A Conversation with Hernando de Soto
In 2000, the Peruvian economist Hernando de Soto published The Mystery of Capital, his landmark study of the relationship between property rights and poverty. De Soto claimed that some $9 trillion of “dead capital” was locked up in land, homes, and businesses belonging to poor people who did not technically “own” them. Without deeds or titles, he argued, poor people all over the world are not able to leverage their property for profit. Solving this problem became de Soto’s mission.
Though his ideas are controversial, they have been immensely influential. (In 2004, Bill Clinton described him as “probably the world’s most important living economist.”) During the past decade, he has attempted to put his theories to the test, advising governments and heads of state around the world. As a first step, de Soto and his colleagues at the Lima-based Institute for Liberty and Democracy designed an administrative reform of Peru’s property system—some 400 initiatives, laws and regulations that have allowed more than 1.2 million Peruvian families to claim title to the lands they farm, and helped some 380,000 firms which previously operated in the black market to enter the open economy. But Peru was only the beginning. From his base in Lima, de Soto spoke with World Policy Journal editor David A. Andelman and managing editor Justin Vogt.
World Policy Journal: Let’s begin by looking at property, which is your particular interest and focus. You seem to suggest that the poor, especially in the most deprived portions of the world, are poor only on paper. In fact, they are wealthy, in terms of the land they can control to grow their food and live with their families. Explain to us why that form of ownership isn’t sufficient to prevent these people from being poor. Why is legal documentation so important?
Hernando de Soto: Let me try an example, because we just started working now in the Peruvian Amazon where, together with the Brazilian Amazon, we’re discovering a lot of the potential wealth of the world. It is a huge source of petroleum, a huge source of gas, a huge source of hydroelectric power, and minerals and metals. The same thing is happening in India and in tropical Nigeria. But let’s concentrate on Peru. In this case, you’ve got native lands where we found that only 5 percent of indigenous people have titles to the land that—by description in the constitution—is theirs.
On the other hand, you’ve got solid property rights that are given to any company, foreign or Peruvian, that wishes to extract oil or any other mineral. So here comes an American company, for example. They get a property right from the Peruvian government and that property right is in the form of a concession. It establishes that it’s theirs, provided you renew agreements and commitments over so many years, but it’s a property right. And they’re going to have it for 60 years, 120 years, or it’s unlimited. This property right then becomes even more “perfected”—that’s the word we use in Spanish—and thus it becomes even more detailed as to how far these rights go. Then that property right—which has been protected by the bilateral international treaty that has been signed between Peru and the United States—gets inscribed and blessed by the United States Overseas Private Investment Corporation (OPIC), which issues guarantees that makes it interesting for everybody to look at that property, because it’s got the backing of OPIC. Then that property right goes to the Multilateral Investment Guarantee program of the World Bank, where again it is ratified by its 187 member countries, who of course view this as a way of guaranteeing investment in developing nations. Then the owner of that title goes to Toronto, Wall Street, or London and says, “I have got a property right that even the Peruvian congress can’t take away.” On that basis, the investor gets $3 billion and brings it back to Peru. Now they’re right next to tribes who have the same amount of land or even more, but are poor.
The difference between the foreign investor and the local investor is strictly the paper. In other words, the paper is by law the statement that tells the truth, that gives direct information. That’s what makes people accountable and raises the funds. It’s not the land, it’s not work, it is not machines. It is a legal statement that is solid. So what I’m trying to say is that we have had all this land that has all this oil, that’s got all this gold, probably for eternity, and it can only be developed through capital. And the only thing that can attract capital is the ability to go to the markets and demonstrate that it can be monetized.
WPJ: But the majority of the rural poor aren’t farming land that has vast mineral resources beneath it. The act of working that farmland is creating the value, in terms of the crops they produce to feed their families.
De Soto: What I’ve just indicated to you regarding petroleum can be applied also to agriculture, since it has become clear over the last five years that we’re going to have food shortages. So there’s going to be food inflation, and you’ve got to develop more food. Today, you’ve got Chinese, you’ve got Saudi Arabians, you’ve got the agro-industrial companies buying huge swaths of land in other parts of the world, and they’re raising the value of those lands which are right next to informal lands, so the value of that land is going up.
If that land were titled and if it were fungible in the sense that you could then use it to get guaranteed credit and investment, or bring it together with other similar plots, then you could have large-scale agriculture instead of small scale. It’s the same thing whether you’re using your land for petroleum or whether you’re using it to feed people. You need the fungibility of the law to create prosperity out of it.
