De Soto's legal failure, balancing access and certainty
Legal failure became a “hot” topic again after the publication of the Peruvian economist De Soto’s (2002) book, The Mystery of Capital. In his work, De Soto contends that the world’s poor have an enormous amount of assets ($9 billion) which they cannot transfer into capital.
According to him, this is what keeps them poor and prohibits their development. Their assets cannot be transferred into capital because the assets are not recognised by the formal (i.e., state) legal system, but are based on ‘extralegal law’. Therefore, “their assets cannot be readily turned into capital, [...] traded outside of the narrow legal circles where people know and trust each other, [.] used as collateral for a loan, and [.] used as a share against investment” (De Soto 2000, 6). In Otto’s analysis (2002a, 2009), De Soto argues that the poor’s assets have remained extra-legal due to two failures. First is the partial failure to enact reform laws that “address the needs and aspirations of the poor” (De Soto 2000, 154). Second is the unsuccessful implementation of those laws in the rare cases in which they have been enacted.De Soto’s analysis oflegal failure excellently illustrates how spatial legal failure works. On the one hand, state law is necessary as a system of trust. It provides certainty and unity, enabling large-scale social interaction. De Soto’s thesis for poverty alleviation is based on making the poor part of this trust system, which should enable them to transfer their (locally embedded) assets into (locally disembedded) capital. On the other hand, the state’s law is abstract and/or contradictory to local norms. Thus, state property law is not well founded in social contracts and state property rights are not locally legitimised (De Soto 2000). Without such local legitimation, De Soto argues that state law recognition projects of extralegal rights will remain unsuccessful.
State law is complicated, dominated by legal elites, and at-times unacceptable to local people, so many cannot participate in its benefits. State law recognition of extra-legal rights that is not locally embedded will remain without effect. This is because the poor will continue to find ways of protecting their locally embedded rights outside of the state legal system, as long as it is not geared towards fitting their locally embedded interests. Therefore, De Soto wishes to find a way of recognising extra-legal rights in state law and creating large-scale certainty and capitalisation, while maintaining their local embeddedness in local contracts. De Soto thus brings to light the basic contradiction between the unity and certainty of the disembedded state legal system and the accessibility and acceptability of locally embedded extra-legal norms. The reason why the legal reform that De Soto proposes has not been made often (or if so, has seldom been successful) can also largely be understood spatially.De Soto's legal failure and Otto's critique of his analysis (Otto 2002a) both serve to show that it is highly difficult, perhaps impossible, to solve the problem of spatial legal failure. De Soto has contradictory desires. He wishes extra-legal rights, which are too specific and locally and temporally embedded to be recognised in the legal sphere, to become legal rights. This would increase the poor's security, capital, and scale of participation. But the unitary logic of state law makes this impossible for one of two reasons. First, the extra-legal rights may become unitary state law rights, be transferred outside of the local sphere, and create the same problems of legitimacy and access in the existing state legal sector. In the words of Otto (2002a), “The core problem [...] is that law-making, even with the best information and intentions, will always affect and change the nature of pre-existing social contracts.” Alternatively, the state legal system may simply recognise extra-legal rights as they are. However, this will not make them more unified or certain, thus prohibiting the poor from transforming their assets into capital.
De Soto's analysis of legal failure shows at once the importance of spatial legal failure for present world development. In his eyes, if the legal failure can be overcome, the poor will be able to make capital out of their extra-legal assets. At the same time, it shows that the spatial problem would not be solved, either by shifting the extra-legal into the legal sphere or by abstracting specific local norms into a larger-scale legal system. The present analysis has made clear that the problems underneath the two spheres of law are spatial. It has also noted that De Soto's solution does not solve the spatial difficulties of simultaneously providing locally embedded legitimacy and access while providing cross-local certainty to form capital.