Sheri FinkThis week on The World, we're examining the lives of the one billion people who live in third world slums. In the cities of many developing nations, more than half the residents live in squatter settlements, where simple shacks crowd what is otherwise undeveloped land.

In part II, we looked at one idea for helping slumdwellers - providing public housing. Today, we examine another idea - giving slumdwellers the means to pull themselves out of poverty. A Peruvian economist is promoting this notion. He says solving urban poverty begins with land ownership and the law. Correspondent Sheri Fink has our story. (All photos by Sheri Fink.)

Listen to Sheri Fink's report (9:30)

Fink: Hernando de Soto is one of the most prominent champions of the world's poor. I held my first conversation with him an unlikely setting.

De Soto: "I've just flown in from Lima to New York, and I'm in this limo with you on our way to Manhattan."

Fink: He was headed to a meeting at the United Nations. And as we drove, he looked out at the streets of this wealthy American city and envisioned it as it once was.

De Soto: "It was pretty much a third world city scarcely 150 or 200 years ago."

Fink: Back then, New York was home to overcrowded tenements and vast squatter settlements like those now found in the developing world. Poor New Yorkers built flimsy, tin-roofed shanties on land prone to flooding. They had no sewage systems. And they drew their water from contaminated wells. At the time, de Soto says, it wasn't so clear that American cities would one day look so different from cities in his own country.

De Soto: "We weren't that unequal some time ago, and you did do a few successful things, and it's a question of finding out what were the causes of your success, and we find that it has a lot to do with law."

Fink: Legal tools are what de Soto says every poor and marginalized slum dweller needs to prosper in today's global market economy. He wants to give these tools to the majority of the world's population. And with his single-minded determination and influence, he may well succeed.

De Soto (left) with a man who is running a business from his home

Fink:De Soto is stout of build and of ambition. He's become one of the most influential thinkers on the problem of urban poverty. The US Agency for International Development and the World Bank have invested heavily in his ideas. And he now co-chairs a United Nations commission with Former U.S. Secretary of State Madeleine Albright. She says de Soto is promoting a bold and innovative theory.

Albright: "Within poor societies, if people actually have title to the land that they live on, to their property, they can borrow against it and become productive members of the countries in which they live."

Fink: One of the first places to put de Soto's ideas to work was his home country: Peru.

The Lima shantytown of Pachacutec

Fink: On the outskirts of Lima, neat rows of shanties climb the desert hillsides. Organized groups of squatters have created neighborhoods on the barren land.

Pilco:"My name is Ires Pilco. Mrs! I live here in Los Olivos de la Paz."

Fink: This settlement was illegal when Ires Pilco first moved here in 1999. Her family built a shack out of straw panels. But at de Soto's urging, and with his assistance, the government gave land titles to her family and other squatters. Once the Pilcos had formal ownership, they began improving their home. They replaced the straw with wood and sturdier materials.

Three stages in the evolution of a squatter home: On the right, straw panels, on the left, wood, and in the middle, brick

Pilco: "They needed to wait for the land title to improve, using the formal materials."

Fink: The Pilcos' experience reflects a trend seen by researchers. When families in slums get title to their land, they're less fearful of being evicted. And so they tend to invest more in their housing. That increases the value of their property. De Soto's theory is that these new home-owners will then use their houses as collateral to start businesses and generate wealth. To show me this next step in a slum-dweller's journey out of poverty, de Soto takes me to Huaycan.

It was the first shanty town in Lima where residents received titles with the help of his program. We stop by a sparkling new garment factory. Several dozen workers sit at sewing machines stitching T-shirts. They work in a clean, airy building with concrete floors, large windows and bright fluorescent lights. De Soto speaks with one of the owners, Jose Luis Surveillos. He lives in this community. And he explains how he and six partners came to open this factory.

De Soto: "They read my book, and that the idea is that you could use your property as a guarantee to obtain credit. And that's why the six associates all mortgaged their homes to be able to constitute the guarantees necessary to get the credit to start off this business."

Garment factory in Huaycan

Fink: This is how the de Soto model works. Property ownership allows poor people to obtain credit, amass capital, and climb out of poverty. Legal reforms make all of that possible. Right now in most developing countries, a morass of laws and bureaucracy keeps the poor from being able to gain title to their property, register their businesses and secure loans.

But de Soto's ideas have run up against some hard realities. Governments have tended to implement only some of the reforms he champions. And few Peruvian shanty dwellers have been able or willing to borrow against their homes. Most banks don't extend credit to owners of straw huts and rickety wooden shacks. And taking out a loan is risky for the poor. The owners of the garment factory de Soto and I visited have taken on considerable debt.

De Soto: "About $114,000."

Fink: They're paying a high interest rate.

De Soto: "Their interest rates are 2% per month."

Fink: And they're worried about keeping up with the payments. Less than a year ago, the factory operated at full capacity. Now it's at just a quarter of that. As we drive away from the factory, de Soto questions what the future holds for these entrepreneurs.

De Soto: "They may have gone in over their heads. We don't know."

Fink: If the poor use their property as collateral to start businesses and they outborrow their ability to pay back debts, they could very well lose their homes.

Indeed, de Soto has his critics. They question whether his plan for rescuing people from poverty will really work. Geoffrey Payne is a British housing and planning consultant who's studied the effects of titling programs around the world.

Payne: "Titling certainly won't get rid of slums. In fact, there's some concern that by giving titles to people you could actually increase the number of informal settlements."

Fink: That's because the promise of a title may entice people to settle on land illegaly, only to sell the property later when they gain ownership. In fact, Peru's experience suggests that may be happening. In 1990, when the country's titling program was introduced, around 9 million people lived in the nation's slums. By last year, the number had jumped to nearly 15 million. According to the UN, Peru's slums are growing at twice the rate of India's. And Geoffrey Payne says titles alone don't improve living conditions for slumdwellers.

Payne: "There's no necessary link between having a title and getting the benefits in phys terms of getting a road, electricity, water, sanitation. In fact, there's a very strong danger governments will think I've given them a piece of paper, they're now the owners of the property, and I can walk away from the problem."

Fink: And Payne says in some cases, giving slumdwellers title could make life harder for them. Some of the poorest slumdwellers can't afford to pay the taxes and fees that come along with property ownership. So they may be forced into distress sales of their new homes. Hernando de Soto says he's now sensitive to the fact that the changes he's promoting won't help everyone, and not all at once.

De Soto: "I didn't say that this was a silver bullet. I said it was - not an important contribution - an indispensable contribution to modernization."

A child in the Lima shantytown of Pachacutec

Fink: What's been missing from the debate over de Soto's ideas is a comprehensive analysis of the results. How are the programs that de Soto helped inspire throughout the world actually working? How have countries with radically different histories, cultures and property systems shaped their legalization programs?

The answers should be coming soon. The UN commission that de Soto co-chairs with Madeleine Albright is studying these questions.

De Soto seems as confident as ever that the evidence will support his prescriptions. After all, Western countries helped lift their cities out of Dickensian squalor by legalizing property and businesses. And he warns that if developing countries don't do the same - if they don't invite the world's billion slumdwellers into the legal, market economy - the poor will be increasingly alienated, and they may increasingly demand alternatives to capitalism.

For the World, I'm Sheri Fink, Lima, Peru.

Web links:
Institute for Liberty and Democracy (Hernando de Soto's organization)
Geoffrey Payne & Associates
Commission on Legal Empowerment of the Poor