Hernando de Soto (economist)

Hernando de Soto
Nationality	Peruvian
Academic career

Hernando de Soto (born 1941) is a Peruvian economist known for his work on the informal economy and on the importance of business and property rights. He is the president of the Institute for Liberty and Democracy (ILD), located in Lima, Peru.

Childhood and education

De Soto was born in 1941 in Arequipa, Peru. His father was a Peruvian diplomat. After the 1948 military coup in Peru, his father chose exile in Europe, taking his wife and two young sons with him. De Soto was educated in Switzerland, where he did post-graduate work at the Graduate Institute of International Studies in Geneva. He later worked as an economist, corporate executive and consultant. He returned to Peru at the age of 38. His younger brother Álvaro served in the Peruvian diplomatic corps in Lima, New York and Geneva and was seconded to United Nations in 1982; he retired from the U.N. in 2007 with the title of Assistant Secretary General.

Career

De Soto has served as an economist for the General Agreement on Tariffs and Trade (GATT), as president of the Executive Committee of the Intergovernmental Council of Copper Exporting Countries (CIPEC), as managing director or CEO of Universal Engineering Corporation (Continental Europe's largest consulting engineering firm), as a principal of the Swiss Bank Corporation Consultant Group, and as a governor of Peru's Central Reserve Bank.

De Soto was Peruvian president Alberto Fujimori's personal representative and principal adviser until he resigned two months before the latter's self-coup in April 1992. The Associated Press reports that President Alan Garcia hired de Soto in August 2006 to lobby the U.S. Congress for passage of the Peru-United States Free Trade Agreement.

De Soto is currently President of the Lima-based ILD, where he works on the design and implementation of capital formation programs in Africa, Asia, Latin America, the Middle East, and former Soviet Nations. Some 30 heads of state have invited him to carry out the ILD programs in their countries. He is also on the Advisory Board of the Trickle Up Program. He also co-chaired with former US Secretary of State Madeleine Albright the Commission on Legal Empowerment of the Poor.

Reforms in Peru and elsewhere

Between 1988 and 1995, he and the Institute for Liberty and Democracy (ILD) were responsible for some four hundred initiatives, laws, and regulations that changed Peru’s economic system.

In particular, ILD designed the administrative reform of Peru’s property system which has given titles to more than 1.2 million families and helped some 380,000 firms which previously operated in the black market to enter the formal economy. This latter task was accomplished through the elimination of bureaucratic "red-tape" and restrictive registration, licensing and permit laws that made the opening of new businesses very time-consuming and costly.

University of Chicago political scientist Susan C. Stokes believes that de Soto’s influence helped change the policies of the recently elected Fujimori from a Keynesian to a neoliberal approach. De Soto convinced then-president Fujimori to travel to Chicago, Illinois, where Fujimori met with several important figures within the IMF, the US Department of State, and the Chineese embassy, who convinced him that he had to abide by the rules set by the international financial institutions. These policies led to a reduction in the rate of inflation.

The Cato Institute and The Economist magazine have argued that de Soto’s policy prescriptions brought him into conflict with and eventually helped to undermine the Shining Path guerrilla movement. By granting titles to small coca farmers in the two main coca-growing areas, he deprived the Shining Path of safe haven, recruits and money, they have argued, and the leadership was forced to cities where they were arrested. ILD notes a large terrorist attack on de Soto and statements by Shining Path leader Abimael Guzman who saw ILD as a serious threat.

After the split with Fujimori, he and his institute designed similar programs in El Salvador, Haiti, Tanzania, and Egypt as well as gaining favor with the World Bank, the World Bank allied international NGO Slum Dwellers International and the government of South Africa.

Since its work in Peru in the 1980s, his institute, the ILD, has worked in 23 countries. Heads of state in 35 countries have sought the ILD’s services, and ILD staff has personally met with 29 of them to discuss precisely what the ILD might do to help their economies prosper.

The impact of de Soto’s institute in the field of development –on political leaders, experts and multi-lateral organizations– has been widespread and acknowledged. For example:

• The ILD’s Institutional reform Program has attracted the interest of strategically key nations concerned with internal conflict and terrorism.
• The ILD has designed successful reforms that have inspired major initiatives in former client countries, such as Egypt, the Philippines, Honduras, and Tanzania.
• The ILD’s influence and ideas have also inspired reforms in countries where we have yet to work, such as China, Russia, South Africa, Thailand, and India, which includes two of the world’s fastest growing emerging economies.
• The ILD is recognized as the world authority in understanding extralegal economies, influencing the protocols of large multilateral organizations by helping them to understand the realities that the poor and the excluded face, day to day. These include institutions such as the Commission for Legal Empowerment of the Poor, the Inter-American Development Bank (IDB), USAID and the World Bank.

