In low and middle-income countries, markets frequently fail to perform adequately. What makes the malfunctioning of these markets particularly relevant is that the resulting welfare effects and efficiency losses have a much larger social impact than in high income countries. Amongst the causes on the one hand ‘hard’ conditions regarding the legal system, and on the other hand ‘soft’ conditions concerning codes of business and personal behaviour have been highlighted (Sen 1999).
Hernando de Soto (2003) has pointed out the ‘hard’ legal and institutional conditions which cause ‘the failure of capitalism’, principally the absence of transferable and enforceable property rights and enforcement of contract law. The absence of enforceable property rights, as well as the high cost associated with legal or permitting procedures give rise to enormous quantities of ‘dead capital’. This capital is de facto owned by the poor, but can not be used as collateral to obtain necessary credit, thus in many cases excluding the majority of the population from the market economy (De Soto 2003).
Berre, Max and Schram, Albert EG, The Issue of Trust in Developing Countries: Was Adam Smith Right and Are Modern Economists Wrong? (October 1, 2009). Paper prepared for International Conference of Political Economy: Adam Smith Today, Kocaeli University, Turkey 1-4 October 2009.