7 replies to this topic

[Lazarus Long]

I am going to go out on a limb here and ask participants on this thread to contribute academic opinion of the highest caliber because it is too easy to become merely partisan and the subject is inherently volitile.

Clearly the parallel trends of consolidating wealth, as it overlaps the politicsof current and forecast events, and come to integrate with our own endeavors cannot be ignored.

I am going to start this with an interview with Dr. Francis Fukuyama about Economic Globalism and Culture.

I intend to try and post De Sotos' work as well but feel free to if someone has the links already available. The issues of culure are "assumed" rather than understood by 98% percent of the world.

If we succeed we will find time to redefine this topic as events and awareness allows but in the meantime let us contribute only the arguments of substantive reflection for the various paradigmatic postitions.

Clearly many disputes that we have discussed herein the forums overlap and I may create a link page that would allow a quick leap to various dialogues where we address various aspects of issues of culture, economics, sociology, memetics, evolutionary psychology, and even, familiy.

http://www.ml.com/wo...orum/global.htm

[Lazarus Long]

Economic Globalization and Culture
A Discussion with Dr. Francis Fukuyama

Earlier this year, the Merrill Lynch Forum spoke with Dr. Francis Fukuyama about globalization. The conversation focused on how culture shapes, and is shaped by, the increasing worldwide economic integration. In his comments, Fukuyama challenges the view that globalization is leading to cultural homogeneity, arguing that societies largely maintain their individual characteristic despite economic pressures. In fact, Fukuyama asserts that these cultural values in many respects define how business is conducted within a nation.

This does not mean that society is not influenced or altered by the process of globalization -- Fukuyama does believe there is a convergence of political and economic ideologies. Rather, he suggests that there are deeper elements of culture not easily abandoned.

Q) To what extent has globalization been realized?

I think that in many respects, globalization is still superficial. Although there is a great deal of talk about it currently, the underlying truth is that the global economy is still limited. It seems to me that the real layer of globalization is restricted to the capital markets. In most other areas, institutions remain intensely local.

Trade, for example, is still predominantly regional. Relatively little trade flows beyond local regions: Asians trade mostly with Asians and Latin Americans trade mostly with Latin Americans. Even in more developed regions this practice holds true. Intra-European trade accounts for roughly 60% of all European trade.

This regional limitation is true elsewhere. Most companies are predominantly national, and certainly governments remain very national. Consumer markets are not only national, but they are segmenting even further within regions as consumer education improves and consumers are able to demand products that precisely meet their needs.

Q) Are there aspects of globalization that lead to greater homogenization?

I think that homogenization and an affirmation of distinctive cultural identities will occur simultaneously. In terms of large economic and political institutions, cultures are becoming more homogeneous. There aren't as many alternatives and regime types. It isn't possible to have a kind of Peronista economic nationalism, or a certain kind of socialism. It turns out that, given the nature of the global economy, there are only so many ways that a political or economic system can be organized to make it viable and competitive. To be an advanced society, a country has to be a democracy, and it has to be connected to the global marketplace. In that respect, there is a greater homogenization of institutions and ideologies. On a cultural level, it's not clear that homogenization is proceeding nearly as rapidly. To a certain extent, there is a real resistance to cultural homogenization.

Q) Do you believe that homogenization will ever occur on a deeper level?

It could be that culture will ultimately become homogenized, just like political institutions, but I believe that it's going to be a much slower process. Many people think that because we have advanced communications technology, and are able to project global television culture worldwide, this will lead to homogenization on a deeper cultural level. I think that, in a way, it's done just the opposite.

For example, there is probably less mutual liking, more distrust and greater emphasis on the difference between the cultures of the United States and Asia today than there was 40 years ago. In the 1950s and '60s, Asia looked up to the United States as a model of modernization. Now, Asians look at American urban decay and the decline of the family and they feel that America is not a very attractive model. Communications technology has allowed both Asians and Americans to see each other more clearly, and it turns out they have very different value systems.

Q) Can global corporations have a homogenizing effect on culture?

I think that there is a global consumer culture that is spread by companies like McDonald's and Coca-Cola. However, if you look beneath the surface and ask people in different countries where their loyalties lie, how they regard their families, and how they regard authority, there will be enormous differences. When people examine a culture, they pay too much attention to aspects like the kinds of consumer goods that people buy. That's the most superficial aspect of culture. A culture really consists of deeper moral norms that affect how people link together.

In my second book, Trust: The Social Virtues and the Creation of Prosperity, one of the central theses argues that these deeper qualities, the so-called moral norms, define economic activity. For instance, Chinese culture is family-centric limiting business transactions to extended family. This fact has many consequences. It means that Chinese businesses tend not to be very large, probably because they are unwilling to bring in managers from outside the family. It means that it's very difficult to establish brand names because large marketing organizations are not used. It also means it is very difficult to build lasting institutions that endure for more than two or three generations. In the China example it is culture that drives economics.

Q) What constitutes these deeper cultural Identities?

Obviously language, religion, and race are all important components of a local identity. My particular interest is in what I call networks of trust. These networks vary in different parts of the world. I think that to really understand how to operate in any region of the world, you really need to understand the networks of trust in that area. Once a trust relationship is established, a business relationship can follow.

For example, in many Latin American countries, many of the largest companies are almost always controlled by a group of families. This is also true in other countries, such as China and Turkey. Obviously, business opportunities in such countries very much depend on an understanding of the way that these social networks are wired together. The only people with a full understanding of how these networks work are the locals themselves. That's why outsiders sometimes find it difficult to conduct business in countries where the expected degree of transparency and ability to form business relations without preexisting social relationships are lacking.

Q) Are there universal human attributes that cut across cultures and nations?

Yes. The desire for material progress is obviously a universal drive. I think that there's a fair amount of evidence that a desire to exchange on the market is also a universal human attribute. In those places where market exchange is not practiced, it is almost always because the state or other form of governmental authority prevents it.

Fernando De Soto's book on Peru gives a beautiful example of the human desire for market exchange. The book evidences the tremendous desire of poor Peruvian peasants who have moved to Lima to barter and exchange. The peasants can't set up formal businesses because it takes 25 days to get a permit, and a great deal of money is needed to bribe government officials. To make market exchanges, they set up this huge informal economy that even has its own judicial system.