WPJ: I’d like to look at the question of the rural poor who migrate to the cities and, effectively, become the urban poor, in Africa and Latin America and certainly in china and some other places. Is there a substantive difference between rural and urban poverty? In other words, the fact of working the land, the fact of ownership in the country, that’s not easily transferred to the city where there are perhaps decades or even centuries of confirmed documentable ownership—spoken for, on paper.
De Soto: A lot of that migration need not take place if the land were part of property law. If some of them decide to go to the city, without documentation there’s no way they can transfer their land wealth to the cities and make a new life there. Because it’s not fungible, it can only be transported through paper. I can’t tell you to what degree having property rights or the rule of law equally available to indigenous people in the countryside of these developing countries is going to reduce migration.
WPJ: Can you tell us where you have had the most demonstrable success in your mission—where there’s been some empirical evidence that your efforts have led to increased prosperity and property in the hands of poor people?
De Soto: There is not much data available. Probably Peru is one, definitely El Salvador is another one, but I would suspect that where we’ve advanced the most are areas which haven’t actually contracted us but have consulted us intensively and taken our regulations and put them into proposals—like Russia. I got called in by President Putin. I’ve talked to him various times, once for four hours, and I’ve talked to his staff. I think they have registered about 800,000 titles.
The other place is China. Every time I go through china somebody comes by, like the president of the People’s congress, and says, “You don’t know how much we owe you. If it weren’t for you, we wouldn’t have done it.” the other place, but we lost contact with them, was Thailand, where Thaksin Shinawatra had a special project, “Capital for the Poor.” then he was ousted. Before that, though, their ministers came regularly to Peru and looked at what we were doing. But they never called us in. they just did it the way they thought would be the Thai way. In South Africa, quite definitely, even the African national congress asks the question of how we’re going to convert “dead capital” into “live capital.”
WPJ: But given the absence of data, how can you be confident that it’s actually playing out the way your model or theory would lead you to expect?
De Soto: Many years ago, when asked why he thought the United States was doing so well, Alan Greenspan said, “It’s information technology. It’s the information revolution. We’ve never had such reductions in the transaction costs and the transmission- of-knowledge costs in this country ever before.” And they said, “Really? How much?” He’s still working on it.
WPJ: Wasn’t the very process of monetizing property assets at least part of the cause of the financial crisis, especially in the United States? In developed economies, wasn’t there too much capital—in the form of subprime mortgages, derivatives, and so on—that turned out not to be “dead,” but actually non-existent or even poisonous?
De Soto: You’ve forgotten what made property rights work—the fact that they’re public and recorded. And what you’ve done [in the United States] is you decided you could have a bubble, and bubbles are part of the capitalist system. If you’re willing to have a capitalist system, then you’re willing to have bubbles. But you’ve gone way beyond bubbles. What you’ve done is, first, get that property you decided to give the poor and give them titles to it. But to get them financed you created mortgages through a Mortgage Electronic Registration System (MERS) system that eventually stopped recording them. Now we know that all your banks are trying to foreclose on, I think, about 60 percent of your mortgages. They have to be foreclosed because you can’t make a connection between the piece of paper of the mortgage and the piece of paper of the title because the MERS system skipped that stage. So it isn’t the property that screwed it up, it’s your property system.
On the other end of the spectrum, you took these mortgages, sliced and diced them, repackaged them in collateralized debt obligations, some of them mortgage-backed securities, then guaranteed them with credit default swaps. You took them 16 generations away from the mortgage. In September 2008, your treasury Secretary Henry Paulson went in front of your congress and even got on his knees in front of Nancy Pelosi and said, “I need $780 billion—nearly $1 trillion—because I have found out about these non-performing mortgages, and we have to buy them because there’s going to be a run on the banks.” She gives him $780 billion, and then three weeks later he appears and says, “You know, we decided not to use that money to buy the mortgages. On the contrary, we’re going to use the Gordon Brown technique, which consists of strengthening the banks instead of buying their bad paper.”
Now I got really curious. While I don’t know anything about the United States economically, I do have a lot of friends in high places. So I went to the White House and I went to your treasury Department and I said, “Why did you change this?” And the reply was, “Because we couldn’t find the derivatives.” The only non-recorded asset in the West is derivatives—the only asset not subject to property-rights legislation dating back to the 19th century, and designed to identify every asset, a total net worth of $700 trillion. So your problem isn’t that you have too many property rights, it’s that you don’t have enough property rights that haven’t been dropped along the way.
WPJ: From the point of view of governments in the developing world, some of which are running for their lives at the moment, what incentive is there to implement the kind of reforms you’ve proposed? Wouldn’t that be politically risky? Effectively, they’re giving away the national birthright of commonly owned property or seizing property already owned by wealthier citizens, who might be their powerful supporters. Effectively, you seem to be advocating a political as well as an economic revolution.
