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The Mystery of Political Awareness

Recently, large numbers of people have been moving into urban centers in former communist and Third World nations. This situation is causing one primary problem: governments are not recognizing that this shift to urban centers is the potential source of promise, not problems. The failure to recognize this essential fact is compromising how governments deal with the situation. De Soto devotes most of this chapter to discussing two blind spots that have caused people to misidentify the primary problem.

The first blind spot is that most people do not recognize that though the majority of the world’s citizens live outside the bell jar of legal capitalism, they have created their own systems for conducting business. The success of these extralegal activities often runs counter to failures in legal business ventures of the same nature. For example, the legal construction industry in Brazil has shown only a very small percentage of growth while the extralegal construction industry, as measured by concrete sales, is booming.

Most of this extralegal construction, in Brazil as in other poorer countries, occurs around city centers. Increased migration to cities has been caused by several factors: road construction, new methods of communication such as radio, agricultural crises including problems related to rural property ownership, lower infant mortality rates in urban environments, higher wages in cities, and educational opportunities. These numerous migrants, however, have been welcomed with hostility, particularly from the legal system.

The legal systems in poorer countries have excluded these migrants, forcing them to engage in often costly extralegal activities in order to survive. De Soto refers to these legal barriers as legal apartheid. The sheer size of these extralegal systems, which hold almost 80% of real estate in Latin America, places them in direct competition with existing legal systems. Governments in these countries do not have the power to compete with these extralegal entities, and they must recognize that existing laws conflict with the way of life of their country’s citizens.

This conflict is the source of much corruption, violence, and poverty. Governments must, then, work to legitimize extralegal assets by reforming the legal framework. The second blind sport is that people largely do not recognize that the situation facing former communist and Third World nations is not new. There are important precedents in European history, and the way these challenges were met can provide clues as to how contemporary governments should act.

When workers initially began to move from agricultural areas into European cities in the seventeenth century, governments responded first by passing laws designed to stop the migration and then with violence. The numerous migrants who remained in the cities faced challenges in finding legal work, and they opened extralegal businesses. These new businesses were not welcomed by those who had lived in the cities for a long time, and punishments were harsh for those who were caught. These businesses, however, continued to function and competed successfully against legal businesses.

Governments changed their tactics and began to accept these extralegal businesses once it was seen that they were more efficient and successful than those controlled by the guilds. Laws were changed to meet the needs of these successful entrepreneurs. De Soto argues that the European past resembles the current situation faced in today’s poorer countries. In order for capitalism to succeed in these countries, governments must realize that there are substantial problems with the legal system, and this system must be changed to integrate the potentially profitable extralegal businesses.

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