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The Poor Man's Capitalist: Hernando de Soto

July 1, 2001

The Poor Man's Capitalist: Hernando de Soto


It's Monday night in Haiti, and Hernando de Soto is talking about the barking dogs again. They're everywhere. In his book. In his slide show. In briefings at the palace for President Jean-Bertrand Aristide. In sweaty sessions with threadbare villagers. They're peppered through the 60-year-old Peruvian's cocktail chatter, figure in his critique of the World Bank, sum up what he has done to date in Lima. De Soto came across the dogs in Bali, he says, not long after he had begun what may, in the fullness of time, prove to be among the more consequential crusades in economic history. It was a simple question: How do you know in Bali where one man's property ends and another's begins?

Throughout the third world, the formal systems of property rights taken for granted in advanced nations simply don't exist. Even after decades, few people officially own the land or homes they occupy; the notion of holding title to property is scarcely found outside of rigged schemes serving a handful of elites. But, as de Soto explains this evening in Haiti, his face full of fresh zeal although he is telling the tale for what must be the thousandth time, you know when you have crossed onto someone else's property in Bali because -- a different dog barks. The dogs know.

It's de Soto's shorthand for the de facto property rights that rule the world, his crystallizing metaphor for the common law at work in the most lawless spots on the planet. And even if the story is apocryphal -- and something in de Soto's relentless proselytizing makes you suspect it might be -- that hardly matters. Like Ronald Reagan's infamous welfare queens, de Soto's barking dogs capture the heart of a profound social problem -- in this case, the persistence of global poverty.

"Imagine a country," de Soto says, "where nobody can identify who owns what, addresses cannot be verified and the rules that govern property vary from neighborhood to neighborhood, or even from street to street." This is what life is like, he says, for 80 percent of the people in the developing world and the former Communist countries. Through "extralegal" businesses and home building, de Soto reckons, the world's poor have accumulated assets worth $9 trillion -- 20 times the direct foreign investment in the third world since the Berlin Wall fell and more than 46 times as much as the World Bank has lent in the last three decades.

But because these assets are not "paperized" in the formal documents and legal structures common in the West, they can't function productively as capital. People can't use their homes as collateral for loans to expand businesses, for example. They can't trade things beyond the small circle where they're known and trusted. The poor live outside the law this way because living within the law is impossible: corrupt legal systems and warped rules force those at the bottom of the world economy to spend years leaping absurd hurdles to do things by the book. It's this "legal apartheid," de Soto insists -- not "cultural" factors like religion or the legacy of colonialism -- that explains why some peoples thrive and others don't.

What's more, de Soto adds impishly, the third world's pervasive denial of property rights resembles nothing so much as the United States in the 1800's. Remember the gold rush, when all those miners squatted and staked their claims with shotguns? Over the ensuing decades, Uncle Sam eventually ratified the ownership realities that had been recognized by communities on the ground. De Soto wants to do the same for the world's untitled masses, formalizing real-estate and business ownership in ways that turn "dead" capital into fuel for growth. This, in a nutshell, is de Soto's spiel.

While economists call him simplistic, third world leaders just call him. Back when Mexico's president, Vicente Fox, was governor of the state of Guanajuato, he sought out de Soto for advice. President Hosni Mubarak's son Gamal is his reform partner in Egypt. President Joseph Estrada of the Philippines brought de Soto in, and his successor, Gloria Arroyo, wants de Soto to press on. All this came before the publication last fall of de Soto's latest book, "The Mystery of Capital."

The book carries endorsements from the conservative icons Margaret Thatcher and Milton Friedman, as well as from Bill Bradley, last year's unfashionably liberal presidential contender. The book has sold 100,000 legal copies in Peru -- the equivalent, adjusted for population, of a million in the United States. And with plans to translate it into a dozen languages, the book has taken Hernando-mania to a new level.

African presidents are faxing him. The president of the World Bank, James Wolfensohn, is taking him along to a conference in Russia. To the leaders of poor countries, de Soto's economic gospel is one of the most hopeful things they have heard in years, not least because it doesn't demand expensive solutions. "We show them that they already have a market economy," de Soto says. "There are such things as poor entrepreneurs."

But Haiti? This is poverty on a different scale. While there are few reliable figures on Haiti, it is generally thought that 80 percent of its roughly eight million citizens live on less than a dollar a day and that 85 percent of them are illiterate. Most children suffer from malnutrition, and life expectancy is around 50. In Haiti, naked men urinate in the streets. People get water at a community tap, storing what they can in unsanitized underground tanks and boiling the water before drinking or cooking. Ragtag vendors jam the streets in Port-au-Prince, hawking old tires, clothes, shoes and motor oil. Gas stations and funeral homes are the only decent structures in view. De Soto says that these woes make Haiti the perfect proving ground for his ideas.

I didn't expect to agree, but after rocketing around Port-au-Prince for three days, I became something of a convert. Little wonder that his fans say that the bearded, balding Peruvian is on to something big. Robert Litan, a Brookings Institution economist who consulted with de Soto in the 80's, until he decided it wasn't safe to hang out in Lima, hopes his friend never ascends to Peru's presidency. (De Soto seriously considered running in this year's election.) "It would really limit Hernando's global impact," he says.

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