Hernando de Soto — Property Rights & Rule of Law

Economist, Peru

What 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.

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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. 

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