I also think a good argument can be made for the universality of entrepreneurship. Over the last few years, the World Bank has strongly advocated the concept of micro lending. Before this, their policy was to lend to central banks and larger institutions. However, a closer examination of social networks revealed that the real entrepreneurial energy is at a much lower level. An interesting example of this entrepreneurship is the informal taxi and transportation services that have been set up in many third world countries. In South Africa, the government granted a monopoly in public transportation to a few companies that completely failed to satisfy the demand. Informal taxi service became one of the largest sources of income for blacks during Apartheid. It was one of the few areas where they could expand their business.

Q) Will globalization lead to the development of additional cultural universals?

I think that there is a set of cultural attributes that must accompany economic modernization. These include a greater degree of individualism, understood as people being evaluated based on their achievement rather than in terms of an inherited status.

What bothers me about the recent discussions of globalization is that people seem to think globalization is going to be much more homogenizing than it really is. In fact, I think that it will have the opposite effect. In a certain sense, the de facto free trade regime and economic interdependence actually allows people to stress cultural differences in ways that they couldn't have before.

Quebec is an example of this phenomenon. There is a great deal of division in Quebec on the issue of separation. I think that there's no way that anyone would have even thought of separation without the North American Free Trade Agreement and the silent revolution in the '60s, when Quebec really modernized economically. In some ways, Quebec is actually more integrated with the American economy today than with the rest of Canada. If they separate, it's not going to cost them economically. In a sense, free trade creates an economic floor. The prosperity brought about by globalization then permits cultures to really assert their own uniqueness.

Q) Can cultures be enhanced by interacting and adapting to one another?
For example, America has certainly adopted aspects of its culture from other parts of the world to its benefit.

The American culture has been enhanced by cultural addition and adaptation more than most other places. In a way, this distorts Americans' perceptions. They look at their own experiences with melding different cultures, and assume that the process will happen as easily in other parts of the world. I think that it probably will happen, but it won't be as easy.

Even in a country as similar to the United States as France, this sort of cultural addition would be more difficult. I know France reasonably well. I go there a fair amount, and I follow French politics. The thing that strikes me is how different France and the United States are, despite two centuries of interaction. Many Europeans cannot understand the libertarian ideals that Americans have. France is very state centered and bureaucratic. They tried privatization for several years in the late 1980s. It generated a strong backlash among the French workers, and the Government has changed its position. Whereas the majority of Americans think that privatization is the coming wave of public policy.

Q) What role will information technology play in globalization?

I am very skeptical about the claim that technology alone is going to enable globalization. The problem is trust. My feeling is that trust is essential to business relationships, and trust is basically a social phenomenon. People establish trust by dealing with one another on a reciprocal basis. Through this, they become familiar with each other's identities, behavior, reliability, honesty, and ability to perform to certain specifications. It is extremely difficult to purvey that kind of information over a digital network.

There is a lot of interesting evidence to support this. There was a study done at SRI in the mid 1960s that examined the impact of long-distance telecommunications on the volume of trans-Atlantic business transactions. There was actually a very weak relationship. Trans-Atlantic business transactions were more strongly correlated with air travel, because most deals could not be consummated without establishing a social relationship.

In digital commerce, people are now technically capable of carrying out a transaction, but they are lacking the value added services that enable them to develop a trust relationship. What globalization requires is not just network technology, but rather the creation of a whole new series of services that are able to convey the information needed for trust.

Q) Will globalization result in a great deal of political change?

There is a correlation between a country's level of economic development and successful democracy. Recently, a study was done that examined the transitions to democracy of several nations. Once equivalent GDP per capita in 1992 purchasing power parity dollars reached $6,000, there's no country in history that has become a democracy and then lapsed back into authoritarianism.

Globalization and capital development do not automatically produce democracies. However, the level of economic development resulting from globalization is conducive to the creation of complex civil societies with a powerful middle class. It is this class and societal structure that facilitates democracy.

I disagree with Samuel Huntington on this point. He argues that China could radically develop for the next two generations without its political institutions becoming at all similar to those of the United States. Huntington does not believe that development will lead people to demand political participation, liberalization of the press, or other civil liberties. I just don't buy that argument. Ultimately, I think that there are going to be political changes as a result of the economic development.

On the other hand, I do believe that the "safe" forms of cultural self expression, the sub-political ones, will continue to exist in their distinct forms. One of the ways in which these distinctive cultures will be expressed is through unique business practices in industrial structures. However, I think that even in this realm, there will eventually be a certain degree of homogenization. For example, right now, Japanese financial institutions are unique and highly regulated. There are no other financial institutions in the world with the same kind of practices and policies. Under global competition, the Japanese institutions are really coming under a lot of pressure to conform to more common, global business standards.

Q) How do you see globalization changing the relationship between the state and citizens?

I think that the attitude that people hold towards the state is one of the major cultural differences that exists across industrialized nations. My colleague at George Mason, Seymour Martin Lipsit, has spent his entire career writing about American exceptionalism. He argues that there is a huge cultural difference between the United States, and even a country as similar as Great Britain in how people view state authority and the effectiveness of state institutions.

Actually, the one area where information technology is probably going to have a vast effect is in citizens' relationships with the state. There are a lot of trans-national, non-state actors today that didn't exist in the past -- environmental groups, for example.

One of my former colleagues at Brown did a study of this phenomenon in Mexico during the Chiapas rebellion. The Mexican government was going to respond to the rebellion in the way that it usually has, which is to send troops into the area and suppress it militarily. However, international human rights organizations were able to mobilize very quickly, using faxes, e-mail and other communications technology. These organizations were able to put the Chiapas Indians on television to tell their side of the story. The Mexican government decided that they needed to attempt negotiations with the Indians because of the widespread publicity. I think you're probably going to see more of this in the future.

Q) Finally, is globalization really a euphemism for Americanization?

I think that it is, and that's why some people do not like it. I think it has to be Americanization because, in some respects, America is the most advanced capitalist society in the world today, and so its institutions represent the logical development of market forces. Therefore, if market forces are what drives globalization, it is inevitable that Americanization will accompany globalization.

