Infrastructure and Hernando De Soto
TheStar.com – Business/economy – The infrastructure that supports our system is slowly being chipped away.
May 17 2013. By: Roger Martin
Why does democratic capitalism seem to thrive in one part of the world and fail so dramatically in others?
In his 2013 book The Mystery of Capital, Peruvian economist Hernando De Soto makes an argument that has radically changed my view of the challenges facing democratic capitalism in North America. In his book, he makes the case that for much of the world, capitalism fails to take hold because the basic structure of property and property rights doesn’t support it. Unless it is possible for an individual or organization to own land outright without threat of seizure, these land assets cannot be used to generate more capital.
In most countries, the potential capital in real estate is in fact dead capital because they don’t have land registry systems or real estate law that uphold them. The resulting lack of capital diminishes economic growth and hinders the adoption of democratic capitalism.
De Soto’s thesis points to a crucial insight: the extraordinary impact of one aspect of our political and economic infrastructure — a land registry — on the entire system.
To be honest, land rights were something I had simply taken for granted. But land rights are a part of the hidden infrastructure of democratic capitalism, a web of supporting systems that underlies the functioning of the whole.
Lying below the operation of democratic capitalism is a vast array of infrastructure elements that have built up over hundreds of years. Much of it is hidden from view or taken entirely for granted — like the assumption that when one plugs an appliance into the wall, power will come from the wires behind the wall, or the assumption that there will not be a stranger inhabiting one’s home when one returns from a trip.
This isn’t infrastructure in the purely physical sense we often connect with the word, though physical infrastructure is a part of the picture. No, this infrastructure includes an array of systems, including political, tax, educational, capital market and trade structures, as well. And the threats we see to our modern form of democratic capitalism come from the effects of chipping away that this little-pondered underlying infrastructure.
The threats come from hedge funds gaming the capital markets to extract rather than create value. They come from corporations playing tax-haven and environmental-regulation arbitrage. They come from creaking, overwhelmed health and education structures that are overburdened and underdeveloped for the needs of our modern society.
To boost the prospects of democratic capitalism, we need to reinforce and rebuild this infrastructure. We need to mindfully question what works and what doesn’t and identify the greatest threats to sustainability.
That is the challenge before us. I don’t know the answers yet. But I gain confidence from the fact that, as De Soto so persuasively points out, seemingly small changes can make all the difference.
Roger Martin is Dean and Professor of Strategic Management at the Rotman School of Management, University of Toronto. His most recent book is Playing to Win: How Strategy Really Works. Twitter: @rogerlmartin
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