Hernando De Soto

Interviewed by Dario Fernandez-Morera

In seeking to make life easier for millions of Peruvians, Hernando De Soto has made his own life difficult. De Soto, the best-selling author of The Other Path (1989) and founder/director of Peru's Institute for Liberty and Democracy, is a champion of market economics and property rights in a part of the world that historically has shown little interest in such ideas. His efforts have led not only to political attacks from enfranchised power elites but to physical attacks from leftist groups, such as the Maoist Shining Path, who have placed him on the top of their hit list. His description of market mechanisms and the way they empower people has ramifications beyond the borders of Peru: Americans, De Soto wrote in The New York Times, have taken their economic and political systems for "granted, losing their ability to recognize and teach the importance of these institutions." When I went to interview De Soto last July, the armed soldiers at the institute entrance ordered my taxi driver to park half-way down the block. A car bomb had recently killed several people at the site, and the soldiers were not taking any chances. After getting out of the taxi, I walked along the concrete wall surrounding the property over to the guard booth controlling access to the courtyard. I showed my passport, and the officer in charge made a phone call to the house inside while another soldier asked me to open my briefcase. When the officer learned that I was expected, he became friendlier. As I walked across the courtyard, I could see the debris that still cluttered the area: a memento of the Shining Path's bomb.

Reason: Your institute once interviewed a sample of 80 landowners in Peruvian agrarian communities and found that 70 of them did not regard themselves as belonging to the propertied class. How do you explain this curious self-image?

De Soto: Let me place that survey in context. When The Other Path was published, it became clear that, in Peru, there were two economies, one formal and one informal. The informal sector constituted between 50 and 60 percent of the total.

We examined the situation in the various government ministries and discovered a pattern of "invasion" of lands in Peru [owned by absentee landlords or by the government]. Who were these invaders? We found that they were farmers--informal agricultural entrepreneurs. From among the leaders of the invaders we selected 80. They were the most prosperous and therefore those with the most authority among these informals. Talking to these informal leaders, we asked them the question, "Do you consider yourself a member of the private sector?" "No," most of them answered. "Do you then consider yourself a member of the public sector?" we asked. "No," they said, "the public sector is the government, the state." Then we asked, "Who do you think belongs to the private sector?" "Los de arriba," those above, they said.

The contradictions were remarkable. For example, a prosperous informal businessman, president of the Peruvian Drivers' Federation, representing 300,000 drivers, was also member of the Central de Tra- bajadores del Peru [Central Union of Peruvian Workers], which is controlled by leftwingers. One day I asked him, "Look, you own a bus, but you talk as if you were a proletarian. You know that a union supposedly defends the salary of the proletarian against an owner, and tries to reduce the so-called surplus value, but you live off your own business. I'm sorry, but you are a capitalist!"He answered: "No, I'm not. Haven't you heard of autoempresa ["self-entrepreneurship"]? I am a worker in autoempresa." "Yes," I said, " I know about the autoempresa. In fact, I have a friend who has an autopizzeria ["self-owned pizza shop"], another who has an autotienda [self-owned store], and so on. I'm sorry, but there's no difference between you and them, except for the fact that you are marginalized by regulations, whereas they are afficially licensed by the government."

This perception originates in the fact that in Peru there indeed exists a private sector, but it exists largely on the basis of competing for government favors, contracts, and privileges, and its economic approach is to try to exclude or marginalize competitors--not by outproducing them in quantity, quality, or prices, but through political means, from legislation to outright use of the many resources of legal coercion at the disposal of a modern state. This is why I have characterized the official Peruvian economy not as a free-market economy but as a mercantilist economy. The informal economy is much closer than the formal to what we call a market economy. Not only does it not function on the basis of political favors, but it often functions in spite of a government opposition incited by participants in the formal economy.

The organizations of Peruvian informals are much larger than such "proletarian" organizations as the Peruvian unions. Until seven or eight years ago, however, they had a similar vocabulary. For example, the itinerant informal entrepreneurs called themselves a sindicalo de ambulantes [syndicate of traveling salesmen] and had a red leadership. The transportation entrepreneurs called themselves frentes de defensa del trans- porte [fronts of defense of transportation]. The rhetoric which served as the discursive basis of this vast informal movement of businesspeople was actually left wing!

Reason: In the United States, local governments are often against informal businesses as well. I recall the case of a well-known newsstand in Chicago, which for many years had sold newspapers and magazines on one of the busiest avenues in the city. In 1992, the politically well-connected bigger stores in the area used the local government to eliminate this informal businessman under the pretext of "improving the appearance of Chicago's downtown."

De Soto: In Peru things have been worse, because the informal sector is much bigger and government regulations are more retrograde. When The Other Path was published, Lima's mayor was a man who considered himself a Marxist-Leninist (today we are very good friends). In order to "help" the informal salesmen, he and his council passed a set of regulations. After a bit of research, we showed him that at least one third of his "progressive" piece of legislation was in fact made up of ideas indistinguishable from ideas developed by the Peruvian legal system during the time of the Spanish viceroys--from 1617 to 1670. We told him: "You know, these ideas of yours aren't very modern for a communist."

