Hernando de Soto's Plan for the Poor
by Steve Sailer
UPI, May 6, 2002
Americans are becoming more concerned about the dire poverty afflicting much of the Third World -- Latin America's faltering economies dispatch millions of illegal aliens to the United States; the Middle East bursts with underemployed and angry young men; and Africa appears too poor to cope with its AIDS epidemic.
At the recent 2002 Global Conference in Beverly Hills, sponsored by the Milken Institute and Forbes Magazine, Peruvian economic reformer Hernando de Soto offered an optimistic but hard-headed plan for how these nations could mobilize the economic energies of their own poor.
Eight Nobel Laureate economists addressed the conference put on by Michael Milken, the much admired and much reviled junk-bond-king-turned-convict-turned- philanthropist. Yet, de Soto, who hasn't won the Nobel, because he prefers using words to equations, or so it is often said, stood out for his highly different approach to economics.
De Soto's central point is that the Third World poor tend to possess de facto control over surprisingly large amounts of assets, such as houses, land, and small businesses. Yet, they find it difficult to use their possessions as collateral to borrow money to invest in starting small businesses.
Why? The poor generally lack the airtight legal titles to their holdings that would give lenders the confidence that they could foreclose on the property if they weren't paid back. In most of the countries that de Soto has studied, registering a property or business can take over a year of full-time work, unless one can afford a well-connected law firm.
An intense yet genial gentleman with Old World manners, de Soto held court the day after being one of the keynote panelists at the Milken Institute conference.
"If you ask Peruvians whether the fact that they own a $20,000 or $30,000 house can help them toward liquidity, they'll tell you it doesn't, because they can't leverage it," de Soto said. "And leverage -- obtaining mortgages, issuing shares, issuing bonds -- is essentially a legal tool, but if you don't have a legal home or business, you can't do it."
De Soto, head of Lima's Institute for Liberty & Democracy, estimates that only about one of every eight countries in the world has the kind of secure and straightforward system of defining legal rights to property that Americans take for granted.
De Soto's perspective doesn't fit into standard American ideological categories. He has devoted the past two decades to helping the poor, but he does it by advocating the libertarian-sounding vehicles of property rights and entrepreneurialism.
Yet, while American free-marketeers tend to assume that property rights are natural and thus threatened only by government intervention, de Soto emphasizes that only government bureaucracies can create and maintain efficient and reliable mechanisms for defining ownership.
When he first became prominent, de Soto paid a visit to the leading economists in the United States. They wanted to discuss with him the typical issues that interest contemporary economists -- Peru's budget deficits, money supply, tariffs, privatization plans, and the like. De Soto, however, wanted to find out how to set up a country registrar of deeds office. "Everybody in America who truly understood property rights died 100 years ago," he ruefully laughed.
"Where the state is not present," de Soto noted, "the people themselves create their own extra-legal systems, just as you Americans did here in California during the Gold Rush. There was no law here. So, California was divided into 800 extra-legal jurisdictions. And they issued their own mining claim titles, until you brought them together. And that's where Egypt and Peru and the rest are today."
The inadequacy of the Egyptian state at protecting property has encouraged Egyptians to turn for this basic social service to Muslim organizations, some of them radical and anti-American, he said. "These fragmentary Islamic organizations are there as an alternative to government," de Soto observed.
"The Muslim countries look bleak," he admitted, "but I have a different perspective on it from working in Egypt for four years. We expected Muslim laws to hinder economies, but that turned out to be unimportant."
Somewhat similarly, de Soto blames inadequate property rights for making Third World businesses excessively nepotistic. Businessmen who can't rely upon their governments often rely upon their families.
"Because it takes 17 months to form a legal corporation in Mexico, it's much easier to deal with my retarded brother-in-law than with a high quality outsider," de Soto half-joked. "So, the result is that the families are the nucleus around which businesses organize. And, of course, it's a bad combination of assets. How lucky can you be that your cousin and brother and sister would have the talents you need?"
"The tendency of anthropologists is to say, 'These Latin Americans and these Arabs are much more family-oriented than Anglo-Saxons,' but that isn't it. We don't have a choice. In America, you have the legal tools to trust each other. You have a way to enforce contracts."
National leaders, such as Vicente Fox of Mexico, Hosni Mubarak of Egypt, and Vladimir Putin of Russia, are increasingly turning to de Soto's Institute for Liberty & Democracy for evaluations of their economic arrangements.
Yet, de Soto only claims successes so far in two countries, Peru and El Salvador, and only partially. Perhaps tellingly, both Peru and El Salvador were wracked in the '80s by civil wars with Marxist guerillas, which may explain why leaders were more willing to shake up their traditional arrangements to benefit the poor.
In the late-1980s and early-1990s in Peru, de Soto recalls, "The Maoist Shining Path rebels bombed us various times, using over 400 kilos of dynamite. We've had people killed in our organizations."
Nonetheless, he remains highly optimistic. "If you give the message clearly, everybody understands it's a win-win situation." He contends that the poor support his plans, and, "The business sector is for it when we show them how much business they lose."
Still, entrenched interests drag their heels. "Usually the resistance comes from those who have a monopolistic position. In Peru, it's the notary publics, because there are only 40 of them and they have to check every document."
In a panel alongside de Soto, Nobel Prize-winning economist Robert Mundell of Columbia University asserted that the typical Latin American country's maze of regulatory bureaucracies was erected by wealthy whites to keep brown and black people from getting ahead.
The more optimistic de Soto was less inclined to dwell on deep-rooted problems of race, but he did confirm that racial rivalry played a role in the baffling complexity of property rights law in Peru.
"The tools that were used by the elite," commented de Soto, who looks to be nearly or all white, "were not separate bathrooms, but legal privileges. So, that's why most of our fight in Peru was to withdraw from the oligarchy all the legal tricks to discriminate and privilege. ...
"If the Peruvian whites decide they don't want to marry an Indian, you can't do much about that, but you can take away the legal tools, and that includes even things like how you can introduce a bill into the legislature. The devil is in the details."
De Soto predicted, "The countries most likely to pull out ahead are Mexico and Chile." He later noted that there is less racial hostility in those two countries. Chile simply has few full-blooded Indians left.
"The Mexicans have always been more tolerant," he observed. "You see a white Mexican with freckles saying, 'We Indians ... ' There is a sort of pride in that Indian background than isn't found down in Peru. The Mexicans are, culturally speaking, much more democratic and nationalistic than Peruvians."
De Soto was upbeat about the future of his reform plan. "You get one successful country and the others will follow."