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markm@eros.cs.jhu.edu
Fri, 28 Dec 2001 11:02:32 -0500
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have tried, and the answers proposed by Hernando de Soto and Francis Fukuyama
are especially insightful and complementary.</p>
<p>Fukuyama's <i>Trust</i> [<a href="#Fukuyama95">Fukuyama95</a>] makes
- many perceptive observationsof how the world's <i>cultures</i> differ
+ many perceptive observations of how the world's <i>cultures</i> differ
regarding attitudes and proclivities towards trust -- how easily, and
under what conditions, members of a particular culture come to trust each
other. In the <i>high trust </i> societies, mutually trusting relationships
@@ -156,9 +156,9 @@
for trust. However, de Soto's emphasis is not culture but institutions,
and their lack. De Soto's portrayal of the poor within a the third world
village is not one of culturally-based low trust. Rather, it is the painful
- lack of the various widely trusted intermediate institutions (or WTIIs)
- that catalyze commerce at a distance in the first world, and that we normally
- take for granted.</p>
+ lack of the various widely trusted intermediate institutions that catalyze
+ commerce at a distance in the first world, and that we normally take for
+ granted.</p>
<p><b><img src="images/1-hubs.gif" width="347" height="212" align="right"></b>Trust
relationships can be thought of as analogous to the airport hub and spoke
pattern. (Figure 1). Many small local networks are interconnected on a
@@ -172,34 +172,35 @@
as if there were flights between every pair of airports.</p>
<p>Similarly, in the first world, two strangers can meet and conduct business
as if they had prior knowledge of and trust in each other, by virtue of
- their reliance on a mutually recognizing backbone of WTIIs. These WTIIs
- are both in the business of securing these relationships to minimize the
- risks their customers face from each other, sometimes requiring it to
- absorb some of these risk onto itself. The economies of scale available
- to a WTII can help tremendously with these risks. Historically, western
- societies have developed specialized WTIIs that bundle trust with other
- expertise: one trusts Citibank not only because Citibank has a demonstrated
- history of reliably backing their loans, but also because they are experts
- in loan and risk management, which are necessary elements of reliability
- in that field: an organization that attempted to engage in banking without
- expertise in these fields could not be trustworthy no matter how honorable
- the employees and executives of the organization might be.</p>
- <p>Other examples of familiar WTIIs include title companies, insurance,
+ their reliance on a mutually recognizing backbone of widely trusted intermediary
+ institutions, or <i>trust hubs</i>. These hubs are in the business of
+ securing these relationships to minimize the risks their customers face
+ from each other, this often requires it to absorb some of these risk onto
+ itself. The economies of scale available to a hub can help tremendously
+ with these risks. Historically, western societies have developed specialized
+ hubs that bundle trust with other expertise: one trusts Citibank not only
+ because Citibank has a demonstrated history of reliably backing their
+ loans, but also because they are experts in loan and risk management,
+ which are necessary elements of reliability in that field: an organization
+ that attempted to engage in banking without expertise in these fields
+ could not be trustworthy no matter how honorable the employees and executives
+ of the organization might be.</p>
+ <p>Other examples of familiar trust hubs include title companies, insurance,
escrow, exchanges and auction houses, underwriters, Consumer Reports,
Roger Ebert, notaries, arbiters, courts and cops, money, etc... The list
is endless. </p>
<p><img src="images/2-low-trust.gif" width="350" height="218" align="right">From
a simple graph-theoretic point of view (inspired by [<a href="#Granovetter73">Granovetter73</a>]),
we can analyze the Fukiyama low-trust world (in which the fanout from
- each node is small) and the de Soto missing-WTII world (in which the hubs
- are absent), and immediately recognize which effect has the greater impact
- on a society's effectiveness: it is the absence of the WTIIs that ultimately
- prevent society-wide trust relationships from forming. Even with high
- cultural proclivity for individual-to-individual trust, in the absence
- of hubs, the resulting virtual network would at best form small islands
- of densely connected networks, only loosely connected to each other. The
- resulting picture resembles both Fukuyama's portrayal of familial trust
- societies, and de Soto's portrayal of networks of villages of informals.</p>
+ each node is small) and the de Soto missing-hub world, and immediately
+ recognize which effect has the greater impact on a society's effectiveness:
+ it is the absence of the hubs that ultimately prevent large scale complex
+ cooperative arrangements from forming. Even with high cultural proclivity
+ for individual-to-individual trust, in the absence of hubs, the resulting
+ virtual network would at best form small islands of densely connected
+ networks, only loosely connected to each other. The resulting picture
+ resembles both Fukuyama's portrayal of familial trust societies, and de
+ Soto's portrayal of networks of villages of informals.</p>
<div align="center">
<table cellpadding="12">
<tr>
@@ -215,38 +216,37 @@
enabling a great division of knowledge and labor. The virtual network
of Figure 2 is one of many separate markets, barely connected to each
other, and each individually of minor extent.</p>
- <p>But shouldn't this situation be an ideal growth medium for WTIIs? If
- there is great market need for them, then surely there is great demand
- and great opportunity. Indeed, this is the situation from which the WTII
- backbone grew spontaneously in the west. Absent government oppression
- we should indeed expect it to grow here as well. However, Western-style
- WTII infrastructures are the result of slow growth processes; they build
- slowly over time. These widespread trust needed by these institutions
- can be seen as a form of capital that takes a long time to accumulate.