However, I think that the American model that people in other cultures are adopting is from the America of two or three generations ago. When they think of globalization and modernization, many people think of America in the 1950's and '60s; "They put a man on the moon," John Wayne, and Father Knows Best. They're not thinking of the America of the Los Angeles riots and O.J. Simpson. The culture that we exported in the '50s and '60s was idealized. It really presented quite an attractive package. The culture we export now is cynical, and a much less attractive model for other nations to follow.

[Lazarus Long]

http://www.foreignaf...capitalism.html
Culture Matters: How Values Shape Human Progress.
EDITED BY LAWRENCE E. HARRISON AND SAMUEL P. HUNTINGTON. New York: Basic Books, 2000, 348 pp. $35.00.

The triumphant religion of the twentieth century was not Christianity or Islam but economic growth. Over the decades, governments throughout the world jumped onto the growth bandwagon as a way to expand national power, relieve abject poverty, and create social justice. True, they argued and fought over the best way for societies to create and distribute wealth. Communism, capitalism, and socialism in their various forms all vied for supremacy. But now a consensus seems to have emerged. Free trade, free markets, and international investment are the intellectually anointed paths to prosperity. Communism and socialism are definitely out.

Yet the consensus is more fragile than it seems. Not only are there conspicuous dissenters, most visibly the street protesters in Seattle and Prague; there is also the inconvenient fact that today's global capitalism has yet to produce anything like universal prosperity. Much of humanity still lies in the grip of extreme poverty. The World Bank estimates that 1.2 billion people -- a fifth of the world's population -- live on less than $1 a day. Worse, little progress has been made since the late 1980s, when the new global capitalism began flourishing. From 1987 to 1998, the share of sub-Saharan Africa's population living on less than $1 a day remained constant at around 46 percent. The story was the same in Latin America and the Caribbean, where the poverty rate stayed steady at about 16 percent from 1987 to 1998. In South Asia, it fell from 45 to 40 percent, but that region's rapid population growth added 50 million people to the ranks of the poor. Only East Asia (including China) experienced notable success, with the region's poverty rate dropping from 27 to 15 percent.

The truth is that global capitalism's benefits are spotty. Some societies have not tried it, and elsewhere others have achieved only scant success. Global capitalism faces an "hour of crisis," contends the Peruvian development expert Hernando de Soto in The Mystery of Capital, because countries as different as Russia and Venezuela are disillusioned by failed excursions into market economics.

To explain what has gone wrong, de Soto argues that global capitalism cannot succeed without local capital -- and therein lies the rub. Global capitalism's orthodox remedies -- balanced budgets, free trade, foreign investments, and stable currencies -- are not everything. Although they can aid economic growth, local development is decisive for success. But local development founders in most poor nations because a critical catalyst, local capital, is missing. Property rights remain primitive, and what little the poor do have (assets such as huts or small businesses) cannot be used as capital to propel economic growth.

In country after country in the developing world, squatters' rights prevail because the obstacles to obtaining legal titles defeat most of the poor. As de Soto explains,

In Egypt, the person who wants to acquire and legally register a lot on a state-owned desert land must wend his way through at least 77 bureaucratic procedures at 31 public and private agencies. ... This explains why 4.7 million Egyptians have chosen to build their dwellings illegally.

If, after building his home, a settler decides he would now like to be a law-abiding citizen and purchase the rights to his dwelling, he risks having it demolished, paying a steep fine and serving up to 10 years in prison.

Egypt is no exception. In Peru, building a home on state-owned land requires 207 procedural steps at 52 government offices, says de Soto. In Haiti, obtaining a lease on government land -- a preliminary requirement to buying -- takes 65 steps.

According to de Soto, clearly defined property rights generate what economists call positive externalities, or benefits shared by everyone. Not only do property rights help people borrow more easily, because property can be pledged as formal collateral; they also create information needed by markets. If property rights are recorded, for example, utility companies can deliver power and bill customers more easily. But without such rights, markets are untapped and commerce is disconnected from much of the legal system. People deal only with those they know and trust or through informal associations that substitute for formal law. Extralegal arrangements flourish because they are essential for survival. Some of these arrangements are ethical, but others are corrupt. In Peru, for example, bribes raise the cost of running a small business by 10 to 15 percent, de Soto writes.

Aside from depressing economic growth, the denial of property rights destroys any constituency for popular capitalism. Some wealthy investors do enjoy property rights and legal capital. "But they are only a tiny minority -- those who can rely upon the expert lawyers, insider connections, and patience required to navigate the red tape," de Soto says. This makes "capitalism a private club, open only to a privileged few, [enraging] the billions standing outside looking in."

LAW AND (DIS)ORDER

De Soto's book rings true when it describes how grand theories of development stumble on crippling practical details. It builds on his 1989 work, The Other Path, which convincingly revealed the widespread informal or underground economies in many poor countries. That book's argument was similar, noting that the bureaucratic difficulties in creating legal businesses usually compel the poor to skip the process. They instead establish small businesses with few, if any, of the necessary permits or licenses. In the informal economy, street vendors, taxicabs, small bus services, shops, tiny factories, and urban marketplaces predominate.

De Soto's insight has clearly influenced developmental economics. A recent study by four economists (three from Harvard, one from the World Bank) examined regulations affecting the certification of new businesses in 75 countries. The study found that government obstacles to creating firms in most of those countries are "extremely cumbersome, time-consuming, and expensive." On average, they require 63 business days to fulfill, assuming an unrealistic absence of delays. Bribes and corruption seem to correspond loosely to the level of regulation.

Unfortunately, de Soto strains too much. He wants to make property rights -- or their absence -- the center of everything. Some societies, mainly in the United States and Europe, have indeed developed workable property rights regimes. Others, mainly in Africa and Latin America, have not. The first group has prospered; the second has floundered. (De Soto generally omits Asia, except for some references to Indonesia and the Philippines.) He concludes that if countries can convert squatters' property into legal property, they can make capitalism work. This transition is difficult, de Soto admits, because many politicians, lawyers, and property owners profit from the status quo and oppose change. Still, expanding property rights remains the secret to unlocking development.

De Soto's logic implicitly accepts a standard economic assumption: human nature is universal: Confronted with the same incentives, people everywhere will respond similarly. But human nature is not uniform. It is molded by history, geography, religion, climate, and tradition -- all the influences that create culture. Peoples around the globe have different values, beliefs, and customs. They behave differently and create societies with different legal and political systems. This observation is mere common sense, but it also suggests a politically incorrect conclusion: Some societies may be more culturally friendly to economic growth than others. The same forces that affect property rights systems may, for better or worse, also affect enterprise, invention, and material accumulation.

