New Internationalist

Hernando de Soto

May 2006

Hernando de Soto is a man in much demand. He and his idea of a ‘people’s capitalism’ have brought him consulting gigs all over the world – Romania, Egypt, El Salvador, Haiti and Mexico to name just a few. His Lima-based Institute for Liberty and Democracy has become a beacon for those committed to market-based solutions to tackle global poverty. His books, most notably The Mystery of Capital and The Other Path, have had praise heaped on them by everyone from ‘end of history’ guru Frances Fukuyama to the prestigious British-based Economist magazine. He has been quoted in speeches by Ronald Reagan, wined and dined at the élite Davos thinktank in Switzerland and been called by Bill Clinton ‘probably the world’s most important living economist’. He is in high demand as a speaker with handsome fees for each talk. His ideas are helping to shape the policies of the World Bank, major aid agencies and governments. The reason for this is simple enough: de Soto holds that the problem for the Global South and the poor in general is not too much capitalism, but too little.

He rejects cold-hearted corporate disdain for the ‘unproductive’ poor, arguing instead that they are not the problem but the answer. He rightly praises the initiative and hard work of the poor in setting up hundreds of thousands of semi-legal or illegal businesses and building millions of illegal squatter dwellings from Caracas to Calcutta. He is also rightly critical of the parasitic state practices that tie up poor people in bribe-inducing bureaucracy and create a constant insecurity for the most vulnerable. But here is where things start to come unglued. He is obsessed with the single magic-bullet solution of legalizing the titles of poor people to both their business initiatives and their squatter homes. Following the classical theories of John Locke he believes that viable contract and property law will liberate the ‘frozen capital’ of poor people, allowing them to invest confidently and gain access to the credit market. But the seductive simplicity of the market as usual breaks down in practice.

It is in his native Peru that de Soto’s reputation was made, working as an advisor to the authoritarian Fujimori Government and standing up to the fanatical Sendero Luminoso (who reportedly tried to assassinate him several times). And it is probably here that his ideas have been most widely put into practice. The results are mediocre at best – of the more than 200,000 Lima households given legal title, less than 24 per cent got any kind of financing and hardly any came from private banks. Shantytown housing in Peru, as many other places, is proving not to be viable as collateral for mortgages – poor building materials, precarious sites, unserviced communities. And while the dream of individual title may be appealing, squatter activists believe that collective security of tenure will give poor communities much more economic and, more importantly, political clout to demand services and improvements.

Then there are the more serious problems that occur when a more prosperous real-estate market does get established. Squatters are often not in a position to take advantage of spiralling real-estate prices. Those with capital simply snap up property as titles become available. In Phnom Penh a de Soto-inspired World Bank project to grant title to millions has kicked off a land grab by speculators, complete with slum fires and forced evictions uprooting 23,000 squatters. In Manila middle-class buyers rushed in to buy up land (at slightly above informal-sector rates) before titling took place. Spiralling land prices in the centre of cities frequently drive squatters to the remote outskirts of town, adding an expensive commute to work to their weekly budgets.

If you own a market stall in Nairobi or a small electrical shop in São Paulo you may well find that legalization of your business is not to your advantage. The balance is a delicate one. If you have to bribe officials and pay taxes and licence fees, in addition to payoffs to local gangs, where is the advantage? While governments need to stop harassing legitimate but illegal small businesses, the advantages of legalization depend on a variety of factors. So de Soto’s notion that ‘it’s the property law, stupid’ is partial at best.

By doing PR for the market de Soto legitimates a system whereby economic surplus is extracted from the South. Either through debt payments or a trade system based on unequal exchange, banks and corporations use the market to extract maximum benefit. Revenue-starved governments face difficult choices. Cutbacks in social spending hit the poor disproportionately. Despite his best intentions, by allowing the market to be the sole arbiter of what is fair and reasonable, de Soto provides an ideological prop to a global capitalism that actually creates poverty.

De Soto’s appeal is rooted partly in the simplicity of his approach and partly in the failure of other mono-solutions across the political spectrum to provide a sustainable livelihood for the world’s poor. Whether it’s state ownership, foreign investment, mega-projects or foreign aid, the ‘magic bullet’ just doesn’t seem to fit into the gun. For a Left desperate for solutions, de Soto’s emphasis on the economic empowerment of the poor has proved quite attractive. For the Right the fantasy of ‘everyone a capitalist’ just confirms their own prejudices and certainties.

De Soto is, by most accounts, a decent and enthusiastic man who genuinely cares about poverty. Still, like so many before him, he is seduced by the beauty of how the market is supposed to operate, and loses track of how it actually does. As one critic put it: ‘This is touchy-feely capitalism at heart. Handle with care.’

Hernando de Soto Fact File
Economic consultant to the rich and powerful
Market maverick. Theorist of people’s capitalism. Saviour of the poor.
Sense of humour
De Soto genuinely seems to have one. He told the Indonesian Cabinet during a presentation in Jakarta on legalizing informal property rights about his stroll through the rice fields in Bali. ‘Every time I crossed from one farm to another a different dog barked. The dogs may have been ignorant of the formal law, but they were positive about the assets their masters controlled.’ Maybe, but what if someone shoots the dog?
Low cunning
Because of his run-ins with the crazies in Peru’s Sendero Luminoso guerrilla group, de Soto is now being advertised as having the economic cure for terrorism. Powerful marketing in the era of the War on Terror.
_Shadow Cities_, Robert Neuwirth, Routledge, 2005. Jeremy Clift, ‘Hearing the Dogs Bark,’ _Finance and Development_, Dec 2003. Madeleine Bunting, ‘Fine Words, Flawed Ideas’ _The Guardian_, 11 Sep 2000. John Garvois, ‘The De Soto Delusion, 29 Jan 2005, ,

This column was published in the May 2006 issue of New Internationalist. To read more, buy this issue or subscribe.

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This article was originally published in issue 389

New Internationalist Magazine issue 389
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