- </p>
+ <p>But shouldn't this situation be an ideal growth medium for hubs? If there
+ is great market need for them, then surely there is great demand and great
+ opportunity. Indeed, this is the situation from which the hub backbone
+ grew spontaneously in the west. Absent government oppression we should
+ indeed expect it to grow here as well. However, the west's backbone of
+ hubs are the result of slow growth processes; they build slowly over time.
+ These widespread trust needed by these institutions can be seen as a form
+ of capital that takes a long time to accumulate. </p>
<p>One of the depressing features of the pictures painted by both Fukiyama
and de Soto is that the only hope they see for these societies is home-grown,
with each individual third world nation bootstrapping itself through all
- these steps, including the evolution of their own WTIIs; or the reform
- and transformation of each society's national government into a system
- of widely trusted institutions. Well, it took a long time for the west.
- If they must recapitulate our path, it will take them a long time as well,
- a time during which desperate poverty will remorselessly prevail. What
- enablers are available now that were unavailable when the west made this
- transition? Might these enablers be used to help accelerate today's poor
- through this part of the process of capital formation?</p>
+ these steps, including, fo de Soto, the evolution of their own hubs; or
+ the reform and transformation of each society's national government into
+ a system that may be widely trusted. Well, it took a long time for the
+ west. If they must recapitulate our path, it will take them a long time
+ as well, a time during which desperate poverty will remorselessly prevail.
+ What enablers are available now that were unavailable when the west made
+ this transition? Might these enablers be used to help accelerate today's
+ poor through this part of the process of capital formation?</p>
<h3><a name="title"></a>The Special Roles of Title and Law</h3>
<p>In <i>The Other Path</i>, de Soto explained the informal economy and
its lack of institutions in general. Eleven years later, after much investigation
both of the phenomenon of persistent poverty, and an extraordinary uncovering
of the history of how the west overcame these problems, in <i>The Mystery
of Capital</i> de Soto has narrowed his focus to the crucial role played
- by the institution of title.</p>
- <p>While all these WTIIs are valuable for the fomation of wealth creating
+ by the institution of title transfer.</p>
+ <p>While all these hubs are valuable for the fomation of wealth creating
societies, not all are equally crucial. De Soto's analysis suggests that
the institution most needed to get the ball rolling, and which are most
painfully absent in the informal sectors of the third world, are credible
- systems of title transfer. It is through widely trusted title agencies
+ systems of title transfer. It is through widely trusted title registries
that banks can become confident that the collateral against which they
make a loan will indeed become theirs in the event of default. This requires
not just trust in the title company itself, but credibility that a transfer
@@ -255,21 +255,23 @@
at a distance</i>: people who have never met one another and probably
never will can engage in asset transfers and capital formation with the
confidence that they will acquire the goods specified in the contract.</p>
- <p>Although de Soto documents the independent creation of title companies
+ <p>Although de Soto documents the creation of extra-legal title companies
in the informal sector, these do not currently seem to be able to provide
the credibility at a distance needed for this transition.</p>
- <h3><a name="govt"></a>The Governmental Paths</h3>
- <p>Among currently existing choices, perhaps the only organization that
- can fill this crucial titling role in a nation is the government itself.
- This is the strategy de Soto has adopted, converting extra-legal assets,
- village by village, into officially acknowledged parts of the formal economy.