In fact, what this man wanted to do would hurt the informals he said he wanted to help: With the regulations and the taxes he was imposing on them, he would cut into the growing profits which had allowed them to open more than 331 new markets in Lima alone.

Little by little, we've been gaining ground. Of 112 informal organizations that we tried to win over, 111 have by now aligned themselves with us to fight in favor of what we call a market economy. We have been less successful with the formal organizations. We tried to unite the formal and informal entrepreneurs in what we called the Confederacion de Empresarios del Peru [Confederation of Peruvian Entrepreneurs]. We wrote down the free-market principles and interests shared by all entrepreneurs. We pointed out that the problem which both formals and informals had to face was not a "class struggle" but rather how to handle the intrusion of the government in the activities of all businessmen in Peru. When we called a meeting, the informal organizations attended, but no formals showed up. Then we asked the formals: "Are you going to open your chambers of commerce to the informals?" They rejected the idea. These two groups continue to see themselves as making up two different social classes. One way of looking at this situation is to see the informals as the Boston Tea Party of Peru and the formals as the English entrepreneurs of King George III.

But we have at least opened the way for the eventual creation in Peru of a large, comprehensive entrepreneurial class like that of the United States, where a "small businessman" wants an America which is "good for business" and a "big businessman" wants the same thing. Of course there are differences between the two, but not an opposition, which is what has been happening traditionally in Peru between the informal and formal sectors.

Reason: What would you say is the difference between the institute's agenda of granting official property rights to their land to the informals and the old left-wing idea of "agrarian reform"?

De Soto: Agrarian reform is a process by means of which government assigns lands to the peasants. But when we talk about titling and registering those who have already occupied the lands, the "squatters," we are talking about a different phenomenon. The squatters have already created their own revolution. They do not need anybody, neither a party nor a government agency, to carry out a revolution for them. I am going to show you the real magnitude of this revolution so that you can see that this is not the sort of resolution that can be negotiated: 90 percent of the agrarian sector in Peru is informal.

Reason: Ninety percent?

De Soto: Yes. If we were talking about 5 percent, 10 percent, then you and I might leisurely converse about carrying out pequena reforma [a little agrarian reform], about giving to the informals land parcels in the jungle, or in the desert, etc. But when we're talking about 90 percent of the Peruvian land that produces agricultural goods which the population buys, it s too late. You can compare this situation with the Gold Rush in California, or with the "pre-emption laws," which were the "squatter laws" in the United States in the 19th century. The country has already been "taken."

In our case, the informals who occupy the lands have reached working agreements amongst themselves. If you go and try to expropriate one of these people and send in troops to do so, your soldiers will come back in boxes. There is no way to touch these entrepreneurs. They get together and defend their private property with guns. All this indicates that there already is among them a de-facto norm of private property.

Reason: I have read that they have also killed Shining Path guerrillas. Does holding private property, even on an informal level, motivate the owners to oppose the anti-private-property ideology of groups like Shining Path or the Cuban-inspired and backed Tupac Amaru?

De Soto: Of course. But there is a reason that makes their political allegiance less easily predictable. The reason is that some communists, at least on this subject, have thought the matter through very well. Shining Path, in some cases, though not too efficiently, has begun to do what Ho Chi Minh did in Vietnam, namely to provide a "service" to the informal owners by giving them title to their property.

Reason: That is what your institute wants to do.

De Soto: Yes. Mao learned better than Chiang Kaishek the lessons of the "home study," and Ho was a follower of Mao. The Americans also learned: When they occupied Japan, Taiwan, and South Korea they titled and registered the poor landowners. The American military government even created organizations like the Joint Commission on Rural Reconstruction in Taiwan. The Americans contacted the informal sector directly. They didn't ask the official registrar services who owned what but instead asked the "land councils," which were the informal entrepreneurial associations. The Americans were right in supporting the informal property owners. Private property constitutes a formidable bastion against socialism.

Unfortunately, the Americans forgot all about that in Vietnam. Instead, they proceeded to implement "agrarian reform." They granted authority to the South Vietnamese government to parcel out the land according to a system of central planning and clarification of property ownership. Ho Chi Minh did rather what we are trying to do: to title the existing system.

If a government does not give to everyone the impression that it is really trying to improve things, it opens the possibility for the left to protest in the name of all the discontented people. One main reason why the informal sector has not become formal is that from Indonesia to Brazil, 90 percent of the informal lands are not titled and registered. This is a generalized phenomenon in the so-called Third World. And it has many consequences.

One is that the price of land drops because it is not legally registered as private property. In Peru, when we title these lands, the market value doubles the same day. After 10 years, it goes up nine times. The principal reason is that it is easier to trade the land once the property rights are clear and established.

