Hernando de Soto (economist)

Hernando de Soto (born 1941; Arequipa) is a Peruvian economist known for his work on the informal economy. He is the director of Peru's Institute for Liberty and Democracy (ILD), located in Lima.

Career

De Soto lived for many years in Europe. He did post-graduate work at the Institut Universitaire de Hautes Etudes Internationales in Geneva. He has served as an economist for the General Agreement on Tariffs and Trade (GATT), as president of the Executive Committee of the Intergovernmental Council of Copper Exporting Countries (CIPEC), as managing director of Universal Engineering Corporation, as a principal of the Swiss Bank Corporation Consultant Group, and as a governor of Peru's Central Reserve Bank.

Reforms in Peru and elsewhere

De Soto was Peruvian president Alberto Fujimori's personal representative and principal advisor until he resigned two months before latter's self-coup in April, 1992. Between 1988 and 1995, he and the Institute for Liberty and Democracy (ILD) were responsible for some four hundred initiatives, laws, and regulations that modernized Peru's economic system. In particular, ILD designed the land reform of Peru's property system which gave titles to more than 1.2 million families and helped some 380,000 firms which previously operated in the black market to legitimize. This latter task was accomplished through the elimination of bureaucratic "red-tape" and restrictive registration, licensing and permit laws that made the opening of new businesses excessively time-consuming and far more costly than most of the largely poor population of Peru could afford.

University of Chicago political scientist Susan Stokes shows that de Soto's personal influence played a big role in changing the economic policies of the recently elected Fujimori from a Keynesian to a neoliberal approach: He convinced him to travel to Washington D.C., where Fujimori met with several important figures within the IMF, the US Department of State, and the Japanese embassy, who convinced him that he had to abide by the rules set by the international financial institutions. These policies were responsible for the stabilization of Peru's economy and the taming of inflation, thereby allowing Peru to return to international financial markets. Critics, however, argue that the so called Fujishock had devastating social consequences.

De Soto and his admirers claim that these reforms played a major role in the decline of the Shining Path and the capture of their leaders. By granting titles to small coca farmers in the two main coca-growing areas he deprived the Shining Path of safe haven, recruits and money. The leadership was forced to cities where they were arrested. They frequently cite a terrorist attack by the organization on de Soto as proof that the policies championed by him threatened the Shining Path. However, other accounts of the Shining Path’s decline point to more efficient intelligence strategies and increased anti-terrorism initiatives within the campesino population.

After the split with Fujimori, he and his institute designed similar programs in El Salvador, Haiti, Tanzania, and Egypt as well as gaining favor with the World Bank. Numerous current and former heads of states count among his admirers and contact him for advice, among them Bill Clinton, Vladimir Putin and Hamid Karzai.

Works

The main tenet of de Soto's books is that people in developing countries lack an integrated formal property system, leading to only informal ownership of land and goods. De Soto's "Mystery of Capital" used the work of John R. Searle in the book "The Construction of Social Reality". De Soto analyzed the social connections necessary to create money and capital. De Soto claimed that the foundation for economic success of American and Japanese capitalism relied on a clear system of property rights which was created during the times of the 'frontier' in America and in Pre-WWI Feudal Japan. De Soto says that modern developmental theory's failure to realize this process of creating an integrated system of property-rights as the downfall of their ability to create viable theories and policies. The lack of an integrated system of property right makes it impossible for the poor to leverage their informal ownerships into capital (as collateral for credit), which de Soto claims would form the basis for entrepreneurship. Hence farmers in much of the developing world remain trapped in subsistence agriculture.

He argues that an important characteristic of capitalism is the functioning state protection of property righs in a formal property system where ownership and transactions are clearly recorded. This made possible a) greater independence for individuals from local community arrangements to protect their assets b) clear and provable protected ownership; c) the standardization and integration of property rules and property information in the country as a whole; d) increased trust arising from a greater certainty of punishment for cheating in economic transactions; e) more formal and complex written statements of ownership that permitted the easier assumption of shared risk and ownership in companies, and the insurance of risk; f) greater availability of loans for new projects, since more things could be used as collateral for the loans; g) easier access to and more reliable information regarding such things as credit history and the worth of assets; h) an increased fungibility, standardization and transferability of statements documenting the ownership of property, which paved the way for structures such as national markets for companies and the easy transportation of property through complex networks of individuals and other entities. All of these things enhanced economic growth.^*

The Other Path: Invisible Revolution in the Third World (1989), translation from the Spanish original El Otro Sendero (1986).
The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else (2000)
The Other Path: The Economic Answer to Terrorism (2002)

Criticism

De Soto's work has been criticized by members of the academic "development community". Several authors have raised concerns about the quality of his scientific work. In his The Other Path, they portray de Soto's failure to reference the existent literature on the informal economy as bad scholarship or an attempt to make his cures for the problems of the developing world more novel than they are. This angered many veteran sociologists and anthropologists, who had already performed field work on the informal economy. Several of his key findings and assumptions were drawn into question, such as over-regulation as the principal cause of informality, the lack of any connection between formal and informal economy, his idealized view of U.S. capitalist development, etc.