De Soto: I’ve got a project in Libya. I was called in by Seif al-Islam Gaddafi, who said the writing’s on the wall if we don’t do something about that informal economy that you always talk about. So we were given a contract, about two months before the shooting began. That’s when the people in Benghazi, that is to say in the east of Libya, rebelled. But they had no leader. So who’s their leader now? Mahmoud Jibril, who was the chief of my project in Tripoli.
So here’s the way I see this. First, I’m of course shocked by what’s happening in Libya. I’m saddened by all this violence. I don’t know if it’s going to end soon, I hope it works out. But I would very much doubt that they’re going to make any progress in Libya without settling the issue of who controls the land, who controls the resources, and whether it’s going to be just one guy, in which case you have a dictatorship, or whether there will be many people, in which case you create some kind of a landed bourgeoisie of small landholders. So as far as I’m concerned, the fact that you have turmoil in the Middle East makes it much more likely there will be change than in peacetime.
The same was true in the United States. It was only when you really got into an open conflict with George III. The change of sovereignty and property regimes generally only happen when there’s an upheaval. So if I had my guess, the next 10 years are going to be, in terms of changing property rights, much more intense and much more fruitful than the last 10 years.
WPJ: Are you concerned that the global economy could be headed into recession again, in some fashion, and that could put a lot of these projects on hold for the indefinite future?
De Soto: Not in the developing world, because these initiatives represent the only possible political solution. Take Mohamed Bouazizi, the street vendor whose suicide started the Tunisian revolution. Why did he commit suicide? Because he didn’t get property rights over the sidewalk, the license to operate his street vending operation. Now many people have actually immolated themselves to protest the regime in Tunis. But when this guy, who was a street vendor, did it, the whole region lit on fire because he happened to be of a certain social class.
Westerners and Americans don’t like the phrase “social class” because it appears to be derived from Marxism, but the fact of the matter is that people do identify with other people based on their economic and social strata. So one of the reasons I’m sending a team to Tunisia now is we’re trying to find out what the connection is between all of these places. Libya has clans and tribes, Egypt has nothing to do with clans and tribes, it’s completely different. Yet they’re all lighting up. And we believe it has to do with a social class that is not on a salary. Bouazizi was not on a salary. The majority of Tunisians and Egyptians are not on a salary. They’re earning their own incomes, they’re very, very small entrepreneurs, albeit outside the law. And once we figure that one out, we’ll find the course the revolution should take. It’s all about who controls the assets and who controls transactions.
WPJ: Back to our theme: How much is enough? How much land, how much property—how much is essential? I know it’s like asking how long is a piece of string. Still, how much is enough for the average Peruvian peasant, or the young person clearing the jungle in Nigeria—how much is enough for them?
De Soto: That is a question we would label in my organization as a land tenure question. Land tenure people might say that three hectares (7.4 acres) is enough—yes, that small. But then you could get somebody who’s an ultra-capitalist who says “Look, scale counts. You can’t really use big tractors and get everything you can without scale; small property doesn’t make sense.” And then there will be a third party who will say, “Well, both of you guys are right, but in different places, because in many places, like the Amazon, the plots of land can’t be very big, because first-time land-owning extends to just a few acres and it’s hard to get.”
WPJ: You’re trying to increase ownership and property rights. Does that conflict at all with the idea of creating sustainable growth? Is there any tension between that model of development and the idea that global consumption needs to be reduced in the long run?
De Soto: I’m not about getting people more property. What I’m trying to do is make everybody aware that somewhere along the line the world decided to follow what was already visible in the West at the time of both Karl Marx and, about 70 years before, Adam Smith. They saw the world being cut up into little pieces, the feudal system crumbling. And that’s when they said, OK, now there’s something new called the capitalist economy, or market economy. Smith liked it and Marx didn’t like it. He appreciated it but he didn’t like it. All we’re trying to say is that a movement has begun in developing countries, and the sooner you’re aware of it, you will be able to handle your revolution much more peacefully. What any country decides to do in such a case—whether there’s overconsumption—is a secondary matter.
My friends at Fannie Mae and Freddie Mac, when they took me in and celebrated me at large conferences and large parties because they thought that I was part of them, I accepted. But they were thinking that I wanted more homeowners. I never said that. I simply said that you can’t have a progressive market economy if you don’t have boundaries as to who owns what. Then you can make clear transactions. Whether the country decides to transform this into a leftist agenda, a rightist agenda, a liberal agenda, conservative agenda, to me is a national choice. I stop there.
[Illustration: Miguel Jiron]