CULTURE CLUB

In April 1999, the Harvard Academy for International and Area Studies held a three-day symposium on culture and development. The conference's highly readable papers, collected in Culture Matters, offer an intriguing counterpoint to de Soto. "The revolution of economic development occurs when people go on working, competing, investing, and innovating when they no longer need to be rich," argues Mariano Grondona, an Argentine political scientist and columnist. This revolution can happen only if the values that promote prosperity -- he lists 20, including competition, innovation, and hard work -- do not disappear when that prosperity first arrives. Trust in the individual is also essential:

If individuals feel that others are responsible for them, the effort of individuals will ebb. If others tell them what to think and believe, the consequence is either a loss of motivation and creativity or a choice between submission or rebellion. However, neither submission nor rebellion generates development. Submission leaves a society without innovators. And rebellion diverts energies away from constructive efforts toward resistance. ...

Carlos Alberto Montaner, an exiled Cuban writer, takes a similar approach in his paper, noting that the rapid growth of the once-impoverished Asian nations has shown that "Latin America had fundamentally misunderstood the keys to prosperity." Part of the blame, he argues, falls on the region's political, religious, military, and business elites, under whom governmental corruption flourishes and people operate outside the law. But the values of these elites often reflect their society's norms, for "a large percentage of Latin Americans either nurture or tolerate relationships in which personal loyalty is rewarded and merit is substantially ignored." The Catholic clergy -- especially proponents of liberation theology -- still attack poverty while condemning "the profit motive, competition, and consumerism," undermining the psychology of success.

The general point is not that some societies are completely impervious to commercial incentives or international influences such as trade, investment, technology, or even property rights. It is that some cultures accept these ideas more readily than others, and that different cultures often promote commerce and enterprise differently. This was certainly true in Asia, as the Harvard scholar Dwight Perkins notes in another essay in this volume. Close personal relations and family ties there helped foster economic development, he argues. They created the very same security and trust needed for trade relationships that laws and an independent judiciary had fostered in the West. In the postwar era, the reliance on family-dominated firms meant that many Asian nations "did not have to wait until they had a well-developed commercial law system before growth could accelerate."

The problem, Perkins says, is that Asia outgrew this system. One-time strengths became the weaknesses that contributed to the 1997-98 Asian financial crisis. As economies expanded, intimate family-business ties bred intimate business-government ties. On the one hand, this faith in government helped promote a high rate of investment. On the other hand, it inspired excessive risks that ultimately threatened entire economies. Companies took for granted that they could rely on government help if necessary, so they increasingly pursued shaky investment strategies.

What does exist -- in the real world, not textbooks -- is cultural economics. People around the globe respond to rewards and penalties, but the rewards and penalties vary among different cultures. Economic incentives and cultural imperatives are constantly interacting and colliding with each other. This is what makes economic development such a fascinating and frustrating subject: no two countries are exactly alike. Even within countries, different regions and different groups have different experiences. A central characteristic of African culture, for example, is the individual's subordination to the community. As the Cameroonian scholar Daniel Etounga-Manguelle writes,

African thought rejects any view of the individual as an autonomous and responsible being. The African is vertically rooted in his family, in the vital ancestor, if not in God; horizontally, he is linked to his group, to society.

If all this seems too abstract, consider the personal story of an American nurse who spent several years in Malawi in the 1990s as a Peace Corps volunteer. In a letter to this reviewer, she described how individual accountability seemed a largely alien concept:

Malawians are a lovely people who value social relationships above all else. My job was to teach Western-style management skills to the nursing and administrative staff [of a local hospital]. As part of a management skills training course, I instituted the disciplinary process that was on the books but unused since the British left in 1964. After a week, the supervisors returned and flatly refused to try and better supervise their employees using a disciplinary process. Why? The employees had put a "curse" on them, and they were frightened.

Culture modifies de Soto's sweeping conclusions. His is a "single bullet" theory of development, when the process is far murkier. Property rights are not the be all and end all of progress but a simple reflection of the larger culture. Consider de Soto's appraisal of America as a case in point. He argues that many developing countries today resemble the United States before the Civil War. Many nineteenth-century Americans owned property without clear legal title. Settlers were often squatters, and miners frequently made property claims that lacked the force of law. In these cases, elaborate informal networks and associations arose to catalogue and legitimize informal property rights. America's genius lay in its eventual merging of informal and formal property rights. Over time, Congress enacted laws that gave legal status to informal but verifiable claims. People could borrow and build on success, and economic development flourished.

The challenge for many developing countries now, de Soto contends, is to imitate this example. If they can somehow convert informal property rights into legal property rights, they too can enjoy the benefits of more rapid economic development. This prescription may be correct. But de Soto never asks why the United States accomplished this feat, whereas so many developing countries have not. What is more likely is that American culture -- the enthusiasm for material advance, the faith in democracy, and the belief in the sanctity of property -- created a climate in which change was possible. In turn, these same beliefs and values (along with rich natural resources) explain U.S. economic success and suggest that the story of property rights is only an interesting sideshow.

The world today lacks a consensus on how to create economic growth because the proven way -- capitalism, even modified by the welfare state -- is a peculiar creation of Western culture. It is an approach that, if not inherently alien to other cultures, is at least unfamiliar and unnatural. But this does not mean that it cannot be adopted or altered elsewhere to generate large economic gains. Forty years ago, after all, much of Asia was considered a basket case. Asia's success offers at least the hope that capitalism is sufficiently malleable to be made compatible with different cultures -- even if the process is neither predictable nor preordained.

Robert J. Samuelson writes a column for Newsweek and the Washington Post Writers Group. A collection of his pieces will be published in the forthcoming book Untruth: Why the Conventional Wisdom Is (Almost Always) Wrong.

[Lazarus Long]

http://www.cipe.org/.../e19/desoto.htm

Economic Reform Today: Property Rights and Democracy
Number 1, 1996
An interview with Hernando de Soto
by the Center for International Private Enterprise

Hernando de Soto is president of the Institute for Liberty and Democracy in Lima and director of several Peruvian companies. He has worked as managing director of Universal Engineering Corporation, as a member of the Swiss Bank Corporation Consultant Group, and as a director of Peru's Central Reserve Bank. He was also President Alberto Fujimori's personal representative and principal advisor, and as such initiated Peru's re-insertion into the international economic system and its macroeconomic reform programs in June 1990.


