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Development economics: neoinstitutional approach of Hernando de Soto

Development economics: neoinstitutional approach of Hernando de Soto

Journal of Institutional studies, , Vol. 6 (no.4),
p. 6-21

This paper analyzes the works of Hernando de Soto and their impact on the economy development. Discusses similarities neoinstitutional approach and features of their implementation in his books "The Other Path" (1989) and "The Mystery of Capital" (2000). The first book devoted to the analysis of the informal economy. It consists of two parts: empirical and theoretical. In the empirical part, he examines three areas of illegal activities (housing, trade and transport), and in the theoretical part investigates mainly transaction costs. Led by Hernando de Soto Institute for Liberty and Democracy conducted a series of experiments to determine the economic "price obeying the law" in Peru, in order to determine the costs that have to bear the persons wishing to engage in the usual legal business. Opting for an illegal organization, the entrepreneur gets rid of the "price obeying the law", but is forced to pay "the price of illegality." This second group includes transaction costs "price evade legal sanctions", costs associated with the transfer of income, higher rates on the black market capital, the inability to participate in the knowledge-intensive and capital-intensive areas of production, relatively weak protection of property rights, "the inability to use price contract system" etc. What should be done? From de Soto’s standpoint, it is necessary to bring the legal system to reality. And the second is devoted to this work, "The Mystery of Capital," in which the author tries to solve five puzzles:
  • The riddle of the missing information,
  • The Mystery of Capital,
  • Riddle political ignorance,
  • Forgotten lessons of U.S. history,
  • Riddle legal impotence.
De Soto puts the important question of why property laws do not work outside the West. Hernando de Soto believes that a significant portion of the accumulated capital in developing countries is undercapitalized. If the assets in the West have double lives: not only directly used for domestic needs, but also they are source of capital (ie loans guarantee), the Third World and former communist countries that they do not fulfill the second function, thereby not actually capital. Therefore, de Soto identifies six effects of private property. Marginalization of society is the consequence of being cut off from the majority of the population of six positive effects of private property. Job Hernando de Soto is a new line of neoinstitutional research - economic and legal concepts of development (Law and Economics of Development).


Keywords: development economics; legal and illegal economy’ neoinstitutional approach’ urbanization’ unemployment; underemployment; price obeying the law; the price of illegality; transaction costs

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Publisher: Ltd. "Humanitarian perspectives"
Founder: Southern Federal University
ISSN: 2076-6297