Governments in the developing countries have tried to open up their economies to the poor a multiple number of times unsuccessfully. They have failed because of the misconception of the government that people are unwilling to enter the formal property system to avoid taxation, their property hasn’t been surveyed and mapped properly and is hence not documented, governments only have to enact law and can ignore the cost of compliance, extralegal arrangements can be ignored and this change can be brought about without political leadership. In fact, cost of operating in the extralegal sector is more than the tax savings it brings.
What keeps people away from the formal property system is the poor legal and administrative system. Similarly, it is not the lack of geographical mapping that has led to the extralegal society. In fact, property is not even a physical expression of an asset, rather it is the understanding amongst people as to how assets should be held, valued and traded. It is law that makes people realise the value of their assets by letting commonly understood property terms represent that asset. Hence, integrating of the extralegal sector with the formal property system is a legal challenge, and addressing this is a political responsibility.
In order to converge all the social contracts in the extralegal sector into a unified formal system, governments must understand how these contracts work and why. They also need to facilitate the poor and accept extralegal evidence of transfer of property as that is only proof of ownership the poor have. The property laws in the West originated from the property norms in the respective countries, which is why people accepted them and abided by them, and governments were successful in converting assets into liquid capital.
People could now be the nationally acknowledged owners of their property, did not have to waste time on politicking and could focus on the productivity of their assets. Social contracts are so widespread in the Third World because the legal system has not been able to meet people’s needs and protect their rights. In fact, government officials and influential individuals twist the legal system in their favour to unfairly acquire property.
In order to correct this, reformers must first understand the social contracts and then codify them such that they can be compared to the existing formal law, and then enact a common law that takes more legal and extralegal realities into account. Bringing about this change will also require a political shift from the feudal system to the patrimonial system. This shift will hurt the powerful elite the most, who will naturally resist it. The only way for reformers is to first have the poor on his side, which will constitute a large and powerful voting bloc and secure the reformers position.
He or she must also articulate that integrating the poor in the formal system will lead to everyone’s better by increasing the liquidity of capital and opening up opportunities for entrepreneurs. Then the public and bureaucracy will have to be won over, and lawyers will be required to give assets tangible representative forms. Only a political leadership can bring about this change because the poor do not have the power and the rich and administrators are too busy protecting the status quo, and it is the politicians who understand the importance of making capital accessible to all.