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8527: NYTimes.com Article: The Poor Man's Capitalist: Hernando de Soto (fwd)

From: kdavis@marygrove.edu

The Poor Man's Capitalist: Hernando de Soto


It's Monday night in Haiti, and Hernando de Soto is talking about
the barking dogs again. They're everywhere. In his book. In his
slide show. In briefings at the palace for President Jean-Bertrand
Aristide. In sweaty sessions with threadbare villagers. They're
peppered through the 60-year-old Peruvian's cocktail chatter,
figure in his critique of the World Bank, sum up what he has done
to date in Lima. De Soto came across the dogs in Bali, he says, not
long after he had begun what may, in the fullness of time, prove to
be among the more consequential crusades in economic history. It
was a simple question: How do you know in Bali where one man's
property ends and another's begins? 

 Throughout the third world, the formal systems of property rights
taken for granted in advanced nations simply don't exist. Even
after decades, few people officially own the land or homes they
occupy; the notion of holding title to property is scarcely found
outside of rigged schemes serving a handful of elites. But, as de
Soto explains this evening in Haiti, his face full of fresh zeal
although he is telling the tale for what must be the thousandth
time, you know when you have crossed onto someone else's property
in Bali because -- a different dog barks. The dogs know. 

 It's de Soto's shorthand for the de facto property rights that
rule the world, his crystallizing metaphor for the common law at
work in the most lawless spots on the planet. And even if the story
is apocryphal -- and something in de Soto's relentless
proselytizing makes you suspect it might be -- that hardly matters.
Like Ronald Reagan's infamous welfare queens, de Soto's barking
dogs capture the heart of a profound social problem -- in this
case, the persistence of global poverty. 

 "Imagine a country," de Soto says, "where nobody can identify who
owns what, addresses cannot be verified and the rules that govern
property vary from neighborhood to neighborhood, or even from
street to street." This is what life is like, he says, for 80
percent of the people in the developing world and the former
Communist countries. Through "extralegal" businesses and home
building, de Soto reckons, the world's poor have accumulated assets
worth $9 trillion -- 20 times the direct foreign investment in the
third world since the Berlin Wall fell and more than 46 times as
much as the World Bank has lent in the last three decades. 

 But because these assets are not "paperized" in the formal
documents and legal structures common in the West, they can't
function productively as capital. People can't use their homes as
collateral for loans to expand businesses, for example. They can't
trade things beyond the small circle where they're known and
trusted. The poor live outside the law this way because living
within the law is impossible: corrupt legal systems and warped
rules force those at the bottom of the world economy to spend years
leaping absurd hurdles to do things by the book. It's this "legal
apartheid," de Soto insists -- not "cultural" factors like religion
or the legacy of colonialism -- that explains why some peoples
thrive and others don't. 

 What's more, de Soto adds impishly, the third world's pervasive
denial of property rights resembles nothing so much as the United
States in the 1800's. Remember the gold rush, when all those miners
squatted and staked their claims with shotguns? Over the ensuing
decades, Uncle Sam eventually ratified the ownership realities that
had been recognized by communities on the ground. De Soto wants to
do the same for the world's untitled masses, formalizing
real-estate and business ownership in ways that turn "dead" capital
into fuel for growth. This, in a nutshell, is de Soto's spiel. 

 While economists call him simplistic, third world leaders just
call him. Back when Mexico's president, Vicente Fox, was governor
of the state of Guanajuato, he sought out de Soto for advice.
President Hosni Mubarak's son Gamal is his reform partner in Egypt.
President Joseph Estrada of the Philippines brought de Soto in, and
his successor, Gloria Arroyo, wants de Soto to press on. All this
came before the publication last fall of de Soto's latest book,
"The Mystery of Capital." 

 The book carries endorsements from the conservative icons Margaret
Thatcher and Milton Friedman, as well as from Bill Bradley, last
year's unfashionably liberal presidential contender. The book has
sold 100,000 legal copies in Peru -- the equivalent, adjusted for
population, of a million in the United States. And with plans to
translate it into a dozen languages, the book has taken
Hernando-mania to a new level. 