- The strategy has been wildly successful in bringing the poor into the
- modern world. Working with the government of Peru, over four years, de
- Soto's organization has formalized ??? worth of assets for a quarter of
- a million people, creating ??? amount of capital and $2.1 billion of new
- tax revenues for the government of Peru. One may hope and expect that
- these demonstrated tax revenues, if nothing else, will tempt other governments
- to follow suit.</p>
+ <h3><a name="govt"></a>The Governmental Path</h3>
+ <p>Among currently existing choices, perhaps the only organizations that
+ can fill this crucial titling role in a nation are formal ones backed
+ by government itself. A government bundles together widespread recognition,
+ some sense of legitimacy, and powers of enforcement. This is the strategy
+ de Soto has adopted, converting extra-legal assets, village by village,
+ into officially acknowledged parts of the formal economy. The strategy
+ has been wildly successful in bringing the poor into the modern world.
+ Working with the government of Peru, over four years, de Soto's organization
+ has formalized ??? worth of assets for a quarter of a million people,
+ creating ??? amount of capital and $2.1 billion of new tax revenues for
+ the government of Peru. One may hope and expect that these demonstrated
+ tax revenues, if nothing else, will tempt other governments to follow
+ suit.</p>
<p>De Soto's isn't the first attempt to title the informal's property and
bring them into the formal sector, but it is the first such attempt in
the third world to work. De Soto documents previous well intentioned efforts,
@@ -292,7 +294,8 @@
the government must discover and respect the local laws, and work out,
at considerable cost in time and effort, a way to integrate those local
laws with the national systems.</p>
- <h3><a name="conflict"></a>Local Knowledge <i>vs. </i>Global Transferability</h3>
+ <h3><a name="conflict"></a>The Conflict: Local Knowledge <i>vs. </i>Global
+ Transferability</h3>
<p> The difficulty comes from an inherent conflict between <i>local knowledge</i>
and <i>global transferability</i> -- local knowledge of the idiosyncratic
people's law, conventions, and negotiated arrangements in force in each
@@ -596,33 +599,34 @@
some number of others, including some Fred trusts, Fred may turn to them
for advice on the contract's meaning -- the computational analog of legal
advice.</p>
- <h3>Local Knowledge <i>and</i> Global Transferability</h3>
+ <h3>Resolving the Conflict</h3>
<p><font color="#FF0000">*** to be written</font></p>
- <h3>The World isn't Purely Electronic</h3>
+ <h3>Why the Third World First?</h3>
<table cellpadding="12">
<tr>
<th>
<div align="left"></div>
</th>
<th>
- <div align="left">Pubic eTitle in physical goods<br>
- (tractor, land)</div>
- </th>
- <th>
<p align="left">Purely electronic rights<br>
(money, stock)</p>
</th>
+ <th>
+ <div align="left">Pubic eTitle in physical goods<br>
+ (tractor, land)</div>
+ </th>
</tr>
<tr>
<th>
- <div align="left">Informal:<br>
- local consensus</div>
+ <div align="left">Digital Path:<br>
+ Jurisdiction-free<br>
+ Coercionless </div>
</th>
<td>
- <div align="left">Can eTitle establist popular legitimacy?</div>
+ <div align="left">10/10th of law</div>
</td>
<td>
- <div align="left"></div>
+ <div align="left">Incentives on corrupt cops</div>
</td>
</tr>
<tr>
@@ -632,29 +636,25 @@
lawyers, cops</div>
</th>
<td>
- <div align="left">Incentives on corrupt courts</div>
- </td>
- <td>
<p align="left">Behavior as 9/10th of law.</p>
<p align="left">Split contracts</p>
</td>
+ <td>
+ <div align="left">Incentives on corrupt courts</div>
+ </td>
</tr>
<tr>
<th>
- <div align="left">Digital Path:<br>
- Jurisdiction-free<br>
- Coercionless </div>
+ <div align="left">Informal:<br>
+ local consensus</div>
</th>
- <td>
- <div align="left">Incentives on corrupt cops</div>
- </td>
+ <td> </td>
<td>
- <div align="left">10/10th of law</div>
+ <div align="left">Can eTitle establist popular legitimacy?</div>
</td>
</tr>
</table>
- <h3> </h3>
- <p> </p>
+ <p><font color="#FF0000">*** to be written</font></p>
<h3>The Rule of Law, Not of Men</h3>
<p><font color="#FF0000">*** to be written</font></p>
<h3><a name="acks"></a>Acknowledgements</h3>