The Mystery of Capital

Now that the debate about what white Australia can do to improve the living conditions of Aboriginals is back on track I thought I’d add my two dollars worth. $2 because this is a subject that I actually know something about, having put my snout, along with almost every other professional in the Territory, in the Aboriginal industry trough. At the outset it’s important that we stop talking and DO something. The last thing needed is another report, and in particular the chapter 7 on economic independence; there’s already too much bumpf involved, viz, p21

An Aboriginal person wanting to start off a business has to deal with five or six different agencies and by the time you have got to about agency three, he is really just about at the end of his rope and does not progress any further.

Or the Reeves Report , or the Collins report, we’ve got reports coming out of our wazoo.

Secondly, the white community has to make up it’s collective mind whether it want’s to continue the paternalistic practices, inherited from the missionaries, of the last 50 years, or allow Aborigines to practice apartheid and cut themselves off from mainstream Australia embracing all of the economic consequences that separate development entails. If it is the former, i.e. the maintenance of ATSIC, CDEP, legal systems, provision of health and housing etc. then greater control has to be taken over how the $2.2 billion current budget is spent. This may mean food stamps, special licencing laws, abrogation of cultural laws etc, but it seems to me that trying to have it both ways, separate development funded by taxpayers, is an anathema.

In evidence given to the House of Reps Committee in April 98 I said, inter alia,

In lots of ways, the plethora of federal and state programs that exist could be easily and inexpensively modified to assist indigenous enterprise development. The most important thing is that everybody knows about everything that is going on, because at the moment there is a lack of coordination. Implementation of industry development programs is, in my opinion, impeded by the fragmentation of agencies and a lack of cooperation and coordination between state and territorial agencies and the Commonwealth equivalents. Problems are currently addressed on a case-by-case basis using an annual funding cycle. This results in a lack of long-term security or stability with little feedback and minimal evaluation of the processes.

Mainstream agencies, even with a comprehensive knowledge base and a wide range of advisory services, have not developed specific programs for indigenous enterprise development. Program delivery during the eighties was almost exclusively tied to the incorporated body, the legal entity established to receive and account for public funds. There is a view that this tended to confuse the issues of enterprise development with those of community development. Thus the goal of maximising income normally associated with commercial enterprise became confused with the socially oriented goal of employment generation and other social goals within the community. For the last 200 years there has been a tendency within government to view the community or the larger group as the unit of indigenous development, and there is often considerable political pressure to establish businesses with some form of collective ownership. However, there is evidence to show that in some cases it is more appropriate for the owners of businesses to be smaller family groups. There is a historical precedent for individuals and families conducting entrepreneurial enterprise. [My] thesis is that by coordination of program delivery, and, by shifting the focus of funding from communities to individuals and family business units – that is, to encourage the formation of a relatively wealthy entrepreneurial subgroup – and backing with public funds. that indigenous enterprise would flourish and lead to the achievement of many of the social goals desired by community ownership.

Since then I have become even more firmly convinced that economic independence is dependent upon the success of the individual or family entrepreneurial unit. And to enable funding of individual businesses, the NT Land Rights Act must be transferred to NT administration and legislation must be changed to allow direct funding of individually owned businesses. Parallel to these legislative changes, recognition of the importance of land values and the ability to offer land as collateral for business, is integral to any economic success, or, as Ken put it in Poor Bugger Them,

Given the low value of land in remote communities (even if it wasn’t held on inalienable and therefore unmortgageable title) and the fact that just about everyone is on welfare means that private sector-based models for increased housing construction are unlikely to be viable.

Imagine my delight therefore when I read that “one of the most fascinating practical economists of our time: Hernando De Soto of Peru, is [of the ] belief that lack of property rights is what’s holding back the developing world”.

In “Property” Simon explains why property is important to solving Australia’s “Aboriginal problem’.

It looks like property is built into the brain. We know property is attractive to women because ugly old millionaires have no trouble getting women. So property is important. Why? It helps insure reproductive success. What is reproductive success? Grandchildren. Stored wealth – property – helps insure grandchildren. So we know why people like property. Reproductive efficiency.

In some places, only the government can own property. These places do not work too well. In other places, a clan is responsible for property with some individual property rights. These places work a little better. In other places, people have squatters rights to property not recognized by government; these places do better yet. The best places of all are where the individual has tradable rights in his property recognized by the government.

Now, to maintain titles you need land records. This means a recorder of deeds and boundary markers, plus angle and length measurement instruments as a check on the boundary markers. So advanced math is developed. Geometry came of necessity. No geometry, no land title… and maybe vice-versa. So that’s how you handle a formal system of property. In many places where there is no transferable title that is recognized nation-wide, people are in effect slaves to a traditional plot of land. That is, there may be title but it is not negotiable because it is informal.