 African presidents are faxing him. The president of the World
Bank, James Wolfensohn, is taking him along to a conference in
Russia. To the leaders of poor countries, de Soto's economic gospel
is one of the most hopeful things they have heard in years, not
least because it doesn't demand expensive solutions. "We show them
that they already have a market economy," de Soto says. "There are
such things as poor entrepreneurs." 

ut Haiti? This is poverty on a different scale. While there are few
reliable figures on Haiti, it is generally thought that 80 percent
of its roughly eight million citizens live on less than a dollar a
day and that 85 percent of them are illiterate. Most children
suffer from malnutrition, and life expectancy is around 50. In
Haiti, naked men urinate in the streets. People get water at a
community tap, storing what they can in unsanitized underground
tanks and boiling the water before drinking or cooking. Ragtag
vendors jam the streets in Port-au-Prince, hawking old tires,
clothes, shoes and motor oil. Gas stations and funeral homes are
the only decent structures in view. De Soto says that these woes
make Haiti the perfect proving ground for his ideas. 

 I didn't expect to agree, but after rocketing around
Port-au-Prince for three days, I became something of a convert.
Little wonder that his fans say that the bearded, balding Peruvian
is on to something big. Robert Litan, a Brookings Institution
economist who consulted with de Soto in the 80's, until he decided
it wasn't safe to hang out in Lima, hopes his friend never ascends
to Peru's presidency. (De Soto seriously considered running in this
year's election.) "It would really limit Hernando's global impact,"
he says. 

 In a simple church in the Carrefours section of Port-au-Prince,
Alan Etienne talks about his dream. Like hundreds of thousands of
Haitians, Etienne, 36, a soft-spoken man, came to Port-au-Prince
from the impoverished countryside. He set up on the street selling
auto supplies, built a small cement house on the state-owned land
where everyone was settling and moved in with his girlfriend and
their infant daughter. He saved enough to buy one of the rickety
pickup trucks that serve as buses (called tap-taps because riders
tap the side to signal their stops). Etienne has driven his tap-tap
11 hours a day for 10 years, but his dream is to open a small food
market. He would like to borrow money to start it, but his house is
worthless, he says, because it's on state land. He figures that it
would command $20,000 if it were officially his. He can't afford to
borrow from the loan sharks: they charge 25 percent a month. If you
have collateral, the bank rate is 25 percent a year. Etienne isn't
so much angry as resigned. 

 When de Soto and his Haitian partners explain their notion of
giving folks formal title, Etienne nods and smiles. So do his
neighbors. They get it at once. Of course, de Soto whispers to me,
even if Etienne were to gain legal title to his property and use it
to open a shop, he would still be on the wrong side of the law.
That's because he would need a license, and obtaining one is so
deliberately complex, it could take him years -- if he ever gets
one at all. This, too, has to be fixed, de Soto says. One mess at a

 De Soto ended up in Haiti at the behest of a reform-minded
business group, the Center for Free Enterprise and Democracy (or
CLED, the French acronym), which was the inspiration of Lionel
Delatour, a member of one of Haiti's leading intellectual families.
After United States troops restored Aristide to power in 1994 (he
had been ousted in a 1991 coup), Delatour began calling de Soto,
but the Peruvian had no time. Two years of badgering later, he
agreed to visit. 

 At a series of packed conferences, de Soto wowed every sector of
Haiti's elite. He chided them for being "M.R.E.'s" -- Morally
Repugnant Elites. They needed to become Morally Responsible
Entrepreneurs, he preached. While he encountered some resistance
from entrenched landowners, de Soto was pleasantly surprised that a
critical mass of Haiti's leaders seemed sincerely interested in his
approach. And he liked the challenge that Haiti offered, a
laboratory in which to prove to the skeptics once and for all that
"culture" isn't a barrier to growth. If a voodoo-practicing nation
descended from slaves could title its poor and grow, de Soto said,
any nation could. 

 When members of de Soto's SWAT team enter a country, they spend a
year preparing an exhaustive topology and valuation of informal
landholdings. They also recruit dozens of local slum leaders to
help catalog the byzantine rules that make doing business legally
impractical for the poor. When they're done, de Soto presents
officials with a picture of reality that can be eye-opening. 

 In Egypt, for example, de Soto likes to talk about a
public-housing project that was built some years back. When it was
erected, it was only three stories. Today, it has grown to eight --
five floors have been tacked on, all off the books, and God help
the residents if Cairo is struck by a serious earthquake. 

 In Haiti, de Soto first made the rounds with his trademark
one-page summary in 1998. Haiti's poor have $5.2 billion in dead
capital, he announced. That pool, he added, is four times greater
than the assets of Haiti's 123 largest private formal enterprises,
11 times greater than the deposits in Haitian banks and 158 times
the value of all direct foreign investment in the country up to
1995. "The poor are not the problem," de Soto concluded. "The poor
are the solution." Once those facts are on the table, de Soto
insists, things can never be the same. 

