Hidden Capital: The Solution to Our Economic Woes?

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This was my submission to the NY Times essay contest last week…

The past 50 years have been marked by a dramatic increase in population and productivity in developing nations around the globe. Here’s the catch: increased productivity has not translated to sustained economic development and a decrease in poverty. Why? Countries with corruption and poor legal infrastructures have not been able to keep track of assets and transactions, leading to the development of what Peruvian economist Hernando de Soto calls the “extralegal economy”. Simply put, the extralegal economy is all the assets that exist outside the sphere of government regulation.

Why is the extralegal economy bad? Extralegal assets do not produce tax revenues and cannot be leveraged for official transactions, such as a loan or a mortgage. If you own a piece of land that isn’t registered with the government, you cannot use it to gain credit or conduct more legitimate business. This is one of the key inhibitors of economic growth. According to de Soto, “…the majority of entrepreneurs are stuck in poverty, where their assets-adding up to more than US$10 trillion worldwide-languish as dead capital in the shadows of the law.” That is $10 trillion that can supercharge the world economy given the right framework for asset registration. That same $10 trillion could also generate tax revenue for infrastructure, further accelerating economic growth.

Legalizing the extralegal economy is no easy task. Imagine trying to keep track of millions of new assets and transactions in a secure manner. It is seemingly impossible. But that is starting to change. Blockchain, the mystical buzzword talked about by many in Silicon Valley, is a possible solution to this problem. A blockchain is nothing but a distributed, immutable database. Once a transaction is recorded on a blockchain, it cannot be changed. These transactions are recorded for all participants in the blockchain using a shared ledger, so each participant knows the complete list of assets and transactions. This is perfect for securing asset registration on a large scale, as blockchain uses cryptographic functions to prevent tampering of the ledger. In fact, as outlined by Adrianne Jeffries in the NY Times, it is already being looked into by US government agencies as a way to store and protect records. Blockchain technologies are a possible remedy to the economic woes of the developing world.

Freeing vast amounts of dead capital will require significant institutional overhaul. This issue lies at an intersection of government, business, and technology challenges which will be difficult to navigate. However, I believe that blockchain, combined with efficient governance, provides the best way forward in truly unleashing the economic power of these countries.

And here is my team’s TSA project to create a blockchain based application for land registry.

-Sid