In the rocky and uneven path to globalization, it is usually the macroeconomic reforms that take center stage. Privatization and liberalization are big and easy concepts to grasp, even if their implementation leaves much to be desired. Fixing the macroeconomic framework is a necessary, but not sufficient condition for generating economic growth and prosperity. The macro-level reforms need to be complemented by progress on the micro-level. Building the grass-roots structures that establish civil society and a productive economy are just as important, but often neglected. That's why it's good to see stories like this one about how the slums of Rio de Janeiro are turned into neighborhoods with paved streets, sewage systems, gas and electricity. The favelas of Rio de Janeiro are the archetypal third-world slums, huge expanses of rickety shacks built on muddy ground on the outskirts of the Big Town. Impoverished rural populations come to see work and riches, and end up scraping together a meager existence on the perimeter of society. Past attempts to "solve" the problems of the slums usually involved building enormous expanses of pre-fab housing and resettling the population there. This never worked. Now they're trying a new approach, in which the city is providing the slums with the amenities of civilization, such as roads, sewage and electricity. The most important aspect is that the slum-dwellers get legal title to their shacks. They move from being illegal squatters to home-owners. The recognizes de iure the ownership that had been established de facto. The effects of this transformation are dramatic, as the article explains:

The noise of children at play resounds from a new, two-story building; anyone who wishes, may enroll a baby or young child at the child care center. The streets are clean, with the La Grota Residents' Association organizing garbage disposal itself. A small wooden sign reminds residents: "Não jogue lixo" (Don't litter). A couple of men sit out in front of a small bar, playing cards; next door, a small shop has opened for business. On a front lawn, seedlings lovingly planted in old plastic containers are sprouting despite the searing sunshine. A woman has nailed a tin sign to her house: "Faço concertos em roupas" (Clothing repaired here).

[...]And being listed in the land register, which turns the tiny plot of land each of the residents once illegally occupied into their legally owned property, lifts them out of the state of illegality. As a favela develops into a residential neighborhood, each "favelado" develops into a citizen.

As the infrastructure expands, says Sandra Miguel Nogueira, president of the La Grota Residents' Association, the social structure slowly grows stronger. She points out that the small community building on the new village square, for example, was built by the residents themselves. The city did not need to contribute even a centavo. Ms. Nogueira's modest office, with just a wooden table and a folding chair, is in the building's lower floor. At their last meeting, the residents decided that a small medical practice is to be established on the upper floor. And at its next meeting, the Residents' Association will pick names for the new streets.

This kind of scheme has Hernando de Soto's fingerprints all over it even though he's not mentioned anywhere in the article. Lifting people out of illegality and giving them a stake in society is the theme of his book The Mystery of Capital, which has the subtitle "Why Capitalism Triumphs in the West but Fails Everywhere Else." You can read the first chapter of his book online at the website of his organization, the Institute for Liberty and Democracy in Peru. The insight de Soto offers in the book is that the reason why capitalism fails in the third world is because the poor are shut out of the legal property system. The poor aren't completely destitute, for they possess their shacks and some items, such as TV sets. But the property they de facto own is dead capital, as they have no legal title to their dwellings or anything else. Unlocking this dead capital, by giving the people legally what's already theirs in practical terms, opens up new possibilities for them. Once you have clear title to a piece of land, you can sell it or use it as collateral. Dead capital becomes productive capital. People don't want to live and work illegally, but often the costs of going legal are prohibitive. In his book, de Soto chronicles the steps necessary to formalize a legally obtained home in Peru. It consists of 5 stages, with stage 1 alone taking 207 steps (bigger version). There are similar graphs in his book about formalizing informal urban property in the Phillipines (168 steps, 13 to 25 years), procedure for gaining access to desert land for building purposes in Egypt (77 steps involving 31 entities) and obtaining a sales contract in Haiti (111 steps, 4,112 days).

So even if people wanted to "go legal," the obstacles are insurmountable to all but the most determined. The process advocated by de Soto of legalizing already existing extralegal ownership claims turns out to have ample precedent in the west too. We now only see the end result of the long historical process of assigning property rights in the west with little memory of what happened a century or two ago. For instance, de Soto describes how land in the Great Plains entered into formal possession of the pioneers who ventured West. The Homestead Act of 1862 was mostly a post-facto acknowledgment of what was going on on the ground anyway. Likewise, the California Gold Rush also led to grass-roots delineation of claims once the number of prospectors rose dramatically. Again the law of the land came later, fixing into law what had been practiced on the ground. De Soto advocates exactly this kind of process for bringing the third world economies into the capitalist system, in order that at the grass roots level people be given the opportunity to move from extralegality into the formal system of property rights and ownership.

The biggest resistance to this comes from the established elites in third world countries. After all, they're living very comfortably under the current system, and tearing down arcane laws and bureaucracy not only endangers their jobs, but it also extends the imprimatur of respectability onto the unwashed masses. Trusting the people is a hard thing to do, which is why I am skeptical that de Soto's program will be implemented by all those leaders who praise it. But projects such as this one in Rio de Janeiro show that de Soto's ideas can be implemented, and can be succesful. More importantly, de Soto offers a vision that provides a powerful alternative to socialists. By stressing private property and private enterprise, it builds on the existing extralegal structures that exist in the slums anyway. It is no surprise that the ILD become of the main targets of Sendero Luminoso, the Maoist terrorists who tried to bomb Peru back into the stone age in the early 1990's.

Seeing De Soto's ideas applied successfully is gratifying. Theory and ideas can take you only so far before the pudding must be cooked and tasted. Now we need more cooks who're willing to try de Soto's recipe.