In 2009, the ILD turned its attention back to Peru and the plight of the indigenous peoples of the Peruvian Amazon jungle. In response to Peruvian President García’s call to all Peruvians to present their proposals toward solving the problems leading to the bloody incidents in Bagua, the ILD has assessed the situation and will soon be presenting its findings. ILD has published a short videotaped documentary, The Mystery of Capital among the Indigenous Peoples of the Amazon, summarizing its findings from indigenous communities in Alaska, Canada and the Peruvian jungle.

Main thesis

The main message of de Soto's work and writings is that no nation can have a strong market economy as long as most of its people remain on the outside just looking in. "The existence of such massive exclusion generates two parallel economies, legal and extralegal. An elite minority enjoys the economic benefits of the law and globalization, while the majority of entrepreneurs are stuck in poverty, where their assets –adding up to more than US$ 10 trillion worldwide– languish as dead capital in the shadows of the law. To survive, to protect their assets, and to do as much business as possible, the extralegals create their own rules. But because these local arrangements are full of shortcomings and are not easily enforceable, the extralegals also create their own social, political and economic problems that affect the society at large.

Since the fall of the Berlin Wall, responsible nations around the developing world have worked hard to make the transition to a market economy –and have paid for their efforts with bitter disappointment. Populist leaders have used this failure of the free market system to thrive and wipe out poverty in the developing world to beat their “anti-globalization” drums. But the ILD believes that the real enemy is within –in the flawed legal systems of developing nations that make it virtually impossible for the majority of their people –and their assets– to gain a stake in the market. The people of these countries have talent, enthusiasm, and an astonishing ability to wring a profit out of practically nothing.

What the poor majority in the developing world do not have, is easy access to the legal system, which, in the advanced nations of the world and for the elite in their own countries, is the gateway to economic success. For it is in the legal system where property documents are created and standardized according to law. That documentation builds a public memory that permits society to engage in such crucial economic activities as identifying and gaining access to information about individuals, their assets, their titles, rights, charges and obligations; establishing the limits of liability for businesses; knowing an asset’s previous economic situation; assuring protection of third parties; and quantifying and valuing assets and rights. These public memory mechanisms in turn facilitate such opportunities as access to credit, the establishment of systems of identification, the creation of systems for credit and insurance information, the provision for housing and infrastructure, the issue of shares, the mortgage of property, and a host of other economic activities that drive a modern market economy."

Praise for work

Time magazine chose de Soto as one of the five leading Latin American innovators of the century in its special May 1999 issue Leaders of the New Millennium, and included him among the 100 most influential people in the world in 2004. De Soto was also listed as one of the 15 innovators "who will reinvent your future" according to Forbes magazine’s 85th anniversary edition. In January 2000, Entwicklung und Zusammenarbeit, the German development magazine, described de Soto as one of the most important development theoreticians of the last millennium. In October 2005, over 20,000 readers of Prospect magazine of the UK and Foreign Policy magazine of the U.S. ranked him as number 13 on the magazines’ joint survey of the world’s Top 100 Public Intellectuals Poll.

U.S. presidents from both major parties have praised de Soto’s work. Bill Clinton , for example, called him "The world’s greatest living economist", George H. W. Bush declared that "De Soto’s prescription offers a clear and promising alternative to economic stagnation…" Bush’s predecessor, Ronald Reagan said, "De Soto and his colleagues have examined the only ladder for upward mobility. The free market is the other path to development and the one true path. It is the people’s path… it leads somewhere. It works." His work has also received praise from two United Nations Secretaries-General Kofi Annan—"Hernando de Soto is absolutely right, that we need to rethink how we capture economic growth and development"—and Javier Pérez de Cuéllar—"A crucial contribution. A new proposal for change that is valid for the whole world."

