug.)

Since then, a similar pattern has continued elsewhere in the city, says Alain Durand-Lasserve, a land-management expert who has worked in Cambodia during the last couple of years. Investors have been buying squatter-occupied state land from various government officials in Phnom Penh, who pocket the money, thus looting the land both from the state and from the poor. In other cases in Phnom Penh—and also in Manila, in the Philippines—speculators or middle-income groups went out before titling programs took effect and bought land at slightly better than informal prices directly from the squatters, who happily sold off for a bit of cash. Then the investors just waited for the titling program—and the attendant leap in value and legal security—to come their way.

It turns out that titling is more useful to elite and middle-income groups who can afford to bother with financial leverage, risk, and real estate markets. For very poor squatters in the inner city—who care most about day-to-day survival, direct access to livelihood, and keeping costs down—titles make comparatively little sense. These poorer groups either fall prey to eviction or they sell out, assuming they'll find some other affordable pocket of informality that they can settle into. The problem is, with titling programs on the march, such informal pockets are disappearing fast. So, the poor sell cheap or are evicted, then can't find a decent new place to settle, losing the crucial geographic advantage they once had in the labor market.

Comments

[Mike]

Gravois arguments against don't seem very thoroughly thought out.

He says Peru's program is failing because only 24% in 3 years actually leverage their new real estate to get capital. I find that number encouraging, not discouraging. In the other places, they are running into trouble because banks are adjusting loan criteria to require more than just land. Not surprising at all, but does it really prove that having the title doesn't help? Not in my mind.

Finally, the horrible result in Cambodia seems at the surface to be more of a problem of design and implementation than policy theory. Simply because a corrupt or inept government was unwilling or unable to see through the intent of the law doesn't make the law stupid, only perhaps stupid in that place at that time.

Not sure his arguments were thought through all the way.

[Adam Smith]

I agree Mike. A big part of what De Soto says is that the legal/institutional framework needs to be done properly along with giving people deed to their property. Obviously this isn't happnening in Cambodia.

[John Christian]

"Gravois arguments against don't seem very thoroughly thought out.

He says Peru's program is failing because only 24% in 3 years actually leverage their new real estate to get capital. I find that number encouraging, not discouraging."

That number applies almost entirely to government lending; private banks don't want "poor" land, not only because it's barely valuable and the costs of repossession may be higher than the value of the collateral itself, but the people applying to purchase plots in poor areas happen to be... well, poor and uncreditworthy. Other recent studies show figures of only 9 - 10% increases in lending. For banks to be interested in land as collateral there has to be a demand for titles. De Soto's book, at its most quixotic, claims that even $500 (valuation method uncited) plots of land in Haiti can provide the extremely impoverished with valuable capital. This however assumes the plot under discussion is 1) better than vacant plots nearby and 2) that there is someone with effective demand (the will and the way) who will pay for it. One surprising report recently showed that the selling price for illegally occupied property often sells for somewhat more than similar titled property due to the difficulty of meeting credit and income criteria necessary to obtain bank loans.

See De Soto's website's (weak) preemptive rebuttal, "The ILD made major reforms that are difficult to quantify economically." (I'll make a qualification here: I agree that titling programs should reduce crime.)
http://www.ild.org.pe/eng/facts.htm

A response to the Slate article from ILD:
http://www.techcentralstation.com/020305D.html

Also see Heather Bourbeau. Foreign Policy number 127. Nov-Dec 2001 pp 78-79. "Property Wrongs: How weak ideas gain strong appeal in development economics."

Also see The Economist's article on De Soto's land titling entitled "No Silver Bullet," which gives a side by side comparison of Argentinian communities which titled or didn't.