In Peru, building a home on state-owned land requires 207 procedural steps at 52 government offices, says de Soto. According to de Soto, clearly defined property rights generate what economists call positive externalities, or benefits shared by everyone. If property rights are recorded, for example, utility companies can deliver power and bill customers more easily. But without such rights, markets are untapped and commerce is disconnected from much of the legal system. People deal only with those they know and trust or through informal associations that substitute for formal law.
Extralegal arrangements flourish because they are essential for survival.
Some of these arrangements are ethical, but others are corrupt. In Peru, for example, bribes raise the cost of running a small business by 10 to 15 percent, de Soto writes. Aside from depressing economic growth, the denial of property rights destroys any constituency for popular capitalism. Some wealthy investors do enjoy property rights and legal capital. It builds on his 1989 work, The Other Path, which convincingly revealed the widespread informal or underground economies in many poor countries.