Citadels of dead capital.

• Author: Soto, Hernando de

Throughout the Third World and the communist countries, neighborhoods buzz with hard work and ingenuity. Streetside cottage industries have sprung up everywhere, manufacturing anything from footwear to imitation Cartier watches. There are workshops that build and rebuild machinery, cars, even buses. In many countries, unauthorized buses, jitneys, and taxis account for most public transportation. Often, vendors from the shantytowns supply most of the food available in the market, from carts on the street or from stalls in buildings they built themselves. The new urban poor have created entire industries and neighborhoods that have to operate on clandestine connections to electricity and water.

Such "extralegality" is often perceived as a marginal" issue. In fact, it is legality that is marginal; extralegality has become the norm. When international agencies jet their consultants to the gleaming glass towers of the elegant quadrants of town to meet with the local "private sector," they're talking to only a fraction of the entrepreneurial world. The emerging economic powers of the developing world are the garbage collectors, the appliance manufacturers, and the illegal construction companies in the streets far below.

In spite of their obvious poverty, even those who live under the most grossly unequal regimes possess far more than anybody has ever understood. These possessions, however, are not represented in such a way as to produce additional value. When you step out the door of the Nile Hilton, what you are leaving behind is not the high-technology world of fax machines, ice makers, television, and antibiotics. The people of Cairo have access to all those things. What you are really leaving behind is the world of legally enforceable transactions on property rights. In Cairo and similar cities, mortgages and accountable addresses are unavailable even to people who would probably strike you as quite rich.

Outside Cairo, some of the poorest of the poor live in a district of old tombs, called the City of the Dead. But almost all of Cairo is a city of the dead--of dead capital, of assets that cannot be used to their fullest. The institutions that give life to capital--that allow one to secure the interests of third parties with work and assets--do not exist here.

To understand how this is possible, one must look to 19th-century America. The United States inherited from Britain not only its fantastically complex land law but also a mess of overlapping land grants. The same acre might belong to one man who had received it as part of a vast land grant from the British Crown, to another who claimed to have bought it from an Indian tribe, and to a third who had accepted it in place of salary from a state legislature--and none of the three might ever have actually laid eyes on it. Meanwhile, the country was filling up with immigrants, who settled boundaries, ploughed fields, built homes, transferred land, and established credit long before governments conferred on them any right to engage in these acts.

Those pioneers believed that if they occupied land and improved it with houses and farms, it was theirs. State and federal governments believed otherwise, and sent troops to burn farms and destroy buildings. When the soldiers left, the settlers rebuilt and returned to scratching out a living. That past is the Third World's present.

English Unsettlement

Initially, colonists in British North America attempted to apply the doctrines of English property law. But most colonists comprehended few of the technicalities of English law; many did not know or care to know the differences between legal writs, law, and equity, or other subtleties. More importantly, the common law of property was often ill-suited to deal with the problems that confronted the colonists. A superabundance of land presented the first settlers with opportunities unimaginable in the Europe they had left. Not all of this land was fertile, well-drained, or within easy reach of meadows to supply hay for the settlers' cattle and horses. In their search for suitable land, the colonists often moved at whim, laying out boundaries, cultivating fields, building houses--and then abandoning it all to move on to more fertile territory.

The result for property rights was a great deal of variability and extralegality. In England, occupying a plot of land for a long period without a title--"squatting"--was against the law. In America, squatting on available land quickly became a common practice. According to Amelia Ford's study of the colonial precedents of the U.S. land system, "Before the arrival of the Massachusetts Bay Company in New England, there were settlers without charter or grant living at various places within the limits of the Bay.... The first Connecticut settlers were legally trespassers on their territory and could base their rights only in occupation and purchase from the Indians." During Maryland's early years, Frenchmen and other non-English people resided on land that they were incapable of owning under the conditions of the grant. And in 1727, Pennsylvania legislators protested those who "sitt frequently down on any spott of vacant Land they can find." These colonial American squatters had already occupied and improved 100 ,000 acres of land without legal permission.

There were no effective legal means to reconcile many of the conflicts that arose. As a result, squatters turned to de facto devices that created openings for legitimizing squatting. One of the most intense conflicts took place on the largely vacant outlying territory now known as Vermont.

Prior to the American Revolution, both New York and New Hampshire claimed the territory of Vermont. In order to circumvent New York's claim, Gov. Benning Wentworth of New Hampshire, "acting on the principle that possession was nine tenths of the law.., made free grants in the region to both New Hampshire and Massachusetts citizens," notes author Aaron Morton Sokolski. Following closely on their heels, squatters with little allegiance to any state soon overran the territory. Although both colonies attempted to thwart the squatters' claims by repeatedly bringing ejectment proceedings against them, squatter dominance of the territory was so complete that Ethan Allen and his "squatter followers" won independence and then statehood for Vermont following the Revolution. A primary result of this extraordinary triumph of squatter power was formal recognition of...