Along comes De Soto ….. [who] heads the Lima-based Institute for Liberty and Democracy, which advises governments on economic development and combating poverty. He received international acclaim for his 2000 book “The Mystery of Capital,” which proposes encouraging growth in developing economies by granting property rights to the disenfranchised poor. His promotion of the idea that minimizing regulation can unleash the entrepreneurial spirit of the poor has made him a popular figure in right-wing and libertarian circles.

“They do have assets, as a matter of fact, trillions of dollars, but they’re not paper rights in a property rights system, so their value cannot travel and actually insert itself into a diversified market.”

This is what happens in developed economies. In the United States, a family’s home is the main source of small business capital. In many countries, however, this is impossible … the main problem is law, and illustrations of the truly ridiculous lengths one must go to in order to secure legal property ownership make a powerful case. …. The problem is, you cannot easily import law to a given place…….. The reason is that the traditional informal property rights already have their own set of traditional rules, justified by local conditions. To solve this problem of local property rights, therefore, laws have to be drafted recognizing traditional property codes. …. The law is something that you discover and then you systematize to make it standard so that everybody can participate in a larger market. And a division of labor, which is what creates prosperity, is then possible.”

He goes on to note that this process of legalization of property is going on all over the world, but it’s going on very slowly. His institute’s efforts work to identify the essential wealth generation processes, and implement them as quickly as possible. This, he says, is the real way out of poverty.

Hernando de Soto, “The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else”

In The Mystery of Capital, the most important economist in the Third World takes up the question that, more than any other, is central to one of the most crucial problems the world faces today: Why do some countries succeed at capitalism while others fail? This seminal new book, by the author The Other Path, offers a revolutionary and practical plan for transforming under-performing economies – based on the forgotten history of how wealth was created in the West.

I don’t think it unreasonable that De Soto’s theory can be applied to the land, comprising approximately 30% of the NT (with another 20% under native Title claim), currently held in trust and unusable. In an interview De Soto explains why, contrary

” to the popular view that success is determined by cultural differences, [he] finds that it actually has to do with the legal structure of property and property rights. Every developed nation in the world at one time went through the transformation from predominantly information, extralegal ownership to a formal, unified legal property system, but in the West we’ve forgotten that creating this system is also what allowed people everywhere to leverage property into wealth.


De Soto advises Third World governments to do away with “property apartheid” and awaken to the fact that the “dead capital” of the poor is a source of tremendous wealth.”

” One main reason why the informal sector has not become formal is that from Indonesia to Brazil, 90 percent of the informal lands are not titled and registered. This is a generalized phenomenon in the so-called Third World. And it has many consequences. One is that the price of land drops because it is not legally registered as private property. In Peru, when we title these lands, the market value doubles the same day. After 10 years, it goes up nine times. The principal reason is that it is easier to trade the land once the property rights are clear and established.

Another consequence is credit worthiness. Everyone talks about creating credit systems for the less privileged. In the United States, up to 70 percent of starting businesses need credit, and they get it on the basis of some kind of real-property collateral. If you have a situation in which 90 percent of Peruvians in a particular sector of the economy do not have title to their property, they cannot get credit. Without clearly defined property rights, you can’t even use the police to correct a problem such as coca production because you do not know who owns the land where the coca grows.

Not having property rights means not having access to the property in all sorts of ways. The answer is to establish property rights which are formalized and, along with them, establish both incentives and responsibilities on the part of the property owner.

Whether you realize it or not, by creating a property system, you end up creating a system that goes beyond defining ownership, and it becomes a system in which you transfer value. And that’s why when you see images of a capitalist market it’s not about people working with their hands – like these big Soviet paintings of people laboring and moving monkey wrenches around – it’s about people moving paper, moving descriptions of assets around, but very secure ones within a body of law that allows you to extract hidden wealth.

Before the idea is politicised as being a simple ‘market inspired right wing plot’ one should read,

My other book, The Other Path, was written for Peruvians, but I was amazed when it spread beyond Peru to all of Latin America and became a Latin American best seller. And then it started going to other developing countries, and one of the other countries it went to was Indonesia. And I was also thrilled because my publishers in Indonesia were the extreme left-wing press, which I thought was interesting.

