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Capitalism at the Crossroads
Friday, October 9, 2009

De Soto is a Peruvian economist who has shaken parts of the development world with ideas about the fundemental roots of capitalism as a development process.  "Capitalism at the Crossroads"  is a short overview of his ideas.  You can see it on YouTube.

In the video, de Soto makes an interesting observation about the extra-legal system that those excluded from the mainstream economy, develop to protect themselves. This is not an illegal system, it is a regulatory environment developed by and for individuals who are not permitted to make use of the laws, rights and responsibilities that we are familiar with (and often take for granted). 

The system is developed in much the same way as our mainstream society's laws - a process of trial and error, of community agreement and mutual benefit. However, it is not codified but evolves and mutates and develops as the needs of the community it serves change.

In one of the recent development approaches that has emerged on the international scene in the last decade - that of MMW or Making Markets Work, an approach often focussed on the developing market where the poor participate and benefit, there is a small component that is often overlooked. Too often in the desire to achieve the goal of economic growth those of us involved in the projects and advisory roles, skip over this component.

The missing link? The indigenous, local system of trade and exchange. The non-codified, evolving but generally accepted way of doing business, of enforcing contracts, or valuing exchange, of giving and receiving credit. 

We would do well to remember that before our intervention the people we are seeking to help were still doing business. They exchanged value in their marketplaces, they enforced contracts, they assessed risk. We would do well to remember that these market mechanisms have credibility amongst the people we are trying to help, and that their regulatory environment has developed to suit their needs. Is it perfect? Probably not, but, as we have seen, nor is ours. 

Maybe learning market related lessons can happen in both directions...