In 2004, I was fortunate to read the address Hernando de Soto gave in San Francisco when he received the 2004 Milton Friedman Prize for Advancing Liberty. I was fortunate again to see and hear him in person in 2008 when he was the main guest speaker at an international real estate seminar.

De Soto is a Peruvian economist who is consulted throughout the world assist countries who wish to advance their economies. His specialty has been developing countries. I am not so sure he should restrict himself to that limited scope. The so called “advanced” economies of the world are showing that they need wise advice on how to handle the times we live in. The global impact of one country on another and the evolution of capitalism are major forces affecting all human kind.

How does de Soto’s address relate to real estate? I believe he proves his case, so please read on….

The following is a selection of part of de Soto’s address:

In the middle 1980s, Milton and Rose Friedman sent me a book, called "The Tyranny of the Status Quo." It was about the "iron triangle" of beneficiaries, politicians and bureaucrats, who hold on to the status quo in developing countries to resist necessary change. And though they may be a minority, I believe we must break down the triangle, and release that grip, or things are not going to go well.

We have been working with President Vicente Fox in Mexico, where we've just finished the numbers (2004). They show that roughly 80 percent of the Mexican population is in the extralegal economy. These underground entrepreneurs own approximately six million businesses, 134 million hectares of land, and eleven million buildings. Together, they are worth $315 billion. This is seven times the size of the Mexican oil reserves and twenty-nine times the size of all foreign direct investment since Spain left.

If you look at the laws of nations, they all look like this: family law, international public law, international private law, criminal law, and even property law. If you're poor, however, all you basically have is a piece of land or a place where you work, whether you're street vending or milking a cow. There is nothing more precious for you than your property. To preserve it without the law, you must satisfy tribal chiefs, crooked cops, corrupt politicians, bad judges, your difficult neighbors, or even terrorists. If the law comes in, however, and says your property rights are recognized, not only by your neighbors but by the police and the whole nation, now you can trade them nationally and even internationally—and the law will protect you. Then you become interested in the Rule of Law. Then it means something. Then you begin to understand it.

It Begins with Property Rights

We believe that the genesis of the Rule of Law—that which will allow a modern nation to grow and, thus, bring peace, stability and prosperity to the world—is the right to own property. We believe that is where it actually begins. And, it is the Rule of Law that will actually generate prosperity.

Developing countries really have no small businesses, because there is no legal framework to support them. What they have are family enterprises—and families have trouble finding ten people to work; perhaps they can find four, and of those four, two are the lazy brother and the alcoholic brother-in-law—guys who weren't meant to make pins.

Entrepreneurs know how you combine resources and whom you employ to work is important. But, if you have no property rights, you cannot get credit or use collateral to create a business within which you can divide labor, or efficiently organize inputs and outputs. You can't separate the assets of shareholders from those of creditors or of workers. You'll never be able to compete in the global marketplace.

The Time Has Come

Our objective, as we go around the world, is to prove that value is not only raw manpower but also the power of man to divide labor. Value doesn't just come from simple labor. It comes from intelligent political and economic solutions that can raise productivity enormously.

To build modern nations, we have to learn how the poor work and then structure law that fits their needs. In the end, Peruvians, Chinese, and North Americans want essentially the same things: life, liberty, and property. We believe the only way to achieve this for all is to build on a market economy based on the Rule of Law, and that our real enemies are the people who do not believe in the potential of human beings liberated by this simple premise.

This article is based upon legal opinions, current practices and my personal experiences in the Puerto Vallarta-Bahia de Banderas areas. I recommend that each potential buyer or seller conduct his own due diligence and review.

Harriet Cochran Murray
Murray-Cochran Associates, S.C.