So, I went to see them. And they said, don’t talk to us about the virtues of property; we know the virtues of property – most of them were, as a matter of fact, Ph.D.s from Berkeley and UCLA – we want to know how it gets done, because we figure that 92 percent of our people don’t actually have property, they just have possessions. But start off with something concrete. How do you know who owns what? …… In other words, you’ve got all these masses of people; how do you warrant a property type in a systematic way to 160 million people? You need systems. And so, …. a metaphor came into my head. And I said look, I’ve just been in Bali, that beautiful island, and all I’ve done during these 16 days is walk up and down Bali – because that’s all you can do in Bali. It’s got these rice fields and these palm trees and these pagodas, and I just kept on walking with my wife. We always knew when we changed properties because a different dog would bark. Therefore, all the information you need is in the hands of Indonesian dogs. So, get the Indonesian dogs organized. And everybody understood it. And then, of course, one of them said, “Jukum Adat,” the people’s law.

Basically, wherever we go, we find the symbol of the dogs barking; people have agreed on some form of law on how they’re going to relate to each other regarding their assets. And what we do is we try to build up a legal system of property that is based on the realities already on the ground. And that’s what happens with people, they make agreements among themselves. And they understand these agreements. ……… In other words, you don’t go out and copy other people’s legislation. You can’t take other people’s rules and bring them in. You can get inspired by the principles, but you basically have to build them from the ground up. And that’s why your democracy works so well, because it’s built from the ground up. It’s adjusted from the ground up. It always takes into account public opinion.

You can take a state cooperative, for example, which is what we did in many parts of Peru, where the left-wing military government had actually organized a great part of the countryside in state cooperatives. They had taken indigenous communities and created state cooperatives managed by government bureaucrats. And when we went there to title them, we knew that they had no sense of property in the traditional sense – it was like a salad bar. You had kibbutzim in there, you had indigenous communities, you had private parties, you had hippie associations; every way of organizing property was there. And if you wanted, you could combine or recombine the notions. We said here’s the menu, you choose. The important thing is you come within the law. That’s all. In other words, you’re going to create property rights and once you’re in those laws, you can change. But it’s a legal process – it doesn’t have to be a revolution anymore. We want you inside the law – in systems. And we’d come back six months later and they had then created their own barking dogs, even if they didn’t have a tradition.

If it’s one thing that all aboriginal communities have it’s lots of barking dogs ! So, it seems pretty simple to me, the NT government takes responsibility for the Land Rights Act, removing it from the purview of a multitude of Canberra based bureaucrats who know next to nothing about land rights in the NT anyway, and put it to the inhabitants of the communities and land successfully claimed under native title and purchased using ILC funds, that they create a land registration system within a year (or two, as is necessary) but with a definite deadline, so that those who wanted legal ownership to a title could have it. The individual or family unit could then use that title as collateral to commence a business, resulting in economic self sufficiency. Easy eh ?

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Kev Gillett
2022 years ago

Property is a given. It works at my level as I nag kids to buy bricks and mortar. It works where I have brought property and people two suburbs away rent all their life. It will not work in the Territory (or anywhere, for that matter)until other matters are dealt with. The best property is that which one has laboured for and maintained in good condition for many years.

It took years of paying a mortgage and then backing up with plumber/electrician/carpenter bills to arrive at a position of sufficient equity to mean something. This applies to myself where I worked and saved to buy and maintain the property. It applies to the famer’s son who inherits after a generation of working and waiting and then improves.

I can’t see it working when you ‘give’ someone a block of scrubby bush or desert. He needs the skills to appreciate, maintain and improve. I think he needs education, a job, wealth and the chance to sit back and contemplate improving his lot further and we both know that’s not a quick fix.

De Soto is right – property is a key but having your population understand this fact is a part of the locksmiths secret – available for all with education.

I try to bring matters down to their smallest common denominator and have tried at my place. You might like to comment there.

nardo
2022 years ago

Thanks Wayne, sparked some thought… and a search… at the risk of endangering your wazoo, came across this paper which describes (I think) what you’re suggesting…

Creation of Melanesian Property Rights

Ken Parish
Ken Parish
2022 years ago

Wayne,

I agree this idea has promise, albeit not in isolation. The combination of low land values and inability to service debt would certainly initially militate against individuals being able to raise loan capital to build a house (or borrow for business purposes). It would need to be implemented in conjunction with development of a business enterprise model based on individuals or families (not the current communal model), and would need to include interim government guarantees or similar until a viable market economy became established.

I expect a scheme of this sort would take some considerable time to show strong measurable positive effects (i.e. a couple of decades not just a couple of years) given the current drastic lack of a skill/education base, the need for major cultural change and the disruptive effects of disease, drug and alcohol abuse and violence. Nevertheless I agree it’s got to be the way to go. I suspect Aboriginal leaders like Noel Pearson would also agree.

Of course, a scheme for implementing individual/family-based alienable (and therefore mortgageable) real property rights would require legislative change both to the NT Land Rights Act and to common law native title and the Native Title Act (Cth). Both forms of title are presently communal and inalienable.

Dan
Dan
2022 years ago

Interesting Wayne, thanks.