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The mystery of capital

The traditional battle between communist societies and capitalist ones has come to an end as capitalism has emerged as the strongest manner with which to organize national economies. Whilst this triumph can be a source of pride for the originators of the system it also holds many perils. Much of the third world, consisting of many former communist nations, has reluctantly and haphazardly crossed over to capitalist methods.

Whilst the West has seen unfettered growth and prosperity during the decade, the rest of the world has only been met with trouble and strife, in the form of collapsing currencies, riots and political mayhem. This is particularly worrisome to the West as many of its investors have placed their eggs in developing world markets. Failed implementation of the capitalist system in the developing world is a recurring phenomenon. In Latin America alone, the implementation of the capitalist system has been tried at least four times within the last two centuries.

Yet, these economies have bounced back to their former ways as they have failed miserably to deploy capitalist methods. Remedies to correct this have been offered by experts from the West, who have incessantly harped about the need to stabilize local currency, resist uprisings and hold firm till investor faith is restored and an inflow of foreign capital revives the system and puts it into motion again. However, as the developing world fumbles again, the West is quick to put the blame on the lack of entrepreneurial spirit and lack of understanding of market systems.

However, De Soto argues that this could not be farther from the truth, as the developing world is brimming with entrepreneurs who have the talent to make markets move. The real problem at hand is the inability of 3rd world countries to create capital and use it to turn the wheels of the economy. Without capital, the system itself will disintegrate. The irony of the situation is that most of the poor who live in these countries already possess the assets that are required to raise capital.

In fact, just their savings alone outstrip all the foreign aid received in the world in over 50 years. Egypt and Haiti are two prime examples of countries that depict this. Given the facts, it is clear that the developing world does possess the ability to create capital. It is in fact the absence of formal systems of ownership and valuation of property; whether personal or business that prevents this from happening. Unlike the West, the developing world lacks proper documentation of property, which is the key requirement in the hunt to raise capital through credit.

This lack of representation of property is a major hurdle to the progress of the capitalist system. Whilst, the West has formalized structures in place to represent property adequately and has had these in place for centuries, this foundation is now taken for granted. People forget that what the developing world goes through today is what the West has been through a very long time ago and in order to make the developing economies successful it is imperative to implement formal structures which enable poor people to raise capital more effortlessly.

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