Archive for June, 2019

Missing capital: India’s trillions-dollar wealth is chained in slums. Time to unlock it

By @ArguingIndia



India needs an investment of around $1 trillion a year over the next five years, if Indian GDP is to grow above 10 per cent to create about 70 to 80 lakh new jobs annually to absorb all new entrants to the job market. Finding the required pool of savings, and, more crucially, the entrepreneurs to use this pool of capital productively is a herculean task.

However, as I show below using ideas generated by Peruvian economist Hernando de Soto, a substantial pool of this capital, something like $2-3 trillion, already exists in the country but remains not fully tapped. More than that, some two-three million small entrepreneurs have this capital in their possession but cannot fully deploy it, although they have tremendous experience in running small businesses successfully.



India’s unproductive capital wealth


In his book, The Mystery of Missing Capital, Hernando de Soto writes: “Capital is the force that raises the productivity of labour and creates the wealth of nations. It is the lifeblood of the capitalist system, the foundation of progress, and the one thing that the poor countries of the world cannot seem to produce for themselves, no matter how eagerly their people engage in all the other activities that characterize a capitalist economy.”

Developed countries, on the other hand, are awash with capital despite lower GDP growth and abysmally lower savings rates. Why is it that millions of hardworking, self-employed entrepreneurs, who save as much as 35 per cent of their earnings, are short of capital for expanding their businesses, and are unable to break out of the chains that bind them? What keeps them from greater prosperity despite such hard work and extraordinary risk-taking? This is the paradox that Hernando sets out to demystify.

Before we can get set to this task, we need to understand the link between property and capital on one hand, and how and when property becomes full-fledged capital that can be put to multiple uses in the economy, on the other. Property here means any asset an individual possesses – bank account, financial asset, or real estate. We will focus on real estate since self-employed entrepreneurs mostly use this asset for savings.

What is the problem with holding such a property in a slum? As Hernando explains, these resources are held “in defective forms: houses built on land whose ownership rights are not adequately recorded, unincorporated businesses with undefined liability, industries located where financiers and investors cannot see them. Because the rights to these possessions are not adequately documented, these assets cannot readily be turned into capital, cannot be traded outside of narrow local circles where people know and trust each other, cannot be used as collateral for a loan, and cannot be used as a share against an investment.”

Applying Hernando’s model to our taxi driver’s case makes three points clear:

1. The taxi driver’s ownership of the shanty is not visible to anybody in the larger economy due to the absence of a formal title and its registration in his name. He owns the shanty, he has put years of savings in it, but he cannot use it outside of the local slum’s knowledge. The important point to note is that no asset can become property, and eventually a capital that is fungible with other capital stock in the economy, unless it is legally tied to an individual. That is the irreducible minimum in the process of converting property into capital.

2. The taxi driver’s property has a single use. The owner and his family can use it among themselves but cannot use the shanty as, say, collateral for a bank loan to buy another taxi and expand his business or develop his farm back home in Bihar or finance his child’s study in a good professional college. The utility or productivity of his property is, thus, not going to be fully exploited. In other words, the self-employed entrepreneur is hugely handicapped because he cannot reap the full benefit of his savings for want of a formal property system that can recognise the value of his savings – which, incidentally, are real and as hard-earned as any legally recognised savings.

3. The taxi driver’s property is not fungible with his other assets or with other such assets in the economy as a whole. His property is neither proper capital for himself nor others in the economy. In other words, his capital, created out of hard-earned savings, is hobbled, chained and cannot become productive to create wealth for him or others unless we find a way to make it fungible with other capital stock in the economy. That is the mystery of missing capital stock in the third world. It is there but we have not yet learned how to unlock it and bring it into use as full-fledged capital stock.

Not capitalism, but Indian capitalism’s fault


Hernando says that it is this handicap – lack of visibility, missing individual identity tied to title, and lack of fungibility with other capital stock – that makes it look as though capitalism doesn’t work for the poor in third world countries.

“The enterprises of the poor are very much like corporations that cannot issue shares or bonds to obtain new investment and finance. Without representations, their assets are dead capital. The poor inhabitants of these nations — five-sixths of humanity — do have things, but they lack the process to represent their property and create capital. They have houses but not titles; crops but not deeds; businesses but not statutes of incorporation. It is the unavailability of these essential representations that explains why people who have adapted every other Western invention, from the paper clip to the nuclear reactor, have not been able to produce sufficient capital to make their domestic capitalism work,” Hernando explains.



