Macroeconomics and Economic Development: Informal Work and Dead Capital
"Dead capital" is Hernando de Soto's term for an asset that cannot easily be bought, sold, valued or used as an investment. Despite obvious poverty in the informal sector in Peru, de Soto's work shows that even those who live in slums possess far more capital than anyone realizes. In fact, the informal economy is so large in Peru that almost 70 percent of the working population work in informal arrangements. ... Possessions ... are not represented in such a way as to make them fungible (i.e. easily exchangeable) assets. Dead capital cannot, therefore, create value for the poor. What you're really leaving behind is the world of legally enforceable transactions and property rights. The developed world has devised a formal property system of titles, title registries, and inclusive property law that includes real estate used for homes or businesses. De Soto shows that this is in a large part why some nations are rich while others remain in poverty. He says:
With titles, shares and property laws, people could suddenly go beyond looking at their assets as they are - houses used for shelter - to thinking about what they could be-things like security for credit to start or expand a business.
The moment Westerners were able to focus on the title of a house and not just the house itself, they achieved a huge advantage over the rest of humanity. When purchasing a home, an open records system enables buyers and sellers not only to gauge the value of homes in nearby areas, but to set reasonable prices based on comparative values. Clear titles and title insurance give buyers the confidence they need to complete a purchase. No clear title? No sale. The system also gives banks the assurance they need to offer a mortgage. It represents a real house (house, land, a factory, a car, etc.)
Source: Excerpts from : "Informal Work and Dead Capital" . Retrieved on February 2, 2106, from http://www.thepowerofthepoor.com/concepts/c6.php
- Explain how "Dead Capital" is related to the informal economy? Define these terms and explain what they mean in the context of DeSoto's 'dead capital'.
- Many of the owners of houses in 'shanti towns' in the outskirts of Peru's capital Lima, are happy that they do not have to pay land taxes, or municipal rates, as we do in Australia. Is this an advantageous situation to be in for the poor in Peru? Explain your answer.
- "... Possessions ... are not represented in such a way as to make them fungible (easily exchangeable) assets" ... and ... "the informal economy is so large in Peru that almost 70 percent of the working population work in informal arrangements". How would this impact on the measurement of Peru's GDP? Explain your answers in terms of the components of GDP, i.e. GDP = C+I+G+NX. Which components would be most affected? How would this affect transfer payments?
- Would the informal economy hinder or promote economic growth in Peru? Explain your answer. Hint: look at "New Growth Theory" and the case study on Botswana on p. 380-381 to answer this question.