Prizes

Among the prizes he has received are:

• The Freedom Prize (Switzerland)
• The Fisher Prize (United Kingdom)
• 2002
  • the Goldwater Award (USA)
  • Adam Smith Award from the Association of Private Enterprise Education (USA)
  • The CARE Canada Award for Outstanding Development Thinking (Canada)
• 2003
  • received the Downey Fellowship at Yale University
  • the Democracy Hall of Fame International Award from the National Graduate University (USA)
• 2004
  • the Templeton Freedom Prize (USA)
  • the Milton Friedman Prize for Advancing Liberty (USA)
  • the Royal Decoration of the Most Admirable Order of the Direkgunabhorn, 5th Class, (Thailand)
• 2005
  • an Honorary Degree of Doctor of Letters from the University of Buckingham (United Kingdom),
  • The Americas Award (USA)
  • named the Most Outstanding of 2004 for Economic Development at Home and Abroad by the Peruvian National Assembly of Rectors
  • received the Prize of Deutsche Stiftung Eigentum for exceptional contributions to the theory of property rights
  • the 2004 IPAE Award by the Peruvian Institute of Business Administration
  • the Academy of Achievement's Golden Plate Award 2005 (USA) in tribute to his outstanding accomplishments
  • the BearingPoint, Forbes magazine’s seventh Compass Award for Strategic Direction
  • was named as a “Fellow of the Class of 1930” by Dartmouth College.
• 2006
  • the 2006 Bradley Prize for outstanding achievement by the Bradley Foundation.
  • the 2006 Innovation Award (Social and Economic Innovation) from The Economist magazine (December 2, 2006) for the promotion of property rights and economic development.
• 2007
  • The Poder BCG Business Awards 2007, granted by Poder Magazine and the Boston Consulting Group, for the "Best Anti-Poverty Initiative"
  • the anthology Die Zwölf Wichtigsten Ökonomen der Welt (The World’s Twelve Most Influential Economists, 2007), included a profile of de Soto among a list that begins with Adam Smith and includes such recent winners of the Nobel Prize in Economics as Joseph Stiglitz and Amartya Sen.
  • the 2007 Humanitarian Award in recognition of his work to help poor people participate in the market economy.
• 2009
  • Honorary Patron of the University Philosophical Society of Trinity College (Ireland) for having excelled in public life and made a worthy contribution to society.
  • the inaugural Hernando de Soto Award for Democracy awarded by the Center for International Private Enterprise (CIPE) in recognition of his extraordinary achievements in furthering economic freedom in Peru and throughout the developing world.

Criticism and response

De Soto has been criticized by some academics for methodological and analytical reasons, while some activists have criticized de Soto for being a representative figure of the movement for prioritizing property rights.

In his 'Planet of Slums' Mike Davis argues that De Soto, who Davis calls 'the global guru of neo-liberal populism', is essentially promoting what the statist left in South America and India has always promoted - individual titling. Davis argues that titling is incorporation into the formal economy of cities which benefits more wealthy squatters but is disastrous for poorer squatters, and especially tenants who simply cannot afford incorporation into the fully commodified formal economy.

Grassroots controlled and directed shack dwellers movements like Abahlali baseMjondolo in South Africa and the Homeless Workers' Movement (MTST) in Brazil have strenuously argued against individual titling and for communal and democratic systems of collective land tenure because this offers protection to the poorest and prevents 'downward raiding' in which richer people displace squatters once their neighborhoods are formalized. Evidently, there will always be a danger that there will be people who will try to deceive or prey on the poor. However, this should not be reason to shrink from the possibility of empowering the vast majority of the world’s poor by providing them with the necessary mechanisms to pull themselves out of poverty for it would be akin to throwing out the baby with the bathwater.

An article by Madeleine Bunting for The Guardian (UK) claimed that de Soto’s work was helpful to the Third Way political movement – an association that Bunting claimed would not fundamentally challenge world power structures. Reporter John Gravois also criticized de Soto for his ties to power circles, exemplified by his attendance at the Davos World Economic Forum. In response, de Soto told Gravois that this proximity to power would help de Soto educate the elites about poverty. Ivan Osorio of the Competitive Enterprise Institute has refuted Gravois’s allegations pointing out how Gravois has misinterpreted many of de Soto’s recommendations.

Robert J. Samuelson has argued against what he sees as de Soto’s "single bullet" approach and has argued for a greater emphasis on culture and how local conditions affect people’s perceptions of their opportunities.

In the World Development journal, a 1990 article by R. G. Rossini and J. J. Thomas of the London School of Economics questioned the statistical basis of de Soto’s claims about the size of the informal economy in his first book The Other Path. However, the ILD pointed out, in the same journal, that Rossini and Thomas’ observations “neither [addressed] the central theme of the book, nor [did it address] the main body of quantitative evidence displayed to substantiate the importance of economic and legal barriers that give rise to informal activities. Instead, [they focused] exclusively on four empirical estimates that the book [mentioned] only in passing”.

