HERNANDO DE SOTO has star appeal. He is on the must-call list of many world leaders. He is feted by the press and funded by international development agencies. His think tank in Peru has produced some of the most influential work in development economics, while his best-seller The Mystery of Capital was hailed by The Economist as “the most intelligent book yet written about the current challenge of establishing capitalism in the developing world.”
In it, de Soto argues that, despite capitalism’s triumph over communism, the market system is in deep trouble as long as so much of the world remains poor. The key to both spurring development and securing capitalism is enabling tens of millions of poor entrepreneurs across the third world to become part of the system rather than excluded from it by bureaucracy and red tape.
Unusually for an economist, de Soto was a successful businessman before he founded his think tank, the Institute for Liberty and Democracy (ILD), in Lima in the early 1980s (see box, page 10). He accumulates more frequent-flier miles than many corporate bosses, bringing all the skills and tools of a marketing expert to sell his idea that the main problem of development is not that the poor in the third world lack capital, but that many lack the legal title to assets they already hold. Giving them legal title will unleash this “dead capital” so that it can be used as collateral for loans to fund new businesses or expand homes.
“They have houses but not titles; crops but not deeds; businesses but not statutes of incorporation. This explains why people who have adopted every other Western invention, from the paper clip to the nuclear reactor, have not been able to produce sufficient capital to make their domestic capitalism work,” de Soto argues.
De Soto’s populist approach has won many converts among world leaders, from Russian President Vladimir Putin and Thai Prime Minister Thaksin Shinawatra to Mexican President Vicente Fox and Afghan President Hamid Karzai. One reason for his success is the zeal with which he promotes his message. In the eyes of many, that message has gained a new urgency since the terrorist attacks on New York and Washington in September 2001. In the early 1990s, his proposed reforms were credited with turning people in Peru against the Shining Path Maoist guerrillas, and the 62-year old de Soto argues that his ideas can also be a potent weapon against terrorism internationally by helping remove a major source of discontent.
Part of de Soto’s skill is in telling stories that everyone can relate to. One of his most famous is his barking dog story. The way de Soto tells it, he was vacationing on the Indonesian tourist island of Bali when he was asked to give a presentation about his ideas on property rights to the Indonesian cabinet in Jakarta. They told him property rights were fine, but how, they asked, do you sort out in practice who owns what? “I told them that when I had been walking in Bali—one of the most beautiful places on earth—I had no idea where the property boundaries were as I strolled through the rice fields,” de Soto said. “But the dogs knew.
“Every time I crossed from one farm to another, a different dog barked. Those Indonesian dogs may have been ignorant of formal law, but they were positive about which assets their masters controlled.” Recognized informal property rights could be developed into a formal system of property contracts by heeding the message of the barking dogs.
The metaphor is so effective that, like a musician with a hit song, de Soto is asked to tell the tale again and again. And with good grace, he complies. “Basically, wherever we go, we find the symbol of the dogs barking,” he says. “What we try to do at the ILD is build up a legal system of property that is based on the realities already on the ground.”
Culpepper, Roy, 2002, “Demystifying Hernando de Soto: A Review of the Mystery of Capital,” available at http://www.nsi-ins.ca/ensi/pdf/deSoto.pdf
De Soto, Hernando, 2000, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else (New York: Basic Books).
Gilbert, Alan, 2002, “On the Mystery of Capital and the Myths of Hernando de Soto,” International Development Planning Review, Vol. 24 (February), pp. 1–19.
Rossini, R.G., and J.J. Thomas, 1990, “The Size of the Informal Sector in Peru: A Critical Comment on Hernando de Soto’s El Otro Sendero,” World Development, Vol. 18 (January), pp. 125–35.
Woodruff, Christopher, 2001, “Review of de Soto’s The Mystery of Capital,” Journal of Economic Literature, Vol. 39 (December), pp. 1215–23.