INTRODUCTION

The 1980s witnessed a sea change in economic thought -- and the beginnings of reform in economic policy -- in countries around the world. In Central and Eastern Europe, shortages of basic goods and economic stagnation hammered home the point that socialism was bankrupt. In developing countries in Africa, Asia and Latin America, policies that echoed socialism -- state ownership of enterprises, heavy regulation of markets and economic isolationism -- had strangled growth in dozens of promising economies. But while the socialist experiment lay in ruins, no one had yet presented a clear blueprint for market-oriented economic reform.

Peru's Hernando de Soto was one of the first to take up this challenge. In his landmark 1986 book, The Other Path, Mr. de Soto identified the barriers to private sector growth that had been invisible to others. The key barrier, he argued, has long been weak institutions. The institutions that make markets function efficiently in the developed world -- including contract law, financial markets and respected judicial systems -- are too often lacking in countries such as Peru. A casual visitor to Lima can attest to the vibrant markets that exist for local products, but the absence of a solid institutional framework means that the full potential of the nation's entrepreneurs goes untapped.

Perhaps the most important -- and least noted -- of these institutions is property rights. Owners of land, corporate shares and even intellectual property are loath to invest in the upkeep and improvement of their property if their rights as owners are insecure. Just as importantly, if property cannot be bought and sold with the confidence that the authorities will uphold the transaction, the market itself will fail to generate dynamic growth. Indeed, the absence of property rights is one factor that drives people out of formal markets into the informal sector.

The Other Path became an international bestseller, and Mr. de Soto's ideas changed the terms of debate on economic policy. In 1987, for instance, CIPE and the US Agency for International Development sponsored a conference focusing on property rights as a necessary condition of economic growth, and representatives from groups in 35 countries attended. By the 1990s, his insights had gained broad acceptance.

Economic Reform Today recently spoke with Mr. de Soto about the institutions policymakers and business leaders have yet to establish to guarantee property rights in the world's emerging markets. As the following interview attests, the labor has just begun.

ERT: When you look at the Western democracies, all of them have strong systems protecting property rights. Is it important for emerging democracies to create such systems?

MR. DE SOTO: I think the first thing that is striking about the Western democracies is that they enjoy property rights. They may have different land-tenure and property rights systems, but they all have one thing in common: they protect the right of people to "transact" their property rights. It is not only important to know that if you are the original owner of something, you can enforce this right; but also, that if you decide to sell it, whoever buys it or uses it as collateral for commercial purposes feels secure about the transaction.

In many developing countries or emerging markets, property rights do exist. However, they do not have the complementary legal framework that is present in developed countries and that allows these property rights to become currency. This legal framework provides a kind of scaffolding which allows property to move to its highest valued use with a great deal of security.

In most of the emerging markets from Russia to Latin America, there are people today who own property that did not before. But the government machinery -- the executive, legislative and judicial branches -- has not kept up with building the kind of framework and institutions needed to protect property rights.

There is the problem of well-meaning groups who claim property rights do not exist in those countries simply because they aren't there in legal terms. These groups in countries such as yours, which I'm sure have the best intentions, wish to protect indigenous property rights. However, they do not realize that in many cases what they are talking about is protecting or promoting the sovereignty of a special ethnic group, not property rights. This results in a needless confrontation between the protection of sovereignty of an ethnic group and the property rights of individuals within such a group.

In short, the important thing is whether there will be enough political savvy in emerging markets to create the legal framework that protects private property rights. These do exist in most countries, though maybe to a lesser extent in hunter-gatherer societies. So the first step is one of discovering which property rights exist. The second is to learn from the evolution of the various models used in the Western world and how organizations were created so as to best organize and protect these rights legally. Many of these systems were spontaneously generated over many centuries and have existed over the last 50 to 200 years.

ERT: How would you describe the relationship of strong systems of property rights to democratic institutions?

MR. DE SOTO: The relationship between the two is very strong. Democracy has a lot to do with establishing a good system of property rights in the sense that it's not really possible to build such a system unless you know how people think about their relationship to objects, land and assets at the grassroots level. Only after you do this can you incorporate property rights into a body of law that is truly effective.

In the United States, for example, throughout the 19th century and the beginning of the 20th century, there were various mechanisms that recognized the role of pioneers in staking out land claims even though initially the country didn't have a legal framework for them. Instead of keeping with the British tradition which accepted what the king and judge made law, the US government accepted that people on the ground had their own ways of settling many property issues and had effectively built local social contracts. As a result, an effective nationwide property rights system was set up that worked, but not using the law brought over from England. Instead, it was built on a system of grassroots democracy and principles of equity that flowed from the fact that a lot of poor people in the US went out and staked claims which were basically approved by the majority of the population. That's why they stuck.

The preemption acts and occupation of lands via adverse possession were nothing other than the US government (including the legislative and judicial branches) continually backing away from imported law and recognizing the emerging rights of squatters in Texas and gold-rush miners in California, for example. Yet, these new claims had a legitimacy the old laws didn't have. The preemption acts, in effect, legally recognized that what the people had created was probably stronger than an old parchment title that had been in place before. If democracy is government by the people, it means among other things that people's social conventions are being acknowledged and protected. It means a country is in touch with evolving conventions, and has gradually woven these property rights into a more sophisticated and far-reaching social contract.

That type of democracy doesn't exist in countries like mine. But what may be more instructive for people from emerging markets is to look into the history of the US to understand what state of development they are in, and what democracy means, rather than looking at the US at the end of the 20th century when all the underpinnings for strong property rights and democracy are already in place but are also, unfortunately, invisible.

As for Latin America, for the last 170 years we've been trying to become like the Western democracies, and we've been failing for 170 years. We have systems, for example, to elect a political party, bring a government to power, etc. But our democracies do not have in place mechanisms similar to the US preemption acts, homesteading and recognition of existing arrangements among common people regarding land and assets. What we've done instead is to simply import a legal system that tells us that, regardless of what the existing local conventions are, property rights are determined by prefabricated legal structures from alien social contracts that develop from different realities and contexts.