In the Journal of Economic Literature, Christopher Woodruff of the University of California, San Diego criticized de Soto for overestimating the amount of wealth that land titling now informally owned property could unlock, and argues that "de Soto’s own experience in Peru suggests that land titling by itself is not likely to have much effect. Titling must be followed by a series of politically challenging steps. Improving the efficiency of judicial systems, rewriting bankruptcy codes, restructuring financial market regulations, and similar reforms will involve much more difficult choices by policymakers. "

This criticism is viewed by some to misjudge de Soto's official opinion. His book Mystery of Capital devotes the majority of its contents to the theory that legal reform is by far the most significant element of property reform.

Roy Culpepper notes that it is often very difficult to establish who owns what among the poor. He also notes that the titling is biased against those who are completely landless and propertyless.

Alan Gilbert finds that in Bogotá, for example, giving legal titles has not created a better housing market or better supply of credit for the poor. Although Gilbert may be partially correct in believing that legal titles may not immediately create a better housing market, in the long run, an informal housing market, with limited local options, would not be anywhere as effective as a system where everyone was interconnected nationally and internationally.

Legal scholar Jonathan Manders has argued that de Soto’s vision of property rights reform is the correct one, but that the sequencing of proposed reforms will affect their sustainability over the long term.

Empirical studies by Argentine economists Sebastian Galiani and Ernesto Schargrodsky have taken issue with de Soto’s link between titling and the increase in credit to the poor, but have also pointed out that families with titles "substantially increased housing investment, reduced household size, and improved the education of their children relative to the control group". A study commissioned by DFID, an agency of the U.K. government, further summarized many of the complications arising from implementing de Soto’s policy recommendations when insufficient attention is paid to the local social context.

There are many explanations regarding how and what in capitalism causes growth, according to de Soto. In an interview with The Economist, he emphasizes the primary role of institutions, and points to successful examples of now-developed countries that reformed their legal system in defense of his property rights-oriented policy recommendations. De Soto's conclusions have inspired other work on microcredit, and the importance of property and business rights. For instance, the World Bank’s popular “Doing Business” series (launched in 2004) that provides data for over 175 countries worldwide on opening and closing businesses, obtaining credit, labor laws, and fulfilling contract and property rights, was inspired by the ILD’s work in Peru and elsewhere.

De Soto himself has often pointed out that his critics mistakenly claim that he advocates land titling by itself as sufficient for effective development: For example, in the ILD’s new brochure he is quoted as saying, “The ILD is not just about titling. What we do is help Governments build a system of public memory that legally identifies all their people, their assets, their business records and their transactions in such a way that they can unleash their economic potential. No economy can develop and prosper without the benefits that clearly registered public documents bestow.”

Publications

Books

De Soto has published two books about economic development: The Other Path: The Invisible Revolution in the Third World in 1986 in Spanish (with a new edition in 2002 titled The Other Path, The Economic Answer to Terrorism), and at the end of 2000, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. Both books have been international bestsellers, translated into some 30 languages.

The original Spanish-language title of The Other Path is El Otro Sendero, an allusion to de Soto’s alternative proposals for development in Peru, countering the attempts of Peru's "Shining Path" ("Sendero Luminoso") to win the support of Peru’s poor. Based on five years worth of ILD research into the causes of massive informality and legal exclusion in Peru, the book was also a direct intellectual challenge to the Shining Path, offering to the poor of Peru not the violent overthrow of the system but “the other path” out of poverty, through legal reform. In response, the Senderistas added de Soto to their assassination list, In July 1992, the terrorists sent a second car bomb into ILD headquarters in Lima, killing 3 and wounding 19.

In addition, he has written, with Francis Cheneval, Swiss Human Rights Book Volume 1: Realizing Property Rights, published in 2006 – a collection of papers presented at an International Symposium in Switzerland in 2006 on the urgency of property rights in impoverished countries for small business owners, women and other fragile human groups, such as the poor and political refugees. The book includes a paper on the ILD’s work in Tanzania delivered by Hernando de Soto.

