Hernado De Sato’s unique book “The Mystery of Capital” proves the viability of the notion that development law can be a very powerful tool of Economic Reform. De Soto links economic failure in the third world and post-communist nations to legal failure in particular of property systems and the informal sector.
The broad theory that law, is a ‘catalyst of development was pioneered by the leading scholar in this field’ of inquiry, the late professor Mansur. Mansur said that classical theories of economic policy are no longer enough in framing development agendas. The search for new insights into economic development should include legal analysis.
When the study of economic development first became a separate entity, it was widely believed that the main obstacle to national development was a lack of classical factors of production, but it has been amply demonstrated that this is largely not a correct assumption.
Classical theories claimed that economic development was based on aggregate factors’ of production – capital, land and other natural resources, such as labour or human capital.
If these classical factors of economic development were enough, we may ask why this has not led to development in places like Nigeria and Russia that possess abundant aggregates of resources for development. Mansur’s simple explanation is that development will not occur unless the legal analysis is taken into account. This is the core notion of development law.
A·developed economy depends on vital legal frameworks and regulatory institutions. Consolidation as an economic policy may not, by itself, achieve it’s developmental objective to deepen banking and reach money locked away in the informal sector without fundamental legal institutional and regulatory reform.
This will require breaking up the Central Bank and reallocating its three key functions to new regulatory agencies including a new Financial Services Authority.
Again 70%· of money circulates outside the banking system. So it is important to· use new legal tools to integrate formal and informal banking. It is difficult to envisage how economic policy will do this all by itself.
De soto gives a very striking example of law as a key primer of development and used property law as illustration. Property consists of two values, physical and conceptual. The physical value may be fixed in say, a house. The abstract or conceptual value is fixed in Property Law systems.
In developed nations, property law allows owners of housing, to represent their value in the conceptual realm. This possibility allows easy access to credit that in turn generates capital for development.· In Nigeria with a very weak legal regime, a conceptual representation of property to create value is missing. Yet the housing asset inventory of Nigerian property exceeds six trillion dollars.
If the value of property is indexed to the banking system by massive legal reform of the property system, we can create an instant credit market in excess of our gross national domestic product multiplied by a thousand times – money will be then available to finance development. Debt servicing will be a simple issue.
But for this to occur and impact on the ongoing reform process, policy makers must, “consider that although macro policies are unquestionably important, there is a growing consensus that the quality of business regulation and the legal institutions that enforce it are a major determinant of development”.
Our key constraints to development include poor security, extremely weak commercial judicial systems, a generally weak legal system, impunity, corruption and· an unviable regulatory framework. These may be described as economic constraints.
No economic policy will remove these constraints. But it is development law that can help remove the constraints Of no mortgage systems in Nigeria, by the repeal of the Land Use Act and erection of a new law on property.
This should clearly identify owners of title deeds and allow easy transfers on property exchanges -, the so called notion of fungibility. De Soto’s book on development law was published to critical acclaim and is widely viewed as one of the most important contributions to development issues of all time.
Milton Friedman, Nobel Laureate in Economics says that De Soto has demonstrated in practice that titling hitherto untitled assets is an extremely effective way to promote economic development of society as a whole.
Margaret Thatcher, contributes by noting that, “The Mystery of Capital has the potential to create a new, enormously beneficial revolution, for it addresses the single qreatest source of failure in the Third World and ex-communist countries – the lack of a rule of law that upholds private·property and provides a framework for enterprise”.
A thriving market economy with an active role for the private sector is all that it takes for economies to develop. This is certainly the time to rethink our economic policy and include development law.
Written – March 24, 2005