Hernando de Soto – Economist for the Poor

Hernando De Soto, the president of the Institute for Liberty and Democracy in Lima, Peru, is most widely known for his book The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else and for his leading role in the PBS documentary series, The Power of the Poor. De Soto first became interested in the sources of economic development after his family was exiled to Europe in 1948. Growing up in Switzerland but making long visits to his homeland, he began to wonder why Peru was poor and Switzerland prosperous. The intelligence, talent and education levels of his friends in Peru were on par with those of his friends in Switzerland, so he wondered, what made the difference?

When De Soto moved back to Peru two decades later, his effort to start a business gave him the beginnings of an answer. In Switzerland it was simple to start a business. But in Peru the red tape and corruption that stood in his way was mind boggling. “If it’s this tough for a well-connected person like me,” he thought, “how much harder is it for the common man?”

Hernando de Soto—Why Are Poor Countries Poor?

To find out, De Soto assigned four students the task of jumping through the legal hoops to start a small sewing business. He says that, armed with an experienced lawyer, it took the students 289 eight-hour days to traverse the bureaucratic maze. For De Soto, the implications were obvious: poor people in Peru would never make it through all of that to launch a small business. Instead, they would enter the informal sector, where legitimate goods are traded (clothing, food, etc.) but outside the formal legal system.

As De Soto investigated further, he came to see that the problem was common to most developing countries and was a major part of why the poor remained trapped in poverty. In the informal sector, an aspiring entrepreneur has limited access to bank loans for growing a business or to the protection of the law, much less access to global markets. Subsistence farmers with no formal title to their land, for instance, can’t use the land for collateral to buy equipment that would enhance their productivity; can’t sell their property and start a business that better suits their talents; and can’t expect justice from a court of law if somebody stronger takes their property from them. Lacking secure property rights, they dare not pursue higher yield, long-term agricultural ventures, since they have little assurance they will still possess the land in a few years.

De Soto returns to the point again and again: Because property rights are insecure and informal in much of the developing world, business remains under-capitalized, hobbled by inefficiencies and locked out of the global market.

Hernando de Soto—What Poor Countries Need and Don’t Need

For De Soto, the answer isn’t more foreign aid. “Why is it that most western nations are wealthy while so many others are destitute? And why, despite trillions of dollars in foreign assistance, is so much poverty still with us?” De Soto insists that what the poor need is rule of law, title to their property, and secure property rights. This, rather than handouts, he argues, is what will unleash the wealth-creating energies of the poor.

Hernando de Soto—From Informal Law to Formal Property Rights

In The Mystery of Capital, De Soto insists that even the dogs have something to teach the governments of the developing world. He illustrates with a story, from a time when he was strolling through an agricultural region of Indonesia where the farmers lacked formal title to their farms. “I had no idea where the property boundaries were,” he writes. “But the dogs knew. Every time I crossed from one farm to another, a different dog barked. Those Indonesian dogs may have been ignorant of the formal law, but they were positive about which assets their masters controlled.”

De Soto’s point is this: The governments of developing countries should craft property law from the bottom up, seeking to understand and formalize the rich network of informal arrangements and tacit understandings of local communities rather than spinning laws in distant capitols devoid of local knowledge. 

• Private Property Rights Breaking the Back of Poverty and Privilege

  When you look at 19th century America or 18th and 16th century Europe, all of a sudden it’ll become clearer that … the thing that broke the back of poverty and privilege in developed countries in the past was when property rights came around and destroyed feudal title.

• Property Rights vs. Sovereignty

  The Spaniards, in many cases, didn’t give people property rights; they gave them sovereignty: ‘You’re such-and-such a tribe; you get this.’ In the States you did the same thing. You gave this to the Sioux, you gave this to the Navajos. You created Indian Reservations. Instead of their property rights, you gave them sovereignty and they lost all of it…. A property right as opposed to sovereignty means that it doesn’t have a flag. It belongs to smaller groups of people, and it’s functional. It can be sold, it can be bought. So say you’re not given a property right. Let’s look at all the indigenous people of the Americas who never got a property right so that they couldn’t lose it, they couldn’t drink it away, they couldn’t do a bad investment. Did they keep it? No, they’ve lost it much more than those who are getting property rights today. So, in each case, what we should do is to go to these indigenous people and say, “What do you want?” Sovereignty so that the Indian Chief decides what’s going to happen? Or property rights? I can tell you the answer right away. But they are not generally given those options. [More on Private Property Rights]

• Property Right Initiating the Rule of Law

  A property right initiates the rule of law … makes people interested in the rule of law. The first thing that they understand … is that everybody on this earth lives on a plot of land.

• Effect of Private Property Rights in Peru

  In the case of Peru you can clearly see that where titling takes place, education is better immediately because more people can get jobs, they feel secure about their homes; they are ready to make more investments in the homes. More kids go to school because many people keep their kids at home just simply to indicate that they have a stake in that place. And now all of a sudden the security is replaced with law. Law has also that function.

• Inclusive Capitalism

  Two-thirds of the world’s population - four billion people - are locked out of the capitalist system. It’s important to let them in.

  We’ve got to understand that either we quickly make capitalism friendly to the majority. Or they will always be on the outside looking in, and every day as they see the disparities of wealth they’ll get angrier and angrier.

• No Silver Bullets

  Creating the rule of law is of course, not a silver bullet. Development is very complex, like life itself. You’ve got education that’s involved, you’ve got health that’s necessary,
  you’ve got enforcement that is all part of it. But if you do not have an order that tells you who owns what, who is where, and who is accountable for what, none of the rest work.