Another consequence is credit worthiness. Everyone talks about creating credit systems for the less privileged. In the United States, up to 70 percent of starting businesses need credit, and they get it on the basis of some kind of real-property collateral. If you have a situation in which 90 percent of Peruvians in a particular sector of the economy do not have title to their property, they cannot get credit. Without clearly defined property rights, you can't even use the police to correct a problem such as coca production because you do not know who owns the land where the coca grows. Not having property rights means not having access to the property in all sorts of ways.

The question is: How is it that so many governments, from Suharto's in Indonesia to Fujimori's in Peru, have wanted to title these people and have not been able to do so effectively? One reason is that none of the state systems in Asia or Latin America can gather proof of informal titles. In Peru, the informals have means of proving property ownership to each other which are not the same means developed by the Spanish legal system. The informals have their own papers, their own forms of agreements, and their own systems of registration, all of which are very clearly stated in the maps which they use for their own informal business transactions.

If you take a walk through the countryside, from Indonesia to Peru, and you walk by field after field--in each field a different dog is going to bark at you. Even dogs know what private property is all about. The only one who does not know it is the government. The issue is that there exists a "common law" and an "informal law" which the Latin American formal legal system does not know how to recognize.

We have been working for eight years and have created a system that recognizes it. And we have been making it work in Peru. And we are about to finish titling 120,000 informal properties in Peru. We are now working on a report of our efforts: "Transforming Poor People's Land into Wealth," or "The Only System for the Titling and Registration of Informal Property." We are already moving from the theory of private ownership to how to create It.

Reason: Some intellectual circles in the United States believe that Shining Path has much popular support in spite of its thousands of murders and sabotages of the Peruvian economy.

De Soto: Undoubtedly some Peruvians, many of them university students and faculty, sympathize with Shining Path. But it is evident from the way Peruvians vote in elections in which Shining Path has issued precise in- structions not to vote, that the vast majority of Peruvians do not. Some people give tangential support to Shining Path, not with the objective of having Shining Path eventually govern, but of putting pressure on the government to change its attitude toward them. No one estimates that Shining Path has troops in excess of 5,000 in a country of 23 million. There are far stronger guerrilla movements in other parts of the world. When ex-professor Abimail Guzman [captured leader of Shining Path] spoke on television from his jail (he was allowed to speak for 15 to 20 minutes, uninterrupted, to both the Peruvian and the world population), his convoluted speech might have been understood by a few specialists on China politics, but aside from them, this man had nothing to communicate.

Reason: How does the institute approach the ecological problems in large cities like Lima, where non-free-market environmentalists blame much of the decay in the quality of life on the abundance of informal entrepreneurs and the lack of government regulation of their activities? De Soto: I am going to give you an answer related more to the countryside than to the city, simply because the argument comes out more clearly there. But the principles are the same and are applicable to the city problems. The answer is to establish property rights which are formalized and, along with them, establish both incentives and responsibilities on the part of the property owner.

One of the great worries of anyone concerned about the environment is that at the very sources of the Amazon one finds an enormous amount of pollution due to the dumping of thousands of tons of sulfuric acid, kero- sene, and other such chemicals. Well, these chemicals are there simply because that's where peasants manufacture coca paste.

The major reason they make coca paste is that these entrepreneurs have no security with respect to their property, because it is informal property and therefore not "legal." They have no incentive to plant, for ex- ample, oil palms, which in five years will give them an economic benefit six times greater than planting coca. To produce palm oil, you have to be able to wait five years, while coca grows like weeds, without any need for care and time. And if you don't have clear property rights, you can't get the credit necessary to grow crops that require more investment capital than coca. Finally, if you have a coca field, and the police go after you, you know it is better to have your coca in small lots.

Reason: So that when the police arrive and you flee, your losses are relatively small.

De Soto: Exactly. But the problem is that if what you own as an informal entrepreneur is only a couple of hectares, you can't start growing, say, commercial cocoa, because the Hershey company is not going to bother buying the amount of cocoa that you can produce there. The end result of all this is that the informals have all sorts of negative externalities because they do not have the legal infrastructure of a market economy that would allow them to solve the difficulties associated with production. From the moment you give these people property rights which are well-protected and transferable, you not only give them incentives to increase production, you also make them accountable and responsible for what they do produce. Look, you turn on your TV and see a program like Miami Vice, where these two good-looking gentlemen go in their beautiful cars after drug dealers. They search for the "Colombians" at 353 Sewer Street, but find that the drug dealers are gone, and now have moved to 301 Huntington Drive, and so the heroes go again after them--all you hear are addresses. But when you see the police in the Alto Ballague in Peru, you see them in a helicopter, floating above the tree tops. There are no addresses. It has been said that there is no workable police force without addresses. Well, there is no workable market economy without addresses, either. And for that you need property rights. The first characteristic of an outlaw is...

Reason: That he does not have an address.

De Soto: Exactly. Until you have universal, well-protected, clear, and transferable private property rights, you cannot have a market economy in Peru, in the ghetto, or anywhere else. And you are going to have all the problems those places have.

Dario Fernandez-Morera is an associate professor of comparative literature and Hispanic studies at Northwestern University.