One of the main obstacles to generating capital for investment in many developing countries like Nigeria has been lack of recognition of title to property held by the informal sector as well as government bureaucracy. At this critical time of global financial meltdown, countries are looking inwards for ways to create more liquidity in the system since the fundamental issue about the meltdown portends credit crunch.
All sectors of the market economy are currently faced with stiffer credit access due to the weakening of the financial sector, the banks. Experts say the property and real estate business has been affected by the meltdown to the extent that the capital market has been affected in Nigeria .
In addressing the challenge of capital generation for economic growth and development, a renowned economist and Nobel Prize nominee for finance, Hernando de Soto Polar, said if the government could give individuals in the informal settlements titles to the properties they occupy, with appropriate documentation, it would serve as a booster to generate capital for investment in the economy.
Soto Polar, who was guest speaker at Pascal Dozie’s 70th anniversary recently in Lagos, observed that the absence of information about people, businesses and property has been the bane of capital, especially for economic growth in many developing economies.
In his book, ‘The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else’, De Soto argued that an important characteristic of successful capitalism encompassed the functioning state protection of property rights in a formal property system where ownership and transactions are clearly recorded. Without such an integrated system of property rights, the poor in today’s developing nations find it impossible to leverage their informal ownerships into the capital necessary for successful entrepreneurship.
The solution according to him, would be to make this informal ownership formal, for example, by giving squatters in shanty towns land titles to the land they now live on.
The key factor is that this informal ownership represents a huge source of available capital. The total value of informally owned real estate alone is more than 20 times all direct foreign investment in developing countries and more than 90 times the foreign aid. The main obstacle to using this capital is the lack of official recognition to title and government bureaucracy. This drives them into ‘underground’ economies. Legalizing these titles and creating the other institutions such as standardised and fixed addresses on real estate and title search records that make using capital possible.
He conceptualises capital as a subject that is studied in an intellectual way noting that business involves dealings with people we have or have never met. For there to be interaction and collaboration, there is need for standardization of information and documentation of same for the purpose of reference by all parties.
The occasion of the birthday celebration of the founder of one of Nigeria ’s robust financial institutions, Diamond Bank Pascal Dozie was therefore used to address the issue of poor capital creation in the economy. The forum which drew a sizeable number of Nigeria ’s economic players from both the organised private sector (OPS) and the public private sector was used drum the requisite for unleashing the capital potential of the economy for greater prosperity.
Taking his audience though an intellectual journey, Polar used various processes in modern and social life such as international passport, medical records and school records to prove that without adequate information documented to certain acceptable standards it would be difficult to collaborate and progress from one level to the other.
The evolution of the world into a modern and scientific society with standardization in the way things are done can be exemplified in language, currency, measurements, quality, time GMT. This allows people in different countries and regions of the world to speak the same thing and apply uniform standard to what they do to ensure international standard and global best practice.
De Soto, therefore, challenges developing countries to rise from the obscurity of practices that do not promote entrepreneurship and distorts economic growth and prosperity.
Specifically, he observed that in many developing countries, the informal sector accounts for a greater percentage of the productive assets locked up in archaic practices that do not recognise the ownership rights to properties by individuals in informal settlements. He said the ownership rights to individual properties, land, farm settlements in both the rural and urban areas can be converted to capital.
Access to credit in the financial sector is difficult because, there is lack of adequate information about borrowers of fund to guarantee recovery. “For banks to give credit to credible people, they need facts about the business, the people and the system. Everything in market economy is documented”, he stated.
The topic was exhaustively discussed with focus on ‘how to unlock hidden capital in developing countries’. The fragmented parts to the wider topic as identified by Emeka Izeze include how to break the barrier of primordial consideration that inhibit economic growth; how do we document to unlock potentials in the economy; how to standardise our concept of capital and use it for national development. How do we use property to give ourselves security in a liberalized world; Izeze also wanted to know how we can develop standard to give value and how to turn the global economic difficulties to create more capital for economic growth and development.
The forum observed that the above may be near unrealisable until we as a country remove the contradictions presented in our land use act. The concept that transfers the community land to the state is therefore seen as anti progressive. There was a call for the reformation of the land use act inline with global standard to give economic power to the citizens which would ultimately have positive impact on the economy by accelerate in economic activities.
As part of areas that will be affected by right policies, the stock market it was agreed need to be reviewed to ensure that its objective of value creation is sustained.
The case study of a typical developing nation like Tanzania was brought to the fore to substantiate his position. Research result of businesses in that country shows that extralegal entrepreneurs constitute 98 percent while legal entrepreneurs make up the remaining two percent.
Also, the real estate business has a skewed concentration on the extralegal or informal sector accounting for 89 per cent and 11 per cent involved in the legal property business.
The implication therefore is that the extralegal property business has developed some standardisation in the documentation of their operations which encourages the business to thrive. According to him, “many Tanzanians in the extra legal economy are already connecting their reciprocal claims and obligations in written document, increasingly using similar terms and vocabulary”.
Conclusively, the forum identified two fundamental issues that account for why market economy succeeds in the western world above the rest of the world; these are legal institutions and governance. George Obiozor observes that the west has the legal institutions that are both effective and efficient in ensuring that the laws are properly interpreted without fair or favour and the government is focused to follow what the law demands as against the situation in developing countries where governments are not focused to implement laid down laws.
Polar had received many international recognitions and awards for his work and is currently the president, Institute for Liberty and Democracy, Peru .