30 July 2010
John Blundell in The Wall Street Journal Europe
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 employee.
John Blundell is director-general of the Institute of Economic Affairs in London, England. He served as a judge for the Milton Friedman Prize.
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