How can these defects in Indian property systems that prevent recognition of invisible and hobbled pools of capital be cured in order to make them as productive as any other capital?

It requires attitudinal changes and deep reforms in our systems that govern property.

Hernando explains why the process is simple but again not so visible to us. “But only the West has the conversion process required to transform the invisible to the visible. It is this disparity that explains why Western nations can create capital and the Third World and former communist nations cannot. The absence of this process in the poorer regions of the world –where two-thirds of humanity lives – is not the consequence of some Western monopolistic conspiracy. It is rather that Westerners take this mechanism so completely for granted that they have lost all awareness of its existence. Although it is huge, nobody sees it, including the Americans, Europeans, and Japanese who owe all their wealth to their ability to use it. It is an implicit legal infrastructure hidden deep within their property systems – of which ownership is but the tip of the iceberg. The rest of the iceberg is an intricate man-made process that can transform assets and labour into capital. This process was not created from a blueprint and is not described in a glossy brochure. Its origins are obscure and its significance buried in the economic subconscious of Western capitalist nations.”

What is clear is that property systems to govern property and convert it into productive capital stock were invented by Western nations long ago when they faced similar problems as we face in our shanties and slums today. The so-called squatter problem that bedevilled the USA for 100 years in the 19th century is one such example. So, we do have templates to resolve the problem:

“Western politicians once faced the same dramatic challenges that leaders of the developing and former communist countries are facing today. But their successors have lost contact with the days when the pioneers who opened the American West were undercapitalized because they seldom possessed title to the lands they settled and the goods they owned, when Adam Smith did his shopping in black markets and English street urchins plucked pennies cast by laughing tourists into the mud banks of the Thames, when Jean-Baptiste Colbert’s technocrats executed 16,000 small entrepreneurs whose only crime was manufacturing and importing cotton cloth in violation of France’s industrial codes. That past is many nations’ present. The Western nations have so successfully integrated their poor into their economies that they have lost even the memory of how it was done, how the creation of capital began back when, as the American historian Gordon Wood has written, “something momentous was happening in the society and culture that released the aspirations and energies of common people as never before in American history.” The “something momentous” was that Americans and Europeans were on the verge of establishing widespread formal property law and inventing the conversion process in that law that allowed them to create capital. This was the moment when the West crossed the demarcation line that led to successful capitalism – when it ceased being a private club and became a popular culture, when George Washington’s dreaded “banditti” were transformed into the beloved pioneers that American culture now venerates.”

Unshackle locked up wealth


How was it done? Quite simply by recognising that formal law follows custom and what is created by custom in slums and shanties is as valid as any other economic process that converts savings into property and then useable capital. These laws have their own logic, validity, and set of practices that we need to recognise and incorporate into our formal systems. These slums and shanties are decades old. The one at Cuffe Parade is more than 50 years old. The original squatters are all gone. The current owners are third generation occupants who bought these properties with hard-earned savings with legitimate income. These shanties represent a significant portion of their life savings. By keeping them out of the formal property system, we are neither going to get rid of the slums nor can we find a way to use the locked up idle capital productively to create more income and wealth.


Such locked up but idle wealth/capital is huge by any measure. A rough estimate – the total capital lying idle at just one of the slums next to Navy Nagar, Mumbai, is in excess of $3-5 billion. The total wealth lying idle in the Dharavi slum is estimated to be upwards of $200 billion. Multiply these slums across metros and major towns and the unused and untapped hidden capital could be upwards of $2-3 trillion. The slums and shanties represent a huge drain on our wealth for what really requires nothing more than a clear-headed policy towards urban property.

If we can find the political will to integrate the property already present but locked up and idle in the shanties and slums across India, we could set free some $2 trillion worth of additional capital to work for creating more wealth and capital for our self-employed and other entrepreneurs. This is not difficult given the requisite political will.

In the second part of this article, we will return to examine the specific in which this hobbled wealth can be put to use in the economy to boost its productivity and increase our GDP growth rate.

This article has been updated to reflect a change. Hernando de Soto is a Peruvian economist.

