Aryo Aliyudanto (born September 28th, 1991), is a student at Gadjah Mada University – Indonesia.

UNLEASING THE ECONOMIC POTENTIAL OF THE POOR:

IMAGINE THE ‘POORHOUSE’

By: Aryo Aliyudanto

Research Background

Poverty is one of the main concerns in economics. The problem of poverty becomes

very important to examine and solve immediately because poverty is an indicator of human’s

welfare. People can be categorized as “poor” if his/her income is lower than $1,25 or $2 a

day Purchasing Power Parity (Worldbank).

Chart.1 on the appendix shows that in the recent two decades, the number of poverty

surely decreases significantly from approximately 53 percent to 23 percent in the total of

world population. But, this indicator is not that representative for the real poverty, because,

the rest indicators such as health, education, capital access and property rights are not

concerned.

‘Diamond’ in Developing Country: The Dead Capital

The capitalism agrees that investment and capital are the most important factors to

develop national welfare. But, in developing countries they are not yet successfully applied as

whole because sometimes the capital is not utilized optimally to development, nevertheless

they become lost for the sovereign’s interest.

In the old-economics perspective, poverty exists because a vicious cycle. Through this

view, poor people seems not to posses the power to develop their life quality, whereas, they

have the great potency to improve their live by becoming capital producers.

Poor people’s assets such as houses which build on fields with no clear ownership,

household savings, and unincorporated companies have not become a concern, then stay

unutilized. The rights of these unrecorded assets cannot be redirected and be

empowered into capital. This is what called “dead capital” by Peruvian economist, Hernando

de Soto (2001).

Why Dead Capital so Important?

Graham (2010) found that the average savings on informal sector of poor people in

Uganda was $132 per year (table.1).1 If there are 8.5 billions poor people in Uganda, the total

informal savings of them is around $112,2 million.

The other unbelievable research came from Peru where the total value of the poor’s

assets that are not legally registered up to $10 trillions, which is 60 times of GDP Peru in

2000.2 That fact arouse a question that can not answer by Hernando de Soto; How to utilized

of that fantastic ‘dead capital’?

Imagine the ‘Poorhouse’

Though it comes over with many critics, I agree that Hernando de Soto’s idea to

empower poor people become capital producers is a brilliant idea. Therefore, that idea needs

a follow up with real action by forming a new governance institute that utterly pleads their

rights with the following functions:

1. Assessing and legalizing assets of the poor

Convoluted bureaucracy is a common thing in a developing country. World

Bank (2011) suggests that to build a business entity in Cambodia takes 85 days

through 8 procedures and spends $ 2,228. It is a number that impossibly can be

reached by the poor.

Hence institute like that is needed. They asses and certify of the poor such as

legalizing rights of fields, livestock, crops, orchards, lands in isolated area, and a

informal ownership document of a business entity with simple procedures and

affordable cost by the poor.

2. Financial Intermediation

The second function of this institute is as the intermediation institute like

banks. This function is excessively important knowing that actually the poor’s saving

potency is immensely high.

Beside it stands as the storage of poor’s fund, this institute also functions as

the fund distributor to the poor which need the fund itself—indeed, with low

transaction cost and interest. By every collateral asset (legalized) which is possessed

1 Graham, A.N.Wright and Leonard Mutesasira, Relative Risks to the Savings of Poor People (Nairobi:Microsave, 2001)page.9

2 Brefout, Loup, Unlocking the dead capital (Worldbank:2010)

by the poor, for instance by collating breeds, fields, informal companies and

also farming revenues, a poor can get a number of appropriate charge account. In

progress, the charge account of health, farming tools and education are also provided

by this institution.

3. Goods and Services Intermediation

Asymetric information is a matter occurred in the majority of the poor

although most of them do not realize it, sometimes when selling or offering both

goods or services, the poor do not get the appropriate earning. As an example, if a

poor farmer wants to sell his field immediately and he seeks the buyers by himself,

it’s need a high transaction cost. So that, this institusions can be a facilitator to

minimize that transaction cost.

As said before, this new institution should be under government’s supervision to

prevent moral hazard done by privates, such as to get excessive profit. To reduce the

transaction cost and loan interest, the government can allocate the national budget to subside

the partial of operational cost of this institute. Besides, the purposes of constructing this

institution to be government agencies is to make it nationally scale and locates at the remote

zone which cannot be reached by the privates, and to be able in adapting with the native

culture.

Conclusion

The main idea of what the writer offers is to cut off poverty by the power of the poor

themselves by legalizing assets they posses and by accumulating them (the assets) into an

institute so that they will not be “dead capital”. So that, the poor can be the capital producers.

Indeed, in the implementation, the sovereigns in the developing countries which are

not responsible presumably will make this institute as the new moral hazard field. But if the

assets accumulation of the poor are extremely high can be collected, government should not

owe money to the other countries for the economics development.

Yet, certainly before constructing this institution, an in-depth research is needed, so

that, government can prepare the regulation and rule of game to make no deterioration of the

poor.

The poor are not lazy people who do not fight against their state, and also not because

of their less motivation to move forward, but it is more like they find themselves single-

minded. “...Indeed, Allah will not change the condition of a people until they change what is

in themselves…”(Al-Qur’an, Surah Ar-Ra’d:11).

References

Alvarado, Ruben. A review of Hernando de Soto, The Mystery of Capital: Why Capitalism

Triumphs in the West and Fails Everywhere Else. New York: Basic Books, 2000, pp.

276.

Bill and Melinda Gates Foundation, Saving Statistics.

Brefout, Loup, Unlocking the dead capital. Country Manager for Serbia, The World Bank,

2010.

C. W. Ahiakpor, James. Mystifying the Concept of Capital: Hernando de Soto’s Misdiagnosis

of the Hindrance to Economic Development in the Third World. The Independent

Review, v. XIII, n. 1, Summer 2008, pp. 57–79.

De Soto, Hernando. The Mystery of Capital: Why Capitalism Triumphs in The West and Fails

in Everywhere else. Black Swan, 2001.

Gilbert, Alan. On The Mystery of Capital and The Myths of Hernando De Soto: What

Difference Does Legal Title Make.? International Development Planning Review,

2002.

Graham A.N. Wright and Leonard Mutesasira, Relative Risks to the Savings of Poor People.

MicroSave, 2001.

______. “Relative system risks to the savings of poor people. Development Buletin.

Kompas. Esai-Esai Nobel Ekonomi. Jakarta: PT Kompas Media Nusantara, 2007.

North, Douglas C. Institutions, Institutional Change and Economic Performance. Cambridge

University Press, 1990

Rutherford, Stuart. The Economics of Poverty: How Poor People Manage Their Money,

SafeSave Bangladesh.

Tiwari, Gaurav. International Property Right Index 2012 Report. Americans for Tax Reform

Foundation/Property Rights Alliance, 2012.

World Bank. Expanding Poor People’s Assets and Tackling Inequalities. World

Development Report 2000/2001.

_____.World Development Indicator, 2012. Can be seen at:

data.worldbank.org/sites/default/files/wdi-2012-ebook.pdf

APPENDIX

Chart 1. Potrait of world poverty, 1981-2008

Source: worldbank, 2012

Picture 1. Poorhouse Mechanism

Source: Writer, 2012

Table 1. Poor People Savings and Losses in the Informal Sectors

Source: Wright and Mutesasira at “The Relative Risks to the Savings of Poor People, 2001”