The de Soto Path

Peruvian economist Hernando de Soto was in town in last month and I did this interview with him which appeared in BusinessWorld. Funny really, how no one has invited this man to India though what he says and his writings are far more relevant to us than what a whole lot of others say. He had been invited by McKinsey. Interestingly, he told me he was to be here in October at the invitation of Sonia Gandhi but couldn’t make it. Did woolly-headed socialist Sonia really understand the significance of de Soto? He probably would have rubbished half the things her government is doing.

http://www.businessworld.in/content/view/2935/3015

IN CONVERSATION

'Most Heads Of State I Work For Are Outright Marxists'

Few economists have the distinction of having been attacked with 500 kg of dynamite and machine guns. That's perhaps a measure of Peruvian economist Hernando de Soto's influence. His first book, The Other Path: The Economic Answer to Terrorism, countered the philosophy of the Shining Path rebels of the 1980s. Designated by Time as one of the five leading Latin American innovators, de Soto is not a blind advocate of western-style capitalism, as evident from his second book The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. His issues are those most developing countries are wrestling with - informal economy, property rights, unauthorised constructions, land acquisition, etc. The poor are at the core of his writings. The Lima-based Institute for Liberty and Democracy, of which he is the president, advises nearly 80 countries in Latin America, Asia, Africa and East Europe. Talking to Seetha while on a private visit to Delhi, de Soto argues for empirical research and numbers to strengthen the case for market-oriented reforms that help the poor. Excerpts:

You are perhaps the only economist who has been the target of bomb attacks.

That probably means I had a meaningful and very radical message. The Other Path provided very clear alternatives to the ultra-left Shining Path movement in Peru. The book was taken up as a motivational force by many groups. As more and more people used it to explain why it was a good idea to have economic freedom of a certain sort, the rebels found it more and more in their interest to bomb us. They said they were having trouble recruiting for their ranks. But it only made us much more visible and popular. It was not just an academic work; it was a book that had consequences. It was put in a political context - to give an alternative explanation for poverty and oppression - and it worked.

You're a strong advocate of market economy but you also say capitalism is like a private club.

I term capitalism for a few as mercantilism. The first bourgeois capitalists were very exclusivist. They didn't necessarily believe in the market, though they believed in the private sector. The fact that a few succeed doesn't mean it is a real market order, but only a system that works for a few. If it is perceived as a system that does not provide opportunity for everybody, it will collapse. I favour a market economy that's open to everybody, not as an act of faith, but simply because I don't know of a better system.

In India, market-oriented economic reforms are criticised as catering only to a small elite. What could we be doing wrong?

I don't know India. People all over are basically ingenious and entrepreneurial. If the system favours a few, that means it is clogged up. You have got cholesterol in your veins. You have to trace the history of poor people trying to get into business through real cases. Once you find where the cholesterol is, both the left and the right will support you in removing it; they have to be crazy not to.

The other problem is that somebody who thinks tradition must be protected just doesn't allow an opening up, in the name of preserving the culture of indigenous communities. Generally, these desires come from intellectual classes; but when the poor people are given the choice, they move to the United States.

In India, there is a lot of talk about inclusive growth. Should this be through government programmes or simply by freeing entrepreneurial energies?

It's not a bad idea to do both things -remove blockages to the market through change of rules and provide ambulances, hospitals and wells.Everyone knows that what is achieved through charity is minuscule compared to what is achieved through rules that are inclusive. But it's human nature to do the former and get photographed. You can't photograph a change of rules.

But don't all governments tend to indulge in economic intervention and strengthen the role of bureaucracy?

The first motivating force of negative intervention in economic activity is essentially the politician. Politicians are guided by the desire to be popular, to do things that are well-serving. If they don't, it's because the arguments in favour of liberalising the economy have not been well-structured. The tendency of people who believe in the market economy is to repeat and plagiarise a western standard term. So they appear pro-elite. But if you are able to indicate - with numbers, facts and logical structure - that your programmes are good for poor people, you'll have to find a very crazy politician not to support it. More than half the heads of state that I work for are outright Marxists.

Capitalism or the market economy never looks exactly the same in any country; it has different cultural traits. Copycat movements of the west are unsuccessful. You have to have a local adaptation.

You say a lot of unrest and dissatisfaction within countries is caused by a sense of disempowerment of the poor. Is that the only reason for all terrorism?

