Are Hernando de Soto's views appropriate to South Africa?

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PAPer 2 Are title deeds a silver bullet for accessing credit? Mary R. Tomlinson When, in 2005, the Peruvian economist Hernando de Soto visited South Africa, he observed that it appeared to be like other developing countries in that despite ‘lots of migration towards cities like Johannesburg … most of the people are excluded from the legal system’. His views have attracted the attention of both the South African government and private sector. For example, the government’s current housing strategy, Breaking New Ground: A Comprehensive Plan for the Development of Sustainable Human Settlements (2004), states that one its main objectives is to ‘unlock dead assets’ – a phrase used by de Soto to describe his strategy for formalising the property rights of the poor. In a nutshell, de Soto argues that if poor people are given title deeds to property they traditionally occupy, they can use this to empower themselves economically – for example, by using them as collateral for loans from financial institutions, which they could use to start a small business. The objective of this paper is to examine the applicability of de Soto’s views to South Africa – particularly the notion that poor people could use property as collateral for business and other loans. De Soto argues that if poor people are given title deeds to property they traditionally occupy, they can use this to empower themselves economically Background De Soto, in line with development agencies such as the World Bank, emphasises that the main stumbling block to development is the inability of the poor to produce capital, because capital is the force that ‘raises the productivity of labour and creates the wealth of nations’ (2000:5). In his most recent book, The Mystery of Capital, de Soto argues that the poor have many more assets and behave in a far more entrepreneurial fashion than is generally recognised. The resources they possess, however, are held in a defective form. For example, their rights to the land or houses they occupy are not adequately recorded, making them difficult to trace and validate. As a result, these assets cannot be used, cannot be traded outside of narrow local circles in which people know and trust each other, cannot be used as collateral for a loan, and so on – in short, they are ‘dead capital’. In fact, de Soto argues that the conversion process required to transform the invisible into the visible has only occurred in the West, which explains why 17
Mary R. Tomlinson western nations can create capital and the third world and former communist nations cannot. In 2004 a South African study entitled Workings of Township Residential Property Markets found that nearly R68,3 billion in township property was unrealisable in value because of a dysfunctional secondary market, in part due to titling problems. The report argued that the state should ensure that this situation was rectified. 1 Hinging the problem of economic empowerment in South Africa on the lack of title deeds is simplistic at best This paper does not dispute the fact that a house is by far the most important asset owned by the vast majority of households, especially if they are able to benefit from capital appreciation. Moreover, housing can clearly help to alleviate poverty if their owners rent out some space for either residential or commercial purposes. This applies to both subsidised as well as unsubsidised houses. It is also not disputing that, when appropriate financial and legal systems are in place, property may be used as collateral for business and other loans. It does argue, however, that hinging the problem of economic empowerment in South Africa on the lack of title deeds is simplistic at best. First, this approach does not take into account the historical dispossession of black South Africans and how this has shaped their relationship to property in post-apartheid South Africa. Second, it does not acknowledge the lessons learnt from extending housing credit to low-income black South Africans in the late 1980s and 1990s, which had dire consequences for many households, mainly because they were unable to meet the bond repayments, resulting in attempts by banks to repossess those properties. This period pointed to the need for ‘appropriate’ credit, generally micro loans rather than mortgage loans, for low-income borrowers, as this does not expose them to losing their house when they fall into default (Tomlinson 2002). Lastly, the de Soto thesis does not recognise the fact that nearly 80 per cent (or 8,7 million) of 11 million South African households earn less than R3 500 a month (StatsSA 2001). Members of these households are unlikely to be formally employed 2 or earn other forms of regular income, and are therefore unable to walk into a bank, or even a micro lender, and access credit in the way that formally employed people are able to do. The history of property ownership by black South Africans South Africa’s urban areas have been shaped by the legacy of apartheid, notably racially based spatial planning and a political economy that developed the minority at the expense of the majority, separating both races and classes. Moreover, the apartheid strategy depended on treating different segments of the black population in different ways. This has resulted in inequitable residential patterns in urban areas, with recent migrants and young people in the most vulnerable positions. Unable to find permanent jobs, migrants and youths have been forced to live in unregulated and unrecognised accommodation, including shacks in back yards and informal settlements. Resources only begin to flow into these areas when they are recognised 18
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Are Hernando de Soto's views appropriate to South Africa?

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