ERT: Why have past efforts, particularly by international donor agencies, failed to result in broader ownership of land titles in emerging democracies? How can you see future efforts generating a better track record in this regard?

MR. DE SOTO: If you look at the inventory of failures and successes -- as we've done over the course of several years at ILD, with a lot of help from CIPE -- there are various reasons why international donor agencies have failed to promote broader ownership of land titles.

The first problem is that they have failed to realize that we are not at the same historical point as the US. As a result, when they come to countries such as Peru, they emphasize the role of time-consuming and expensive activities, such as photogrammetry, fine maps and electronic organization of the existing information. All the equipment and detailed maps are useful, but they do not clarify the actual situation of who owns what because who owns what and what rights they have to trade it or use it are basically determined at the grassroots level and not by graphical or computerized documentation. This information can be determined only by political and legal means. Only once these are in place can the equipment be put to good use.

As I said earlier, property is a type of social contract between people, and it is a very political thing. There are places, for example, where people really do have a sense of community regarding grasslands to be used to pasture animals and which can't be parceled off. Other cases may involve public grounds in towns and cities to which people may have accepted temporary usage rights. By contrast, most of the projects done by international donor agencies emphasize the technically-driven aspects of making boundaries more precise rather than finding out what the existing social contracts regarding land ownership are. Too many experts forget that before the West had computers and photogrammetry, people had already agreed on property rights.

A second problem is the tendency of many donor agencies to work directly with existing property registries which don't reflect what's actually happening. In Peru, for example, you will find a total mess if you look only at the registries. Many of the registered titles are not valid because the country has been titled and re-titled -- with and without foreign assistance -- over forty times. As a result, there are sometimes dozens of titles per parcel of land, and the question remains, "Which of these titles are the ones that really count?" This is especially true when someone inadvertently wakes up a "dormant title," which is what happens when some so-called experts inadvertently trigger expectations by breathing life into ignored statutes, which may be perfectly legal on paper, but have been effectively substituted by much stronger conventions.

In short, property means not simply honoring pieces of paper just because they exist. First, law changes over time, and the genius in creating property rights lies in determining the current social contract regarding rights to a particular asset, then building on that reality. This is what happened in Japan after the Second World War when the American occupation forces respected the rights determined at the grassroots level by the Japanese themselves as the source of law.

In short, the problem with many donor agencies is that they have missed the point altogether: that property is a living thing, and is incorporated in social conventions that have a lot to do with democracy. This is not to say we don't need surveying, mapping and computers that enable us to process data better. The problem in Latin American countries and the former Soviet Union, for example, is that the machinery may be in place, but they lack the mechanisms required to locate, decode and systematize the crucial information people at the grassroots level have about who owns what and what their basic rights are. The only good solution is to be able to pick up on what people have already spontaneously created.

ERT: Would it be possible to repackage the type of work that different donor groups have done, or is this too complicated a process to put it on the right track?

MR. DE SOTO: First, as I said before, donors must recognize that in our countries, aside from the written law, there is often unwritten law which is much stronger because it is recognized by most of the population. If the advisors are helping to write new laws, they must make sure these laws actually reflect what people believe; they must structure the laws on the basis of the existing social contract so that people obey them and they thus become enforceable. Otherwise, what you are doing is simply strengthening the paper rights of those people who have political power or privileged access to the judicial system versus the rights of those people who actually own the land and whose ownership is generally respected.

Every time a donor comes in and decides to fight for what's on paper because that's what he finds when he opens the books, he may be bringing back to life outdated political charters which, in many of our countries, no longer reflect who the real owners of land and other assets are. For example, if the US had sent in a technical mission to Japan after the Second World War whose only mission was to modernize the system of land record keeping, surveying and mapping, the end result would have been to reaffirm the rights of feudal lords over the land when, in fact, during the previous four hundred years, the real rights over land were held for all practical purposes by small farmers, although their feudal lords taxed them heavily.

I'm rather pessimistic as to just how much can actually be done unless donors become fully aware that one of the most marvelous things that occurred in most of the European countries and the US during the 19th century was a huge property revolution. What used to be patrimony -- that is, assets that belonged to only a few families -- was converted into a modern property rights system where assets became accessible to everyone and easy to transact.

For the moment, of course, the big issue in most emerging markets is that the majority of people live, work and use land for which they have no legal title even though their neighbors recognize it is theirs, and governments wouldn't even dream of tampering with that land. Without such a title, however, there is no way to build a system of securitization that gives them access to credit or water, telephones or electricity. Private companies can provide these services only as long as the fundamental risks of doing so can be controlled.

That is the key problem for us today. However, many of the experts who work with the donor agencies instead transferred to our countries issues that are not the most important to our countries -- at least not for the moment. Take the case of intellectual property rights. How can you explain to someone who has no legal property rights over something as tangible as his home that he cannot replicate a brand-name watch in his workshop or that if he creates a song, he has exclusive rights to it and that it can't be duplicated or plagiarized? Intellectual property rights are crucial, but unless they are brought about in a context meaningful to the majority, they will be very difficult to enforce.

So I would recommend that donors accept they may have lots more to learn about what's happening in our countries at the grassroots level before some of their assistance may be useful. They also must accept that many convoluted political processes in Latin America, Asia or the former Soviet Union occur because some state organizations are way behind the reality at the grassroots level.

ERT: You have worked for many years trying to make it easier for informal sector businesses to register their enterprises and become legitimate. How successful have your efforts been in lifting the standard of living of people in the informal sector, and what needs to happen to push that process forward?

MR. DE SOTO: The first thing to remember is that the projects we did with CIPE had very low budgets if you think in terms of what other countries have spent and yet have few results to show for them. Second, these programs were really private ones, and the results have been impressive.

During President Fujimori's administration, registered titles to over 300,000 plots of land have been awarded. Production on these titled properties has risen by about 40% compared to properties which were not titled and registered. About 25% of the owners now have access to bank credit since they can use the titles to guarantee their bank loans. Although some of them had access to credit before from microenterprise organizations and small banks, most had to rely on loan sharks who charged them extremely high interest and other charges. Meanwhile, the value of homes in urban areas has increased by an average of 200% since they were titled and registered three years ago, and their value will continue growing.

