The Spirit of Capitalism
Article Summary
The economist Hernando de Soto argues in his new book that property rights are an essential ingredient for economic development. But this single-bullet theory would do better by noting the complex cultural factors that also affect growth.
De Soto's insight has clearly influenced developmental economics. A recent study by four economists (three from Harvard, one from the World Bank) examined regulations affecting the certification of new businesses in 75 countries. The study found that government obstacles to creating firms in most of those countries are "extremely cumbersome, time-consuming, and expensive." On average, they require 63 business days to fulfill, assuming an unrealistic absence of delays. Bribes and corruption seem to correspond loosely to the level of regulation.
Unfortunately, de Soto strains too much. He wants to make property rights -- or their absence -- the center of everything. Some societies, mainly in the United States and Europe, have indeed developed workable property rights regimes. Others, mainly in Africa and Latin America, have not. The first group has prospered; the second has floundered. (De Soto generally omits Asia, except for some references to Indonesia and the Philippines.) He concludes that if countries can convert squatters' property into legal property, they can make capitalism work. This transition is difficult, de Soto admits, because many politicians, lawyers, and property owners profit from the status quo and oppose change. Still, expanding property rights remains the secret to unlocking development.
De Soto's logic implicitly accepts a standard economic assumption: human nature is universal: Confronted with the same incentives, people everywhere will respond similarly. But human nature is not uniform. It is molded by history, geography, religion, climate, and tradition -- all the influences that create culture. Peoples around the globe have different values, beliefs, and customs. They behave differently and create societies with different legal and political systems. This observation is mere common sense, but it also suggests a politically incorrect conclusion: Some societies may be more culturally friendly to economic growth than others. The same forces that affect property rights systems may, for better or worse, also affect enterprise, invention, and material accumulation.
In April 1999, the Harvard Academy for International and Area Studies held a three-day symposium on culture and development. The conference's highly readable papers, collected in Culture Matters, offer an intriguing counterpoint to de Soto. "The revolution of economic development occurs when people go on working, competing, investing, and innovating when they no longer need to be rich," argues Mariano Grondona, an Argentine political scientist and columnist. This revolution can happen only if the values that promote prosperity -- he lists 20, including competition, innovation, and hard work -- do not disappear when that prosperity first arrives. Trust in the individual is also essential:
If individuals feel that others are responsible for them, the effort of individuals will ebb. If others tell them what to think and believe, the consequence is either a loss of motivation and creativity or a choice between submission or rebellion. However, neither submission nor rebellion generates development. Submission leaves a society without innovators. And rebellion diverts energies away from constructive efforts toward resistance. ...
Carlos Alberto Montaner, an exiled Cuban writer, takes a similar approach in his paper, noting that the rapid growth of the once-impoverished Asian nations has shown that "Latin America had fundamentally misunderstood the keys to prosperity." Part of the blame, he argues, falls on the region's political, religious, military, and business elites, under whom governmental corruption flourishes and people operate outside the law. But the values of these elites often reflect their society's norms, for "a large percentage of Latin Americans either nurture or tolerate relationships in which personal loyalty is rewarded and merit is substantially ignored." The Catholic clergy -- especially proponents of liberation theology -- still attack poverty while condemning "the profit motive, competition, and consumerism," undermining the psychology of success.
The general point is not that some societies are completely impervious to commercial incentives or international influences such as trade, investment, technology, or even property rights. It is that some cultures accept these ideas more readily than others, and that different cultures often promote commerce and enterprise differently. This was certainly true in Asia, as the Harvard scholar Dwight Perkins notes in another essay in this volume. Close personal relations and family ties there helped foster economic development, he argues. They created the very same security and trust needed for trade relationships that laws and an independent judiciary had fostered in the West. In the postwar era, the reliance on family-dominated firms meant that many Asian nations "did not have to wait until they had a well-developed commercial law system before growth could accelerate."
The problem, Perkins says, is that Asia outgrew this system. One-time strengths became the weaknesses that contributed to the 1997-98 Asian financial crisis. As economies expanded, intimate family-business ties bred intimate business-government ties. On the one hand, this faith in government helped promote a high rate of investment. On the other hand, it inspired excessive risks that ultimately threatened entire economies. Companies took for granted that they could rely on government help if necessary, so they increasingly pursued shaky investment strategies.
