De Soto: A Hero Of Third World Capitalism

R. A. Hettinga rah at
Thu May 6 05:31:21 PDT 2004


The Wall Street Journal

      May 6, 2004


De Soto: A Hero
 Of Third World

May 6, 2004

Hernando de Soto has been the target of several murder attempts -- an
accolade few other economists can claim. The Peruvian's would-be murderers
range from the drug barons who depend on lawlessness to prosper, to the
deranged Marxist terrorists of "The Shining Path" gangs and, it seems, to
several agencies of the Fujimori regime in Lima who did not like the veil
on their corruptions being lifted. But Mr. de Soto has remained faithful to
his mission -- to evangelize for the capitalist solution to so-called Third
World misery: give them property, markets and laws.

Here in the so-called First World we enjoy two great benefits from which
people in the Third World are locked out -- private property rights and the
rule of law. These make our growth, our markets and our society possible.

Here we have defined property. I do not mean just real estate. Our lives
are a pulsating penumbra of contractual relationships. At its most obvious
we own a vehicle. We own, that is to say have secure possession of, many
items of great value but often no more than paper claims upon third
parties. . . . what are all shares and bonds but such abstractions
identified with symbols on pages? Our property rights may get dented by
burglars but almost never are they fully expropriated. If we find ourselves
in disputes with others we resort to courts. In other words we live by what
F.A. Hayek called "Rules of Just Conduct."

So settled are these assumptions that it is a jolt to realize that in the
most impoverished three quarters of mankind, people do not live in a
psychological or material landscape where our familiar institutions work.
Poverty is not the result of lack of assets. It is the inability of people
to possess -- or trade -- the assets they do have.

That's why Mr. de Soto's work is so important. And why he will be awarded
the biennial $500,000 Milton Friedman Prize tonight by Washington's
prestigious Cato Institute.

Hernando de Soto is awarded his laurels for his intellectual achievement.
His work has been explained in diverse articles and lectures and distilled
into two fine books "The Other Path" (1989) and "The Mystery of Capital"
(2000). Both are magisterial. Both are utterly subversive of the stale
assumptions under which the Third World is most often discussed.

But it would be wrong not to refer to Mr. de Soto's moral and physical
courage. Having made a small fortune in business in Europe he could have
retired at 38 and lived well in his native Peru. He says that returning to
his homeland opened his imagination. Why were his compatriots so poor while
the Europeans were so prosperous?

One happy discovery Mr. de Soto has made is that the poor are often rather
more wealthy than is seen in official statistics. If you live in Ecuador or
Uganda or Vietnam you may not feature in national statistics. These are
formal frauds concocted by the bureaucracies of the Third World State often
to demonstrate they need yet more "aid." An Ecuadorian's straw hats, a
Ugandan's sweet potatoes or a Vietnamese's shrimp harvests may not figure
in any official inventory, yet they are the product of conscientious work
supplying their local markets or, as we might say, "creating value."

Every Third World city has its shanty towns. To the naive donor nations
these are proof of poverty. Yet these places, bereft of services we regard
as normal, are clearly a step up from the deeper poverty of their rural
hinterlands. These shanty towns, it turns out, have subtle property rights
and adjudications but of course no recourse to normal contract law.
Brazilian companies will not run electricity or water or gas to such
sprawls of population because the authorities will not permit them.

Mr. de Soto's analysis is subtle. Often you cannot see the Third World's
intangible webs of licenses, permits, consents, tariffs, levies and
extortions. He offers no excuses to the World Bank and all the other well
lubricated official aid agencies. He says in every case they connive at the
barriers. They make matters worse and often preserve the worst of the
agencies of these failing states.

The people of the immiserated nations are just like the readers of The Wall
Street Journal. They are as agile. They are as dexterous. They are as
intelligent. They work the long hours. Yet their daily strivings seem to
produce little. This is not because they are obtuse or stupid or
misdirected. It is because they do not have the assurance and clarification
of who owns what.

Place a Harvard MBA in a favela next to Sao Paulo in Brazil and he would be
lost. He would be lost because he could get no credit as no property rights
are permitted by the State. Try being a financial wizard without any access
to finance. Try selling shoes or furniture or beans. So, the people of the
Third World do not need injections of "aid" or even well-meaning Peace
Corps volunteers. They need property rights.

I now see the entire Third World dilemma in a different light after
encountering Hernando de Soto. I think he has changed the Peruvian
perception of itself too. The enemy of the poor is really the tiny elite of
these nations. They live a life of relative luxury because they have access
to the sort of property rights we all enjoy. Try buying even a few dollars
worth of IBM or Wal-Mart or BP if you live in a favela. No stockbroker will
want to deal with you. No banker will open an account where no postman can
deliver your mail. The bulk of the population is simply kept out of the
extended order of the world's trading system. Try being a farmer if you
have no tenancy let alone any freehold.

So, my congratulations to Hernando de Soto. Here is capitalism as a noble
ideal that will lift countless millions, rather than the parody of
corporate greed we see from Enron and related betrayals of the law-abiding,
trade enhancing ideal of the company. A market stall trader on a street
corner in La Paz is the blood brother of a Carrefour or Marks & Spencer

John Blundell is director-general of the Institute of Economic Affairs in
London, England. He served as a judge for the Milton Friedman Prize.

R. A. Hettinga <mailto: rah at>
The Internet Bearer Underwriting Corporation <>
44 Farquhar Street, Boston, MA 02131 USA
"... however it may deserve respect for its usefulness and antiquity,
[predicting the end of the world] has not been found agreeable to
experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'

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