On the hills surrounding Lima, Peru, and many other South American cities, large numbers of residents live in urban slums, many having taken over these lands through urban invasions. Many families have resided in these dwellings for a long time, and most have basic water, sewage, and electricity. But what they don t have is clear titles to their properties.
Hernando DeSoto, a Peruvian economist and author of The Mystery of Capital, has studied the consequences of informal ownership in detail. He argues that throughout the developing world, property is often held without clear title. Without this evidence of ownership, people are not willing to make long-term investments to improve their lives. But there are other important consequences as well.
Economists recognize that strong credit systems the ability to borrow and lend easily are critical to the health of developing economies. But without clear title, people cannot use property as collateral (or security) for loans. As a consequence, the poor may in fact be living on very valuable land, but are unable to borrow against that land to start a new business. Also, the types of investments made will depend on the availability of credit. DeSoto observed that producing palm oil in Peru is very profitable, but it takes time and depends upon the ability to borrow funds. Production of coca paste an ingredient of cocaine does not take as much time and does not depend on finance. It is also a plague on the developed world. Switching farmers away from production of coca paste to palm oil requires improvements in finance, which are very difficult without clear property rights.