We have brought over 276,000 enterprises from the informal sector to the formal one. This was done by re-engineering the whole process and cutting the delays and red tape for entrepreneurs to legally register a business from about 300 days to less than a day. The weight of the process is now on the bureaucracy rather than on the business owners. Now that these enterprises are in the formal sector, the government is collecting hundreds of millions of dollars more in taxes than before. These enterprises are also employing more people. Over 500,000 new jobs have been created just with this process because people now own legal businesses, they can advertise and don't have to pay bribes for protection.

The land titling and business registration process has been so successful that the Fujimori government has decided to expand it since it has helped Peru achieve one of the highest growth rates in the world. These programs, which were carried out largely in the Lima area, are to be reinforced and adequately financed so they can cover the whole national territory by the year 2000 or thereabouts.

ERT: In the last issue of ERT we explored the impact of privatization in emerging markets and the work that remains to be done. Do you see a way that stronger property rights and privatizations can be accomplished in tandem?

MR. DE SOTO: I don't see privatization schemes actually working unless you finally settle the property rights issue. There are several reasons for that, as the experience of Latin America shows. We began privatization a long time ago. Even our railroads used to be privately owned by the British, and we had seven consecutive waves of privatization efforts between the 1820s and the 1990s. But we always swung back to renationalize the assets that were privatized.

Today, many people in the region accept, sometimes very grudgingly, that our governments have to privatize because they are broke and must reduce the public deficit because it produces unbridled inflation and debt. But the whole process hurts the people after a while if they don't understand what's going on. Giving away property to Enron, General Electric, British Gas, or whatever other company may just look to them like handing over sovereignty or creating a foreign enclave. For a person to understand that private property is a good thing and that a foreign company can get rights to it, he must have an opportunity to get private property as well.

The first thing then is to formalize the social contract at the grassroots level so that everybody can understand what property rights are about, and then to understand the distinction between sovereignty and property rights. Governments have to show that they are not giving up sovereignty, but only rights to companies to run enterprises and services privately in everyone's best interest.

The next thing, of course, is to ensure that everyone benefits from privatization. In other words, if I see a private company coming in, having access to credit, electricity and clean water while I'm not getting any, I will resent that situation unless I too have private property that I can use to get the same things. Once I too have a chance to own private property or know that I have a possibility of acquiring it, I will not resent privatization because I'm basically part of the process. We have already seen the connecting links between property rights programs for the majority and successful private investment in infrastructure projects whether they be independent power producers and/or utilities involved in the distribution of energy and water.

In short, I don't think many privatization programs are durable unless property rights or access to property rights are available to everyone in countries such as mine. If they are not, there will be nationalist backlashes, and politicians who depend on the public's vote will be tempted not to respect privatization contracts they have signed. Unfortunately, there are many examples from history to buttress my point of view.

ERT: Recognition of collateral is at the root of the financial system of every country in the West. How do you see better recognition of property rights in this regard dovetailing with efforts to bolster financial systems in emerging democracies?

MR. DE SOTO: Clear-cut property rights are indeed essential since you can only pledge collateral if you own something. If you give somebody a valid, respected, secure property title, it's really the first step in the securitization process. Let's take the US as an example. I understand that asset-based securities account for about $4 trillion of the $13 trillion in its financial markets. These asset-based securities in the end all rest on mortgages and the rediscounting of mortgages. There are other mechanisms that make this whole system more secure, including national mortgage intermediaries like Ginnie Mae, Fannie Mae, Freddie Mac and others that help create secondary markets. But what is at the bottom of these mechanisms is the fact that somebody who owns land or other private property can pledge it as collateral. This engenders a great deal of the capital markets in the US and even anchors the rest of its financial system.

By contrast, in countries such as Peru and probably most of the former Soviet Union, over 70% of the people cannot be linked legally to a piece of land or real estate. Therefore, the first stages of what you can call securitization -- turning illiquid assets into liquid ones -- is the process of formalization, which in turn leads to the creation of collateral essential to establishing large financial markets.

The US began moving in this direction in the 19th century by first creating county land registries. It then compensated for deficiencies in the registers through the creation of title insurance companies and legal conveyances in titles which guaranteed there were no defects in the title, thereby making unmarketable property marketable. As a result, in the US today a house is shelter, land can produce agricultural goods, and a tractor allows its owner to reap the wealth of the land. But these assets are also capital because one can use them as collateral to obtain and create capital, and that's because title to them can be clearly determined. The title reflects a social contract that is respected by everyone.

While real estate accounts for some 45% of the assets of families in the US, it represents anywhere from 70% to 80% of the assets of Peruvians. But since it is not duly securitized in Peru by a good property formalization system, there is no way a country like Peru can build a mortgage market or a capital market that will allow it to prosper. This also is the reason why the country continually has to obtain international financing.

ERT: What can businesses in the US and other Western countries do to help establish stronger mechanisms for protecting property rights in emerging democracies?

MR. DE SOTO: There are many Western businesses that have the know-how to be able to do this. I just don't think they've become aware of the opportunities in emerging markets, and how to take advantage of them. The market for their services, however, could be equivalent to over 40% of the GDP of countries that don't belong to the OECD. These companies could also enjoy higher profits in emerging markets than those they typically earn in the industrial nations.

Again, the US is a good example since the consumer credit revolution and the so-called non-bank banking started there. It began first with the establishment by the large manufacturers, such as General Electric and General Motors, of basically their own financial affiliates to extend credit to cash-poor consumers in order to sell more dishwashers, refrigerators, cars, etc. These affiliates created mechanisms to collect credit more effectively and also to securitize it.

More recently, the credit revolution has gotten a major boost with the establishment of credit-rating systems such as TRW that use information technology and automated systems to facilitate a person's ability to obtain financing. Poor people can even go to companies such as The Money Store to obtain credit, and this credit revolution has now reached the point where experts such as Robert Litan, now at the US Office of Management and Budget, are documenting how these new credit organizations are starting to displace the traditional big banks or forcing them to merge.

All of these kinds of second-tier providers of consumer credit have developed numerous mechanisms to mobilize the assets of relatively poor people and bring them into the financial markets. Some of these institutions also are able to buy small debts, consolidate them and thus convert them into solid paper that can be traded in the financial markets.

