Getting Assets on the Grid
It’s easy to see how the shimmering success of individual entrepreneurs can distract from surrounding structures that have long kept them from effecting change. Microfinance and the social enterprise movement have mobilized so much human capital among the BOP. Changing surrounding structures could unlock even more capital that the BOP could mobilize to secure prosperity along with dignity. How much more is there? Roughly $10 trillion in real assets owned by BOP households worldwide.
That rough estimate comes from the Institute for Liberty and Democracy (ILD), led by Hernando de Soto. They started out in the 1980s by walking through the slums of Lima (Peru) to ask poor people about their daily lives; in particular about where they lived and what did they do every day. The research they compiled eventually made its way into de Soto’s first book, The Other Path. After ILD performed similar research in the slums of Mexico City, Cairo, Port-au-Prince and Manila, de Soto published their findings in 2001 as his second book, The Mystery of Capital.
What ILD found in every case, throughout vastly different social and political contexts, was that BOP households owned an entire world of property, businesses and other assets whose only documentation resided in dispersed extralegal arrangements. ’Extralegal’ signifies that these assets are documented, but their documentation is outside the formal legal structure for ownership. It may sound outrageous, but that $10 trillion estimate is more likely underestimated than overestimated. BOP households aren’t always keen on letting researchers know about absolutely everything they own, nor what they would really pay if they had the chance to invest in real estate.
It turns out that because these assets reside only in dispersed extralegal arrangements, they can’t be fully mobilized on behalf of their owners. In western developed markets, assets or wealth are held in widely-recognized legal arrangements that have meaning to other people far and wide. Among dispersed extralegal arrangements, such assets have meaning only to the small number of people who recognize the legitimacy of their owners (many of whom are women). These assets are off the grid.
Microfinance has worked around the problem of assets being off the grid by providing small loans without collateral requirements. That doesn’t change the fact that those $10 trillion in assets are still there, waiting to be mobilized as collateral for larger investments. Clearly there is business acumen among the BOP to mobilize them. Micro- and social enterprises provide brilliant proof of that. The main obstacle is how to get those assets on the grid.
ILD and de Soto have pioneered how to get those assets on the grid by incorporating dispersed extralegal arrangements into widely-recognized legal arrangements. It’s not a matter of changing culture but rather changing the legal structure around culture. ILD consistently discovers some concept of wealth or assets in every tribe, village and slum it comes across. In direct response to recent violence related to indigenous property rights in the Peruvian Amazon, ILD produced a video that focuses on Amazonian culture and Peruvian legal structure.
It’s that surrounding legal structure that has long kept the BOP from fully mobilizing their wealth and talents. Although changing legal structures takes a lot of grassroots political effort, local organizations are working toward that end in every part of the world (here’s a PDF from CIPE with examples). Development could get so much more through enterprise, if the BOP could mobilize the $10 trillion of assets they already own.
P.S. In 1984, de Soto came to the United States to find a partner who would help ILD conduct a grassroots campaign in Lima to improve the surrounding legal structure for Lima’s BOP assets, particularly BOP businesses. The partner he found was the Center for International Private Enterprise (CIPE), which was founded previously that year. ILD and CIPE based the campaign theme on “289,” which was the number of days it took to formally register a business in Peru before the campaign. After the campaign, it took less than one day. The cost to register was also reduced, from over $1,200, all the way down to about $174. ILD and CIPE helped initiate 200 further reforms designed to bring Lima’s BOP property, businesses and other assets onto the grid. Since then, ILD has offered its expertise to other countries seeking to bring BOP assets onto the grid; while CIPE has gone on to build capacity for more than 200 other partners worldwide, each doing similar work to fully mobilize BOP wealth and talent.