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Assets the poor hold informally, such as houses on untitled land and unregistered businesses, cannot be mortgaged, used as collateral, sold to strangers, or divided among investors. They exist physically but cannot generate further value. De Soto estimated this idle wealth in the developing and post-communist world at roughly $9.3 trillion, far more than all foreign aid and direct investment combined.
A formal property system records an asset's economically relevant qualities in a standardized document. That representation makes the asset usable in transactions beyond its physical use. A registered house can secure a loan to start a business, and this conversion of static assets into mobile, fungible capital is what separated the West's prosperity from everyone else's.
De Soto's team set up a small garment workshop in Lima following every legal requirement. It took 289 days of six-hour workdays and cost 31 times the monthly minimum wage to register it. Similar trials for obtaining legal title to state land in Peru, Egypt, the Philippines, and Haiti ran from 6 to 25 years and involved dozens to hundreds of bureaucratic steps. This showed that the poor stay informal because legality is priced out of reach, not because of culture.
On Bali's rice fields, de Soto found that the dogs barking as he crossed from one farm to the next knew exactly where property lines were, even though no official registry recorded them. Informal communities already hold detailed, locally enforced agreements about who owns what. Effective formal law must be built by discovering and codifying these existing social contracts rather than imposing rules from above.
In the 18th and 19th centuries, American settlers occupied land in defiance of English-derived law and invented their own claim systems through miners' and claim associations. Legislators eventually ratified these practices through preemption laws and the 1862 Homestead Act. The West's formal property system therefore grew out of absorbing extralegal arrangements, which is the same integration developing countries now face.
Formal property produces capital through six mechanisms. It fixes an asset's economic potential in a representation, and it integrates scattered information into one system. It makes people accountable, and it makes assets fungible so they can be divided or combined. It networks people through verifiable identities, and it protects transactions. Without all six, markets stay confined to small circles of trusted acquaintances.