Hernando de Soto: "The problem is not economic, but legal"

ICA. One of the most awaited sessions at CADE 2003 was, without doubt, the president of the Institute for Liberty and Democracy, Hernando de Soto, concerning market economics.

The economist affirmed that this system, which has been applied with success in many western nations, can not take hold in Latin America despite the fact that the majority of countries in the region fulfill all of the measures required by the International Monetary Fund (IMF).

De Soto said that to establish a market economy in Peru, it is not necessary to have natural resources, innovation, nor education, although the latter is important. “What we need is an efficient reform of the State that would include the informal business sector, who unlike the big investors do not have the support they need. You have to remember that 80% of Peruvians do not have access to the instruments of a market economy and because of that do not support it, nor are they even interested in preserving it, he said.

Nevertheless, the economist pointed out that the main problem for Peru is not economic, but legal, and that for this reason the creation of a legal structure that will permit the development of a market economy is absolutely necessary. A president who lacks leadership can not carry out a reform of the State. He must lead, be committed, and be convinced of the reforms, to create entrepreneurial structures adequate to the reality of the country, to establish law so that all Peruvians can operate on a larger scale, and establish property titles in order to create capital.

With respect to the statements by the prime minister Beatriz Merino, who said a massive layoff of workers was not necessary in order to reform the State, De Soto said that Merino ought to explain how to achieve it and that it would be interesting to know how they planned to implement the reforms and to what purpose.

The economist was against taxing banking transactions, as that would increase costs and increase the informal economy

DeSoto is far too intelligent to want that.

Exactly. DeSoto is doing great work through his institute. The following book is a MUST READ to understand global poverty, and the setbacks formerly communist and other liberalizing/developing countries have encountered on the path to prosperity. It is an absolute revelation. Not only insightful, but also based in extensive, systematic, on-the-ground research. (Excerpts from both the editorial and reader reviews at Amazon):

The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else

It's become clear by now the fall of the Berlin Wall and the collapse of communism in most places around the globe hasn't ushered in an unequivocal flowering of capitalism in the developing and postcommunist world. Western thinkers have blamed this on everything from these countries' lack of sellable assets to their inherently non-entrepreneurial "mindset." In this book, the renowned Peruvian economist and adviser to presidents and prime ministers Hernando de Soto proposes and argues another reason: it's not that poor, postcommunist countries don't have the assets to make capitalism flourish. As de Soto points out by way of example, in Egypt, the wealth the poor have accumulated is worth 55 times as much as the sum of all direct foreign investment ever recorded there, including that spent on building the Suez Canal and the Aswan Dam.
No, the real problem is that such countries have yet to establish and normalize the invisible network of laws that turns assets from "dead" into "liquid" capital. In the West, standardized laws allow us to mortgage a house to raise money for a new venture, permit the worth of a company to be broken up into so many publicly tradable stocks, and make it possible to govern and appraise property with agreed-upon rules that hold across neighborhoods, towns, or regions. This invisible infrastructure of "asset management"--so taken for granted in the West, even though it has only fully existed in the United States for the past 100 years--is the missing ingredient to success with capitalism, insists de Soto. But even though that link is primarily a legal one, he argues that the process of making it a normalized component of a society is more a political--or attitude-changing--challenge than anything else.
With a fleet of researchers, de Soto has sought out detailed evidence from struggling economies around the world to back up his claims. The result is a fascinating and solidly supported look at the one component that's holding much of the world back from developing healthy free markets.
[...snip...] In strong opposition to the popular view that success is determined by cultural differences, de Soto finds that it actually has everything to do with the legal structure of property and property rights. Every developed nation in the world at one time went through the transformation from predominantly informal, extralegal ownership to a formal, unified legal property system. In the West we've forgotten that creating this system is what also allowed people everywhere to leverage property into wealth. This persuasive book revolutionizes our understanding of capital and points the way to a major transformation of the world economy.
[...snip...] De Soto thoroughly documents his arguments estimating that "the total value of real estate held but not legally owned by the poor of the Third World and former communist nations is at least $9.3 trillion." $9.3 million is a staggering number -- especially in the context that it is forty-six times all the World Bank loans in the past 3 decades.
De Soto follows the processes and legal barriers to gaining title on property: to gain property rights and construction permits in Egypt can take up to 14 years and that it can take up to 4112 days to gain a five year lease in Haiti! With the amount of time and money required, people have skipped the process of legalizing their property resulting in their lack of liquidity.
[...snip...] So often we hear the solution to poverty and inequality in the developing world can be solved by fancy trade agreements, or glitzy technical solutions such as providing high speed internet connections. Then Hernando De Soto comes along with the most unsexy solution imaginable: reform the system of property rights.
[...] De Soto gains a lot of credibility because he clearly has gotten his hands dirty in the very countries and issues he writes about.
To summarize his findings, in the developing world, property and business ownership is difficult for the middle and lower classes to achieve, and they live outside the "bell jar" of the privileged in the developing world, who do not face these difficulties. Failure to achieve legal property rights and ownership, these classes are greatly restricted in acquiring capital to improve their properties or grow their business.
This is not to say the poor and middle class are lawless in these countries. On the contrary, De Soto demonstrates that informal and customary systems of property rights exist outside the legal framework of the country. In fact, such conditions existed in the United States and Europe, and over time, laws in these countries were adapted to reflect and integrate these extralegal agreements. De Soto argues that this must also take place in the developing world for capitalism to truly thrive.

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