THE LEGAL FOUNDATIONS OF ECONOMIC GROwTH 117
enormous effort just to determine the basics of the transaction: does
the seller own the real estate and have the right to transfer it? Can
he pledge it? Will the new owner be accepted as such by those who
enforce property rights? What are the effective means to exclude the
other claimants? In developing and former communist nations such
questions are difficult to answer. For most goods, there is no place
where the answers are reliably fixed. That is why the sale or lease of
a house may involve lengthy and cumbersome procedures of approval
involving all the neighbors. This is often the only way to verify that the
owner truly owns the house and there are not other claims on it. It is
also why the exchange of most assets outside the West is restricted to
local circles of trading partners.^1According to de Soto, the establishment of a formal property system brings
with it six major advantages.^2 First, it fixes the economic potential of assets.
When one records the ownership of a house or land in writing, one starts to
think about the object as an economic asset. What was formerly viewed as a
place to live or to grow crops becomes something which can produce value
either as collateral for a loan or as equity that can be exchanged. Second, prop-
erty records integrate dispersed information into one system. When owner-
ship is not recorded in public documents, it is difficult to acquire information
about assets. One has to search out owners and discover from neighbors what
belongs to whom and what different rights to land exist. When this informa-
tion is centralized in public records, it is much easier to access. Third, property
records make people accountable. When someone who owns property that
is not recorded breaks the law or does not abide by the terms of a contract,
there is no way to locate his assets or place liens against his property. Property
records make it possible to ensure that contracts are honored and that people
obey the law.
Fourth, property records make assets fungible. As de Soto explains, ‘If stan-dard descriptions of assets were not readily available, anyone who wanted
to buy, rent, or give credit against an asset would have to expend enormous
resources comparing and evaluating it against other assets – which would also
lack standard descriptions. By providing standards, Western formal property
systems have significantly reduced the transactions costs of mobilizing and
using assets.’^3 Fifth, property records help to network people. By improving
communication about assets to a wide range of people, these records serve to
connect people into a larger network of economic relationships. This contrib-
utes to an increase in the specialization of labor, which in turn leads to more
efficient production. Sixth, property records protect transactions. For instance,
by assuring buyers that sellers have good title to the assets they are selling or
by registering liens on property, a formal property system produces trust in