Hernando de Soto didn't start out planning to save the world. Born
in southern Peru, he left early, after his father, a diplomat, took
a post abroad, eventually ending up in Geneva. Returning to Peru
for college, he was deeply struck by the overwhelming poverty. The
gulf between Europe and his homeland was inexplicable, he thought,
when "the quality of the people was the same." 

 After returning to Switzerland for his master's degree, de Soto
went to work for the General Agreement on Tariffs and Trade. Soon
he was lured away to run an organization of copper-exporting
nations based in Paris. There he caught the eye of Swiss bank
executives, and at 30 he became the chief executive of an
engineering company controlled by the bank. His sales prowess won
contracts ranging from nuclear plants in Turkey to ports in Congo,
and by the age of 39 he had put together a comfortable nest egg.
Divorced and bored, he felt it was time to go home. 

 De Soto soon became obsessively curious about the black market
that seemed to comprise most of his countrymen's economic activity.
He walked Lima's streets counting hundreds of illegal stalls. He
drove out of town and saw thousands of squatters living in tents
made of straw matting. And no one seemed to be studying the
situation pragmatically. He got a small grant and brought in an
obscure American anthropologist who had written what de Soto
thought was the only perceptive thing he had been able to find on
Lima's squatters. "He taught me how to walk a shantytown," de Soto

 In 1983, de Soto decided to start an institute to study Peru's
"real" economy and push reforms to help the poor. The Institute for
Liberty and Democracy was controversial from the start because it
saw poverty through a different lens than the one prevalent among
Latin America's left. The Socialists told Peru's street vendors and
bus drivers that they were exploited proletarians. De Soto told
them they were small entrepreneurs victimized by legal
discrimination. The Socialists focused on factory workers. De Soto
said this was silly when barely 10 percent of the population earned
its keep in such settings. Before long, de Soto reached the
conclusion that the left was great on social justice but didn't
know a thing about economics. 

 By 1986, he had readied a book on these themes, provisionally
titled "The Other Path." It was a slap at the Shining Path, the
Marxist guerrilla group then terrorizing the country. As the
publication date approached, de Soto began to have second thoughts
about that title. If he went ahead with it, he thought, "they were
going to kill me." But friends (these are friends?) told him he
couldn't turn coward now. So instead of dropping the title, he got
a bulletproof car and learned how to use a gun. 

 The book became a sensation and made de Soto's name across Latin
America. As he had feared, it also made him a target -- the
institute's offices were bombed, and his car was machine-gunned. He
and his second wife put off having children for fear of leaving
them orphaned. 

 Real power came his way in 1990, when Alberto Fujimori won the
presidency of Peru on a platform of economic efficiency and
antiterrorism and made de Soto a top adviser. De Soto's
formalization program titled 1.6 million of the country's 2.3
million extralegal buildings and brought 280,000 illegal small
businesses in from the cold. 

 Unfortunately, the impact of these steps remains hard to gauge
because Fujimori's interest fizzled before the credit-promoting
phase could be enacted. These measures would have made it cheap and
easy for banks to extend credit -- using the new paper as
collateral -- and to enforce collection for nonpayment. Still, de
Soto did manage to move much of Peru from barking dogs to paper --
a serious, if incomplete, achievement. In a move that now seems
prescient, de Soto broke with Fujimori in 1992 over the president's
refusal to enact democratic reforms. De Soto found himself freer to
answer calls from abroad. 

hen President Aristide welcomed Delatour and de Soto into his
office at the presidential palace, a copy of "The Mystery of
Capital" was on his desk. De Soto's relationship with Aristide had
always been good, but Aristide was growing increasingly wary of
CLED. De Soto was worried that the president's misgivings would
poison the well for an economic plan that had taken years to

 The risk was that Aristide would want his bureaucrats to implement
the titling process themselves, rather than contract with private
groups organized by CLED. The private route, de Soto knew from
experience, would title Haitians far faster and more effectively.
But Aristide, a shrewd politician, knew that whoever went into the
neighborhoods to bestow these new rights would gain enormous power.

 De Soto and Delatour told the president that the first step was to
title poor squatters in places where there could be no conflicting
claims: the 40 percent of land owned by the state. Once Aristide
gave the go-ahead, they could recruit staff, prepare a huge
communications effort and begin titling in nine months. Private
land would be messier. They would need to create special
arbitration panels to resolve ownership disputes; Haiti's judiciary
wasn't up to it. Further reforms would then be needed to limit the
countless steps required to open a business legally. The effort
would take 5 to 10 years, they guessed. 