Terrorism is usually born where there is helplessness - whatever you do, you don't see a future. Secondly, terrorists provide services - the protection of the businesses and the assets of the poor. Give the poor a property right that is efficient. It should not be only a recognition of their land. That's like giving them a knife with only one blade. Give them a land that has a series of functions - that can be used for starting a business, sold and leased, used as collateral. It should be like a Swiss army knife. People will take the Swiss army knife over terrorist protection. Then the terrorists lose their constituency.

Thirdly, don't give up on terrorists. Don't forget that some of the most radical reforms in favour of the market are done by illuminated terrorists like Deng Xiao Ping. People do change their mind. But you have to indicate to them in terms that they can understand.

You say the poor are not the problem but the solution.

The market economy is essentially about scale. How can you get scale if you don't bring in the poor? They're the consuming mass and they are conglomerated, which is what you need for the division of labour. There is a problem when you have people out in the jungle with no connections whatsoever, like the headhunters of Peru or the sheep people of Colombia. But people conglomerating in cities are the solution. Both Marx and Adam Smith said so. I'm not saying anything new. All I'm saying is identify them in our areas.

Why do you say property is a key institution for the poor?

Property is not just land or a physical object. It is simply the right that one has to give an asset - tangible or intangible - a series of functions and create an identity. Secondly, the value of all things tends to increase. When you become more productive, the value of things goes up. Financial value is captured in a property title. You ask Bill Gates or anyone from Infosys the value of what they've got and they will show you a piece of property paper. If you do not give the poor property over the little that they own, their chances of making it in a capitalistic world are zilch. Because they have no way to capture identity, location, capital or give guarantees for credit.

The issue of land rights has come up in India in connection with land acquisition for industry, giving tribals rights over common land and slum clearance programmes. How are these issues to be dealt with?

When private sector came into Britain, they had something called the enclosures. The oligarchy moved with great agility and took over the forests and left a lot of the proletariat in the situation of Oliver Twist - dispossessed. But that's not what happened in France, Germany, United States or Canada. They didn't let the oligarchy take away the forests or the buildings. They gave equal access. It all depends on how you do your laws.

Secondly, in the beginning all poor people lived in slums; that's the starting point. The question is whether you're going to have property over it and whether you're going to use it as a tool for moving ahead. Steve Jobs that started Apple started in a garage. Practically all American billionaires of today started in garages.

A property right means a person's right to something is recognised. It's like a voucher which tells them that they have a title over something that will have to be substituted for something equivalent. But give them security. If they feel you're going to expropriate them without any form of compensation, they will simply stop any movement towards change.

But what about cases where people have encroached on government land?

If you have got 100,000 people who have encroached on government land, how are you going to take them out? It's just not realistic. It's not going to happen. What you can do is empower them and find a way to make sure that when you do, you are not going to set an example for more encroaching. In Peru, it took 21 years to go from custom (encroachment) to law. If you lower the cost of getting land legally, everybody would prefer to earn their land through legal measures than illegal measures. Illegal measures are not costless - it means you have to get thugs on your side, accept corruption. People will always choose the law provided it's cheaper than the illegal part.

But when doing this, it is important to get the numbers. Numbers are very convincing. For example, in Egypt, we tried to find out how many people live in public housing and how many people were given public housing. We found that the number of people living there was ten times the number who had been allotted houses. Obviously, people had built additional storeys on public housing. So the question was do you bring down the additional storeys and destroy the city or do you say I forgive you but this is the last time you're going to do it.

The thing is when you've got numbers, you are able to see what is politically feasible and what is not. If you have to choose between 25 million people and 5,000 big landowners or a few bureaucrats who don't want change, you're going to go for the 25 million. But the first thing you need is an inventory of where you are. How big is your informal sector? What is it constituted by, where are the real obstacles? And then you will see that politicians will do very rational things. Because there is such a thing as reward for satisfying constituencies.

Should the government be acquiring land for private industry?

Logically, if what you are going to do with the land industrially is put it to a higher value use than the person who owns it now, you should be able to buy it. Let the poor people become rich because the land on which they are can be put to more profitable use. Let the market deal with it. This doesn't mean that eminent domain has no role but its use should be very selective. Property should be fungible so that the highest price takes it in the right direction.

In India, operationalisation of a legislation giving tribals rights over traditional land is being held up because of opposition from environmentalists saying this will endanger forests.

That's not a valid argument. The advantage of making sure that whoever has the land or the asset is clearly identified through property record is that you can sanction them if they are damaging the environment.

(Businessworld Issue 13-19 Nov, 2007)