The problem with these consumer credit institutions is that most of them are not internationally oriented. The traditional bankers also must reorient their activities not only to serve governments and their usual wealthy private customers, but also to get to know and service the average consumer, as they have learned to do so well in the US.

ERT: Do you see a role as well in this process for the whole title insurance industry and other institutions in the US that are involved in helping people obtain secure titles to their property?

MR. DE SOTO: Definitely. These kinds of organizations and the bankers that are familiar with their techniques can indeed play an important part in emerging economies. One of the reasons is that many of the conditions in these economies today are more similar to the environment in which these institutions were born in the US than they think. I don't know of other organizations which are more aware and have more tools to assist emerging markets in this effort than those in the US. I would include in this not only title insurance companies but also mortgage and commercial banks, insurance companies and other businesses that help build a country's infrastructure.

The challenge they face is not a small one, however. One of the main reasons is that generally most of these companies have not yet seen the connecting links between property rights and their businesses nor where the cash collection points are. Moreover, they tend to be very domestically oriented and rely on fuzzy criteria for risk analysis in foreign markets and "Power Purchase Agreements" that are totally oblivious to the necessary association of their rights to those of the final consumers who, after all, will always be the primary concern of the governments they contract with.

It also takes time because you must first understand what formalization is about(converting the informal into the formal. But if these US industries don't internationalize, other organizations that may not have their know-how and expertise will move in and take away from them the opportunities opening up in emerging markets.

Another thing to remember is that the whole US economy would also benefit if its insurance and credit companies worked in these areas abroad. They would not only help enormously with what the emerging markets need to do in terms of property rights, they also would do wonders for US business working in these markets. Insurance firms -- as well as consumer-credit organizations -- would be able to make the process of investing and making money overseas a much more secure and fruitful endeavor than it is today for many other kinds of US companies, especially in infrastructure.s

[Lazarus Long]

Hernando De Soto
Interviewed by Dario Fernandez-Morera
Outlaws and Addresses,

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.

[Lazarus Long]

This is the conclusion of the new preface to De Soto's book "The Other Path". I suggest it is an even more important work at this juncture as we contemplate not only the future of Iraq but the very principles of Foreign relations that are being reorganized everyday now.

The full text can be found here along with the First Chapter of the book for review. This is a must read for Neo-Conservatives that would like to appear even remotely educated as to the world at large, let alone compassionate. Libertarians and Randians will recognize a kindred spirit. I understand a "popularist" that I can find common cause with.

Full Text of new preface

The Lessons from Peru's Successful War against Terrorism

The ILD did not set out to take on the terrorists. Our goal was to figure out ways of bringing the majority of Peruvians into a legal system that had traditionally shut them out and thus stunted the nation's economic development. We never had any intention of joining the war. Like the historian Arnold Toynbee, I firmly believe that war is not only tragic but a total waste of human energy. But if you happen to be committed to development and helping the poor, and in time of war you are caught in crossfire, you had better try to understand what is happening and why. Our participation taught us much about the politics of exclusion and development in today's circumstances.

What I came to understand is that today, a massive social and economic revolution is taking place in the developing world that rivals the Industrial Revolution in the West that gave rise to market capitalism. In the last forty years, some 4 billion people, who had been living in the hinterlands of developing countries and former Soviet nations, have abandoned their traditional way of life. They are moving away from small, isolated communities towards a larger and more global division of labor in the expanding markets that both Adam Smith and Karl Marx had seen emerging in the West two hundred years ago, and that are now struggling to emerge outside the West.

*****

Concluding paragraphs:

The final and most important lesson I learned is that the excluded hold the key to victory. They are the overwhelming majority, and it is they who are looking for change most fervently. Few people in the developing world are unaware of how well their counterparts live in the market democracies of the West. If governments create the legal property tools that they require for their enterprises to prosper, they will become part of the legal expanded market. If governments do not take them seriously as economic agents, if governments see them only as a nuisance or passive recipients of charity, the resentment among the poor against the status quo will only increase. Enter the terrorists, eager to exploit this hostility against the state, encouraging the poor to focus on their exclusion rather than on their aspirations to resemble the affluent citizens of the market democracies of the West.

The poor want only what everyone reading this book wants: a secure, prosperous life for themselves and their children. The Other Path is the story of how the poor in one country are spontaneously creating a market society. They are on the right track. Do we help them create the legal framework to achieve that goal by themselves or do we ignore their economic aspirations and, by default, open an opportunity for terrorism?

The end of global terrorism is decided predicated upon making it possible for all people to find a meaningful existence more than any mythical clash of cultures. Some individuals clearly never will stop if their problems are "psychological" and this is a where the final distinctions will be made but if the "reasons" for unrest and discontent are economic and philosophical it also must be understood that these are not hopeless historical conflicts that have no possible solution.

They are a dynamic and complex blend of the quixotic relationships of factors that demand the closest scrutiny and an adherence to a process of rational resolution that can avoid the worse manifestations of the psychological aberrations that are the basic element of a desire to be a "Terrorist", or at leasat identify and isolate such behavioral types.

Yet even with the closest scrutiny possible we must also continuously rebalance the subjective/objective aspects of individual purpose and how we integrate our social collective to contribute to meaningful and healthy competitive characteristics as opposed to the more malignant aspects of our character.

Edited by Lazarus Long, 09 April 2003 - 04:28 PM.

[DJS]

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.

This makes sense too me. [blush] However, isn't this a movement that would have to be home grown? How can we directly influences this trend in a favorable direction? I like the point that the disaffected could be lured into the terrorist camp. Therefore we must try to win "their hearts and minds" before the terrorists do. But aren't there also the terrorists who can not be won over no matter what we do? How do we deal with the terrorists while trying to win over the "peasant majority" of the world? I am going to reread this thread to try and better digest this.

[Lazarus Long]

However, isn't this a movement that would have to be home grown?

Stop being obtuse. Cocaine is a global commodity like oil, weapons, critical resources etc. You can't just turn your back on global market forces that exploit impoverished local populations and say:
"Well it their responsibility, but in the meantime I will just take advantage of their powerlessness to exploit their resources since they can't."

Winning hearts and minds doesn't mean make them love us, OR our system, it means helping them find a meaningful life such that we can find common cause to honestly trade. People who have something to live for do not become terrorists UNLESS you threaten all they live for.