One accusation concerns possible methodological flaws in both his qualitative work and his statistical evidence. For example, he estimates the total value of informal Third World dwellings as 9.34 trillion USD (about $4000 per person). However, the Journal of Economic Literature (Woodruff, Dec. 2001) claims this number relies on an estimates of the degree of informality in a typical underdeveloped country and a value of houses that are both based on extrapolations from small and arguably unrepresentative samples, namely countries that were studied precisely because of their high degree of informality. Woodruff posits that that the real number may be about 3.6 trillion. De Soto's estimates of the number of street vendors in Lima were also accused of bias, and his practice of publishing almost no detail regarding the methodology behind estimates has been criticized.

Others drew attention to failures of de Soto style policies, such as the experience with property titles in the shantytowns of Bogotá, Colombia, where a housing market failed to develop and the credit situation did not improve, or similar experiences in Phnom Penh, Cambodia, or Manila, Philippines, where speculators "took advantage" of inexperienced squatters when land titles issues. A study of a land-titling project in Buenos Aires found negligible improvement in credit access (see link below). The lack of a significant increase in lending to the poor by private banks leads critics to believe that his policies are oversold. Positive experiences in related areas of microcredit (for example, Grameen Bank) have not needed de Soto's work as a foundation, and have come from quite different politico-economic approaches. Others have claimed that by legalizing the property of the poor, de Soto's policies have led to their land being subjected to higher taxes and regulations than they were in the informal economy, thus leading to more inefficiency than under an informal property regime. But this should not be viewed as a criticism of De Soto, but as a criticism of big government interference as De Soto criticizes.

Supporters respond that the critics do not take into account possible regulatory interferences and problems caused by lacking rule of law and corruption in these nations. Theoretical property rights that do not function in practice arguably do little good.

Critics of de Soto also claim that he has ideological bias. They point out that de Soto's thinking strongly resembles that of the Austrian School of economics and its main representatives Friedrich von Hayek and Ludwig von Mises (neither of which he credits in The Other Path). Regardless of whether de Soto himself is "partisan", his beliefs, which posit relatively painless capitalist solutions to poverty are attractive to free-market and libertarian institutions such as the World Bank, The Economist, and the Cato Institute the last of which endorses and promotes his views as their solution to problems of poverty.

Moreover, his critics attribute the attention he has received to skill in selling his ideas to the press and politicians rather than their fundamental merit or effectivenss.

De Soto and his followers answer that his failure to reference literature has been intended, as he and his team for The Other Path “closed our books and opened our eyes”. His defenders argue his findings (unlike much of the academic criticism against him) has real-life effects, given the number of policymakers that consult his opinion. Likewise, some of de Soto's critics (including the below-mentioned Slate article by Gravois) posit what are perceived as unrealistic expectations, such as claiming that de Soto's ideas are not working simply because, in a space of five years, the Third World economy has not blossomed, although it took the rest of the world centuries to develop economically, financially, and industrially.

Responding to the alleged failures of policies designed according to his writings, de Soto has argued that property rights and deregulations are only necessary, not sufficient conditions for growth, and hinted that much of the criticism leveled against him is motivated by professional jealousy over the attention that he has received rather than any real weakness of his ideas.

Also, although de Soto has been accused of having ideological biases in favor of free markets, his critics often have their own. For example, dependency theory draws heavily from the work of Karl Marx and other socialist and communist theorists, and much critical work against de Soto (including the below Guardian article) includes many of the central tenets of dependency theory without acknowledging them.

Other

The original Spanish-language title of de Soto's book The Other Path is El Otro Sendero. This was an allusion to countering the Shining Path guerrillas; the Spanish for "Shining Path" is Sendero Luminoso. The Senderistas had in the past attempted to assassinate him. In 1999 Time magazine chose de Soto as one of the five leading Latin American innovators of the century. On May 6, 2004 de Soto received the Milton Friedman Prize for Advancing Liberty and a $500,000 cash award from the Cato Institute for his "contribution to the advancement of private property rights in developing countries".

External links

Institute for Liberty and Democracy website
CNNFN Video Interview with Hernando de Soto
"The economist versus the terrorist", The Economist January 30, 2003
"Peruvian considered finalist for Nobel economics prize", The Miami Herald October 10, 2001
A very critical article by John Gravois in Slate Magazine.
A reply to John Gravois by Ivan Osorio on the pages of the Competitive Enterprise Institute
Hernando de Soto Extra Biography
Biography of de Soto on the occasion of the Friedman Prize with lots of other information
A highly critical review in the British newspaper The Guardian
An essay by Robert Samuelson in Foreign Affairs, arguing that de Soto underestimates the importance of culture
^*, Dirk Verhofstadt had an exclusive interview with Hernando de Soto
John Searle and Hernando de Soto: The Mystery of Capital and the Construction of Social Reality
Hernando de Soto: La Competitividad del Pequeño y Mediano Empresario, Puntal del Desarrollo
^*, Property Rights for the Poor: Effects of Land Titling, Sebastian Galiani and Ernesto Schargrodsky, August 2005 (Study of Buenos Aires land-titling project that found negligible effects on credit availability.)

Not to be confused with Hernando de Soto the Spanish conquistador who died exploring the south-east area of the modern United States in 1542.

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