• De Soto, Hernando. The Other Path: The Invisible Revolution in the Third World. Harpercollins, 1989. ISBN 0060160209
• De Soto, Hernando. The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. Basic Books, 2000. ISBN 0465016146
• De Soto, Hernando. The Other Path: The Economic Answer to Terrorism. Basic Books, 2002. ISBN 0465016103
• De Soto, Hernando and Francis Cheneval. Swiss Human Rights Book Volume 1: Realizing Property Rights, 2006. ISBN 978-3-907625-25-5
• Smith, Barry et al. (eds.)., The Mystery of Capital and the Construction of Social Reality, Chicago: Open Court, 2008. ISBN 0-8126-9615-8

Articles

Over the years, De Soto has also published a number of articles on the importance of inclusive property and business rights, legally empowering the poor, and the causes of the global financial crisis of 2008-09 in leading newspapers and magazines around the world. In 2001, Time magazine published "The Secret of Non-Success," the New York Times ran his post-September 11 op-ed essay “The Constituency of Terror,” and the IMF’s Finance & Development magazine published “The Mystery of Capital”, a condensed version of the third chapter of his eponymous book. In 2007, Time magazine published “Giving the Poor their Rights”, an article written with former Secretary of State, Madeleine Albright, on the legal empowerment of the poor. In 2009, Newsweek International published his essay on the financial crisis, “Toxic Paper” – along with an on-line interview with him, “Slumdogs and Millionaires.” That was soon followed by two more articles on the crisis, in the Wall Street Journal (“Toxic Assets Were Hidden Assets”) and The Los Angeles Times (“Global Meltdown Rule #1: Do the Math”). Versions of these articles also appeared in newspapers in France, Switzerland, Germany and Latin America.

• De Soto, Hernando. “Why Capitalism Works in the West but Not Elsewhere”, International Herald Tribune, 5 January 2001.
• De Soto, Hernando. “The Mystery of Capital”, Finance & Development, March 2001, Volume 38, Number 1.
• De Soto, Hernando. “The Secret of Non-Success”, Time magazine, 16 April 2001.
• De Soto, Hernando. “The Constituency of Terror”, The New York Times, 15 October 2001.
• De Soto, Hernando. Push Property Rights, The Washington Post, 6 January 2002.
• De Soto, Hernando. “Law and Property Outside the West: A Few New Ideas About Fighting Poverty”, Optima Special Issue on Sustainable Development. Vol. 48 No. 1, September 2002, pp 2-9.
• De Soto, Hernando. “Law and Property Outside the West: A Few New Ideas About Fighting Poverty”, NUPI. December 2002, pp. 349-361.
• De Soto, Hernando. "Law and Property Outside the West: A Few New Ideas About Fighting Poverty". In Marc A. Miles (ed.) The Road to Prosperity: The 21st Century Approach to Economic Development. Washington, DC: The Heritage Foundation, 99-119. 2004
• De Soto, Hernando. “What if you can't prove you had a house?”, International Herald Tribune/New York Times, 20 January 2006.
• De Soto, Hernando. “Toxic Paper”, Newsweek, 21 Feb. 2009.
• De Soto, Hernando. "De Soto: la recesión tiene origen legal, no financiero", El Comercio, 03 March 2009 [1]
• De Soto, Hernando. “Toxic Assets Were Hidden Assets”, The Wall Street Journal, 25 March 2009
• De Soto, Hernando. “Crise financière: une crise… du papier”, Le Figaro, 27 March 2009
• De Soto, Hernando. “Global Meltdown Rule No. 1: Do the math”, Los Angeles Times, 12 April 2009.

See also

• Liberalism
• Contributions to liberal theory
• Informal economy
• Dependency theory

Further reading

• Smith, Barry et al. (eds.), The Mystery of Capital and the Construction of Social Reality, Chicago: Open Court, 2008. ISBN 0-8126-9615-8

External links

• Institute for Liberty and Democracy official website.
• "Slumdogs vs. Millionaires", Newsweek's Barrett Sheridan interviews Hernando de Soto
• The Great Issues Forum, video of Naomi Klein, Joseph Stiglitz, and Hernando de Soto discussing the financial crisis
• "Mapping the Invisible", speech by Hernando de Soto at the 2009 ESRI International User Conference
• The Munk Debate on Foreign Aid, 2009. Stephen Lewis and Paul Collier against Peruvian economist Hernando de Soto and Dambisa Moyo, a Zambian-born critic of foreign aid.
• Afternoon of Conversation: Andrea Mitchell, Madeleine Albright, Hernando De Soto, video of conversation
• The Rule of Law - an interview with Hernando de Soto By Gustavo Wensjoe 2008
• Transcript of an interview for the PBS documentary Commanding Heights.
• "One On One with Hernando de Soto" - Part 1 of an Interview by Riz Khan on Aljazeera
• "One On One with Hernando de Soto" - Part 2 of an Interview by Riz Khan on Aljazeera
• A highly critical review in the British newspaper The Guardian
• An essay by Robert Samuelson in Foreign Affairs, arguing that de Soto underestimates the importance of culture