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Proud to be a Liberal

By @ArguingUndian


“Liberals were wrong and have lost,” screams twitter on my time line.  I didn’t know if any liberals were actually contesting the election that they have just lost.  A more subtle form of the above argument holds that the elections have proved liberals no longer speak for the subaltern classes since the subalterns have overwhelmingly voted for Modi ji who is a subaltern personified.  I didn’t know liberals spoke for subalterns because as a liberal I speak only for myself.  Politicians speak for others, not liberals. And I do believe it is right to speak of fairness in society, especially when the underprivileged are given the short shrift, and will continue to do so.  It doesn’t mean I own the subalterns or that they even care for what I have to say.  So why are the liberals the losers here?  It is something worth exploring.



Populism is often set up as “we vs. them” where “we” represents the masses that shower adulation on the populist leader.  The “them” can be anything opposed to what populism is pushing at any particular point in time.  So if populism is pushing Hindu majoritarianism, then the other are minorities, or termites.  If populism is pushing nationalism then the other are anti-nationals who love Muslims and/or Pakistan.  On the other hand, if populism is pushing right wing orthodoxy then the “them” is communists, urban naxals or tukde tukde gang.  Populism by definition is very light on ideology because it aims to attract voters uncommitted to any particular party or ideology and must therefore be all things to all people. Perforce it picks on a vague thing like “Making America Great Again” or “Strong & Resurgent India” as a coverall for all sorts of things. The trick lies in conflating the slogan with the populist leader through propaganda.  Now who in her right mind wouldn’t want a “strong & resurgent India”? But since the leader is identified with this notion, the moment you oppose the leader you are ipso facto against strong & resurgent India.  On such cheap rhetorical trickery are people branded anti-nationals, urban naxals, tukde tukde gang or whatever.  In this gaggle of emerging epithets the liberal is a catchall category for the “other.”


What is a liberal?  The fact is “liberalism” has no meaning outside of a context.  Who were the original liberals in history?  The original liberals were Christians who argued that all souls were equal before God and hence all people should be equals here on earth as well with each being entitled to redemption according to deeds. In time, the first liberal agenda was abolition of slavery and that helped to eliminate the scourge over the following decades starting with the Roman period.  Did the liberals of that era remain liberals after the Church was established, slavery tamped down etc.?  No. Over time, liberals themselves turned orthodox, defending the Church’s orthodoxy as vigorously as they had opposed slavery.  Modern liberalism surfaced with the founding of a number of Universities in Italy circa 1500 that opposed the Church orthodoxy but were Christian in faith nevertheless.  Much like Hindu liberals that Hindutva despises. The liberal cause then was that truth could be discovered through the application of reason and that an individual, not church or society [class or caste], had primary agency.  Church, or the revealed truth, was not the basis of all that was known or knowable.  Truth was something we had to discover through reason applied to facts and experience. And that is what real liberalism is all about.  In short, a liberal is an individual who believes truth can, & must be, discovered by application of reason.  Now try and find somebody who is not a liberal today in this context? The entire edifice of what we know today is owed to liberals starting with the Greeks of antiquity who recognized no Church other than reason and were rediscovered by renaissance circa 1500.


To be liberal is to be political.  For the simple reason that application of reason is what creates new knowledge and new knowledge is what threatens the established order of things.  Reason will uncover new knowledge.  In fact that is the only way we know how to discover & create new knowledge. There is no other way.  And as new knowledge is discovered the priesthood of existing knowledge denies it.  The established order ridicules it, laughs at it, points to the inconsistencies it gives rise to, and quotes authority to hold that since the established order is proven over time, the new knowledge & the liberals who back it, are wrong. This sequence is unchanging in time. But as we know, new knowledge gets applied tentatively at first, then with more confidence, and as people gain familiarity & confidence, new knowledge replaces the old.  Old authority is set aside & new authority created.  Yesterday’s liberals become the new Conservatives and society then waits for the next new thing to emerge.  The enduring liberal then is one who not only believes that new knowledge must be discovered through reason but also keeps in mind that, almost certainly, what is discovered today may well be set aside with new discoveries tomorrow.  I find it hard to believe how the world at large can fault a true liberal unless of course you are establishment and have something crucial to lose from the new ideas.