 Aristide said they would have to work to defuse potential
opposition. He had ideas on how to entice the notary publics to the
table. Corrupt officials who administered public lands would also
have to be co-opted. Aristide said he would probably vest
responsibility for the program with his ministers of finance and
commerce; both men were from the private sector, he reminded de
Soto and Delatour, and were friendly with CLED. 

 Afterward, the president confided that de Soto's "scientific"
approach to development fit well with the human dimension he
stressed in "Eyes of the Heart," his own recent book attacking
globalization. "I know the political will I have," he said. "We can
make it happen." 

 The United States ambassador, Brian Dean Curran, wasn't so sure.
"Let me ask a fundamental question," Curran said later that
morning, after de Soto briefed him. "It's not by chance that so
much is in the informal sector. The formal sector is the enemy. You
do it on the sly, you stay away from the authorities, work only
with your family -- that's how you get around in this country. How
do you bridge that cultural gap?" The short answer, de Soto said,
is that you work from the ground up. "We're going to write the
blurbs for him," de Soto said of Aristide. "We're going to write
ads for him. We're going to write jingles for him. But he's got to
go out and sell it." 

To reach the Delmas section of Port-Au-Prince, we took roads so
pitted that my tape recorder flew from my hand as we bounced along.
A thin, grayish stream ran down the side of the street carrying
effluent from people's washing. Improvised wires stole electricity
from the main line. Flies were everywhere. In an informal gathering
of 15 Haitians, a schoolteacher explained how he bought his home
nearby for $7,000. The seller didn't have any documents. 

 "How did you know you were buying the right house on the right
land?" de Soto asked. The teacher said he knew the area and had
sounded out the neighbors. Then, he said, he made up a sales
agreement of sorts and had it witnessed by a few respected people
on the block. In a court, of course, this document would have no
value. In Delmas it did. 

 I asked the group how they would react if the government said it
was starting a big new program to title their property. Would they
trust them to do it right? "They never finish what they start," one
man answered. "The people who work for the government are just out
for themselves." 

 At our hotel the last night, I asked de Soto if he expected to see
any country he has worked in turn around in his lifetime. If one
nation succeeded with his plan on each continent, he told me
earlier, it would set the continent on fire. This night there was
less bravado. "I'll probably see it by the end of my life," he
said, shrugging. "You don't know." One thing he felt sure of,
however. If something like his agenda didn't catch on, a backlash
against globalization was unavoidable. 

 "The social war is going to be terrible unless you do something,"
he said. "You can't wait 30 years, and it's not just Oliver Twist.
It's Oliver Twist with James Bond's weapons." I asked about critics
who say he's peddling an idee fixe that ignores the critical role
of culture in development. De Soto could barely contain himself.
"I'm not writing for Harvard students," he said. "I'm writing
basically for Aristide and Hosni Mubarak and Gloria Arroyo and Fox.
Political leaders know this isn't a one-shot idea. They know it
amounts to a revolution." 

 De Soto took his napkin and poked one corner up through his closed
fist, then pulled the whole thing through from that tiny corner.
"Like any person with political qualities," he said, "I know how to
put a whole program behind a very simple slogan." He is a former
C.E.O., he reminded me. There's a strategy here. 

 But what about culture? I asked again. The expatriate Chinese seem
to rise wherever they go. So do Jews. Doesn't that matter as much
as getting property law right? De Soto smiled. "It's a little bit
like saying, 'You can say whatever you want, but guys that are
taller than six feet have a better chance of playing on the
basketball team,"' he said. "This culture thing makes for good
reading. But what do you do with it? 

 "You see," de Soto said with his conspiratorial grin, warming to
the pitch again, "I'm a plumber." By that he means that he studies
the culture of the streets, to see how people's lives really work
and how he can actually change a country. And as he sees things,
it's just a matter of time. 

 De Soto said he recently read about a South Pacific island where
the natives now worship in latter-day "cargo cults," with religious
ceremonies built around documents like bills of lading and purchase
orders. They've figured out that after these papers get handled,
fabulous things start showing up in big ships. 

 De Soto loved it. 

 "They're close!" he said, laughing. "They
just need to get a little more secular." 

 Matthew Miller is a syndicated columnist and a senior fellow at
the Annenberg Public Policy Center of the University of