De Soto: The key to demystifying capital
WASHINGTON - In a brief, brilliant exposition, Hernando De Soto defined lack of access to legally enforceable financial relationships as a leading cause of poverty in developing countries.
The leading voice for property rights and market economics in Third World nations compressed the research, experience and insight of several masterly books and many years into a 30-minute talk to open the Asset Building for Sustainable Livelihood Conference of the U.S. Agency for International Development, Jan. 14 - 16.
He began with reference to the beginnings of modern capitalist theory in the West - Adam Smith's "Wealth of Nations" and its famous example of the pin factory, where the assignment of separate tasks to separate people in the production process of pins produced 480 pins for every one produced by a single person handcrafting the whole pin.
"That's where the magic is" in economic performance, De Soto said - "productivity."
But Smith did not understand that formal legal relationships help the performance along, he added. Where those are not available, as in many Third World and informal sector economies, the model is undermined accordingly. The relationships in place tend to be not professional or legal but familial - a family member may be professionally incompetent but trustworthy, and trustworthiness may trump all other virtues where legal protections cannot be counted on.
In Egypt for instance, 90 percent of privately-owned assets are not legally recognized. Forging the relationships that formalize the recognition in law of a privately owned business takes 549 days there - "549 days to raise a business," as De Soto put it. "It's death, it's the impossibility of profit."
De Soto founded and directs the Institute for Liberty and Democracy in his native Peru (where he has been a target of Shining Path, the communist terrorism organization active there in the past decade). His scholarship focuses on poverty in developing countries, primarily Peru and other Latin American nations, touching only tangentially on indigenous peoples. Yet his findings have points of contact with Indian country.
The lack of legally enforceable financial relationships has kept investors away from many reservations - even where those reservations represent obvious potential markets in limited regional economies, as for instance with banks in reservation border towns. Since the late 1980s, a number of tribes have set about to create a comfort zone of legal protections for outside investors, often through a Uniform Commercial Code.
Informal economies also operate on many reservations. In Latin American nations, Peru for one, De Soto has tended to praise informal sector entrepreneurs and to criticize the counterproductive government regulations that are deployed to hinder them, barring their - and the nation's - way to economic growth. He is on record suggesting that a better path is for such governments to legitimize informal sectors with policies that in effect formalize them.
De Soto's books include "The Mystery of Capital" and "The Other Path."