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Economist for the poor wins
praise
By Peter F Schaefer
The world is discovering an unlikely new leader
for poor and developing nations: Peruvian economist and
property-rights advocate Hernando de Soto. In recent
weeks, it has been announced that de Soto will receive
the Sir John Templeton Prize, the Milton Friedman Prize
for Advancing Liberty (this Thursday in San Francisco)
and a Royal Order from His Majesty the King of Thailand.
Time magazine has named de Soto one of the 100 "most
influential people in the world today".
These
honors should come as no surprise for a man who has done
so much to better the lives of so many poor people (and
poor nations) around the globe.
De Soto, 63,
travels the world advising governments on how to
strengthen their economies by providing their poor
citizens with the means to prosperity. De Soto begins by
explaining the "hidden architecture" of property rights,
which is the basis of all modern economies.
These rights are so well established in
developed countries that they become invisible. The
systems run smoothly in the West, but in poor countries,
legal property rights simply do not exist for the
overwhelming majority of people.
This translates
to more than 4 billion people around the world who live
in states without the necessary architecture that
defines things and then sets the rules for those things
to work. As a result, many live as squatters without
rights over their own homes and businesses, mired in
poverty with no chance to escape, except perhaps through
migration to the West. Establishing that architecture is
what de Soto does. Yet it is nothing radical or new. It
is, in fact, an old idea, an old model - that works.
The initial document of America's First
Continental Congress was sent to King George III of
Great Britain in 1774. It listed grievances and rights,
the first of which were the right to life, liberty and
property. These rights, taken from the natural law and
firmly established in England's and Europe's history,
were declared in the United States Declaration of
Independence and detailed in that country's constitution
and Bill of Rights. The architecture was in place.
De Soto decoded America's legal revolution that
allowed squatters who improved land to gain a property
right to that land, thus preempting the owner. And if
the owner moved them off the land, they had to be
compensated for those improvements, which made
reclamation unlikely. The first preemption code was
passed in the state of Virginia in 1642, but the
principle was in operation from the time of the first
settlers.
As the US expanded westward across the
North American continent, Congress enacted more than 30
laws that preempted prior land claims on enormous tracts
of land, thus allowing land disputes to be settled in an
orderly manner. California's history is particularly
illuminating because it is a story of vast preemption,
as the state accommodated the land registries of
millions of people living in more than 800 squatters'
associations.
In explaining property rights as
vital to prosperity, de Soto makes plain that it is the
system of property law, not just physical possession,
that confers most of the value to property in the
marketplace. This is true because ownership is much more
than possession. It is a process of buying, selling,
renting and collateralizing that goes on constantly, and
effective rules can only come from a legal process
common to everyone in the marketplace. Local customary
rules are not sufficient to create either a wide or
efficient market.
De Soto has techniques that
allow modern systems of property law to be transplanted
to very different cultures. The United States, for
example, did so after World War II, in Japan and its
colonies, Korea and Formosa. America's strategy was to
see that Japan adapted to US values.
The US
employed totally different strategies in Europe and
Japan, and as a result, won the peace in each region,
though in very different ways. America's problem was
that the leaders who came after the "greatest
generation" looked at the wrong model of US postwar
success and so carried the incorrect lesson to
developing countries. In Vietnam, for instance, the US
followed General George C Marshall's model - cash, aid
projects and trade - and failed to build a nation. Only
General Douglas MacArthur's Japan offers a successful
model of modern nation-building by design.
Democracy and capitalism evolve from a structure
of laws and cannot be purchased through foreign aid or
great natural wealth, which de Soto explains with
considerable clarity. His interest in this history is
not as a historian of transformation but as someone who
wants to transform poor societies. The real question he
asked, and the main reason he won the Friedman award, is
how these transformations can be mapped and accelerated.
In the West, these laws were created over
centuries through a convergence of customs,
philosophies, and the give-and-take of an open political
process. There was no formula, no "little blue book" of
democratic capitalism. Its rise throughout Europe and
the US was a process of trial and error, guided by
preference and conditioned by efficiency, not by any
political or economic cookbook.
But after more
than 20 years of research by de Soto, we now know how
these national transformations succeeded. MacArthur in
Japan and, later, de Soto in Peru have shown us how to
compress a process of decades, even centuries, into a
few years. In both Japan and Peru, personal freedom
increased, billions of dollars in assets were
capitalized, and homeowners and entrepreneurs were
empowered to an extent that would be impossible through
even the most generous and sustained aid program over
generations.
A decade ago, the most vicious,
entrenched insurgency in the Western Hemisphere was the
Shining Path in Peru. It had 80,000 armed soldiers. De
Soto and his team spent two years planning property
reform for the impoverished Peruvian coca farmers, whose
sons populated the Shining Path. Just six months after
the de Soto program was launched, the Shining Path
leaders were in jail and their army had melted away,
choosing to work in their newly legal farmsteads. De
Soto convinced the peasants and slum dwellers that the
state would guarantee their property better than the
guerrillas, and so the poor people of Peru turned
against the Shining Path almost overnight.
The
foundation of laws beneath every modern nation is aimed
at ensuring the same basic trio of goals articulated by
John Locke and Thomas Jefferson: life (personal
security), liberty (personal autonomy) and property
(civil protection for houses and goods). If life,
liberty and property are secured by the state, then
democracy and capitalism are the natural outcomes. De
Soto gave the Peruvians (and many others) Jefferson.
Two decades ago, US president Ronald Reagan went
to the North-South Summit in Cancun, Mexico, and advised
the leaders of the Third World to ask Americans for
their system of political economy, not for their money.
Last year, de Soto went to another such summit in
Monterrey, Mexico, and explained to the world leaders
how to do just that. He has broken the code by
deconstructing what every successful state has done. Now
it is time to use de Soto's insights and help the
developing nations attain the heights that we have.
Peter F Schaefer, senior fellow in the
Institute for Liberal Democracy since 2002, has advised
Hernando de Soto informally since 1984. This article was
supplied by the Cato Institute.
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