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Secure property rights give individuals and firms incentive to invest, maintain assets, and engage in long-term planning. Without protection, land and capital are underutilized and informal sectors predominate. De Soto's research on property titling shows how formalization unlocks capital in developing economies by enabling collateral-based borrowing and improving incentives for reinvestment.
From institutions and development, you know that institutional quality determines whether people can engage in the complex, long-term economic activity that drives growth. Property rights are among the most fundamental of these institutions — they answer the question: if I build something, invest in something, or improve something, can I keep the returns? The answer to that question shapes nearly every economic decision individuals and firms make.
Consider a farmer who does not hold formal title to the land she cultivates. She might farm it productively for years, but without legal documentation, she faces constant risk: a local official could reassign the plot, a more powerful neighbor could claim it, or a new government policy could displace her. Under this uncertainty, she rationally underinvests. Why plant trees that take five years to bear fruit if you might lose the land next year? Why build irrigation infrastructure that you cannot take with you? Why invest in soil conservation whose benefits accrue over decades? Insecure property rights systematically bias economic decisions toward short-term, low-investment strategies — exactly the opposite of what development requires.
Hernando de Soto's influential work highlighted a second channel: dead capital. In many developing countries, the poor hold enormous aggregate wealth in land and housing, but informally — without legal titles recognized by the formal economy. This means they cannot use these assets as collateral to borrow from banks, cannot easily sell or transfer them, and cannot use the legal system to resolve disputes over them. De Soto estimated that the total value of informally held real estate in developing countries exceeded $9 trillion — capital that exists physically but is economically invisible. Titling programs that formalize these holdings can, in principle, unlock this capital by enabling mortgage-based borrowing and providing the legal certainty needed for long-term investment.
However, the evidence on titling programs is more nuanced than the theory predicts. Studies in Peru, where De Soto's ideas were tested at scale, found that titling increased investment in housing and reduced the labor needed to defend property claims, but did not dramatically increase access to credit — banks required more than a title to lend to poor households. In parts of Africa, formal titling has sometimes undermined customary land arrangements that effectively protected vulnerable groups, particularly women. The lesson is that property rights are not just about formal legal documents; they require a functioning system of registration, enforcement, and dispute resolution to be effective. A title that courts will not uphold, or that requires bribes to defend, provides little real security. Effective property rights reform must address the entire institutional chain — from the clarity of the legal framework to the accessibility of courts to the honesty of land registries — not just issue paper certificates.