As I said before, Greeks worshiped reason and were the first liberals in thought if not in deed.  [Plato’s liberalism coexisted with a caste system and slavery, worshipped the Spartan totalitarian dystopia as an ideal and denounced his own democratic Athens as debauchery!]  People of Plato’s era would have seen him as a Conservative who preached the ideal of communism to elites & upper castes.  In contrast we have Heraclitus who recommended we celebrate change as new knowledge is discovered and would have rubbished Plato’s theory of the permanent ideal that decays over time because it assumes the perfect is already known and there is nothing new to discover.  That is an idea that runs through Hindu thought & philosophy as well.  Moral of the story?  To be a liberal is to welcome new knowledge & to be ready to apply it.  That unfortunately is neither simple nor easy.  Being a liberal is tough while being a conformist is to go with received wisdom.  Bracketing a liberal with an ideology forever is futile and a negation of the very idea of liberalism.


So why are liberals pilloried all the time? Why is a liberal always intensely political?  The reason is simple.  All new knowledge will always be followed an argument in society about if it is wrong, right, its correct scope, application, changes need etc. And there will be a liberal argument for it just as there will be conservative argument against it.  But more than just the validity of the new idea, there is the political.  An example from the times of Pythagoras may help. Back then Mathematics was revered much like religion because it was so useful & magical in constructing houses, buildings, bridges, monuments etc. Temples were raised to the glory of perfect rational numbers.  Until a mathematician named Hippasus arrived on the scene arguing that there could be no rational root of the natural number 2 and that there many such irrational numbers. There was no way around Hippasus’ argument and so what did his fellow mathematicians do?  They took him out to sea for boating and drowned him rather than see their temples demolished!  And you thought the Hindutva lot was luddites? New knowledge is usually not as welcome as you might assume from a casual reading of history.  As Michel Foucault famously said, every new idea creates its own priesthood. But before it can do so, it falls to the liberals to demolish the old.  Which is why we liberals are the permanent enemy of the old & the new establishment. And so rarely found except in the wild.


Liberalism without a context is meaningless and must always be discussed in a frame of reference. Liberals in a communist society argued against communism with as much vehemence as conservatives argued for orthodox totalitarian communism.  Likewise liberals in a Capitalist society will argue against orthodox laissez faire as conservatives argue for it.  Liberalism is neither pro this dogma nor anti-that.  A liberal is against dogma of the left & the right, whether economic or social, because she wants to remain open to the possibility of change but also because dogma inhibits the agency of an individual to pursue new knowledge.  Note a liberal is not always anti-establishment either.  If for instance you find a society where the individual is celebrated and individualism is encouraged as in the US, then a liberal is very much pro-establishment. Which is why you find liberalism more of a conservative virtue in the US rather than in the collectivism of the left. Liberalism in India is much misunderstood term in politics.  Who is true political liberal in India?  Very few. The leftists would almost never count among them.  Neither would the Hindu right.  But a distinction needs to be made here between the personal and society at large.


At the personal level, I can hardly think of any educated person who would not be a liberal in the sense of choosing reason over dogma as the way to discover the truth.  Most of us are liberals in that sense.  The political liberal though is hard to find.  A liberal being one who wants maximum agency, economic & political freedom for an individual, is most unlikely to found in the left parties, communists or Hindu right.  Ever since independence India has lost its individuals.  They don’t exist.  We see individuals only as a part of collective categories – caste, class, religion, student, teacher, haves, have-nots, nationalist, anti-nationalists, male, female, termites, non-termites, whatever.  India has lost her individual. And without individuals, there are no liberals.  We have reduced liberalism itself to a permanent category of empty ritual. In India the idea of a liberal is still stuck at the level of an individual and has yet to be adopted as a norm for society as a whole.  As a society we are steeped in religiosity and conservatism/orthodoxy to the core.



So which liberal lost the election that the populists won so handsomely?  The correct answer is none.


India needs an army of liberals to break the chains of economic and political orthodoxies that constrain Indian enterprise and Indian ideas.  Our contribution to the world’s store of new knowledge and new ideas over last 500 years & more has been pathetic.  Revolutions have come and gone bypassing us while we remain stuck in orthodoxies of an irrelevant past, our economic & political prowess a fraction of what it needs to be.  Remember an entrepreneur is a liberal first, an entrepreneur second. And our orthodoxies set up such perverse incentives for entrepreneurs and liberals that we revere those who kill them. No, the liberals haven’t lost because there weren’t any liberals in the fray to begin with.  What has happened is that left wing orthodoxy has lost to right wing orthodoxy.  That is at best a pyrrhic victory for India. India will win only when liberals & entrepreneurs win and that won’t happen under any orthodoxy, left or right.


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