Wednesday, September 21, 2011

Hernando De Soto The Great Peruvian Economist On Property Rights And The Very Poor

Taking the long view: Property rights are key to fair inclusion

Two graceful alpacas are grazing in front of Hernando de Soto’s home, but there is no sign of his pet dogs, Marx and Engels, so named because “they are German, hairy and have no respect for property”.
The Peruvian economist first came to fame with his 1987 bestseller The Other Path. Now, he is everywhere. So far, some 30 governments – from Afghanistan to Mexico and Russia – have sought his advice on how to harness his brand of popular capitalism.
When the FT met Mr de Soto on a typically grey Lima afternoon, he was suffering from jet lag. Yet despite his globe-trotting, the wellspring of much of his thinking remains Peru.
The lights are low in the study. History books and economics tracts are piled high on a glass table and on the shelves. The subject of the day is the new president, Ollanta Humala, a former army officer.
Yet Mr de Soto prefers to take the long view on local politics and the closely fought second-round vote against Keiko Fujimori, daughter of the former president. He advised Mr Fujimori until they fell out when the leader made a grab for power.
“A notable point about this year’s election is that – however controversial it was – the losers respected the result. That’s a good sign,” Mr de Soto comments. “And if people do worry about Mr Humala’s military background, that’s also positive: being sensitised is a way of protecting themselves.”
Another of Mr Humala’s more unusual features is his unconventional family. The president’s father believes in Quechuan racial superiority, and one brother is serving a prison sentence, having led a 2005 coup. Mr Humala himself led a revolt in 2000.
“Jimmy Carter and Bill Clinton had brothers, Margaret Thatcher a son,” observes Mr de Soto drily. As for Mr Humala’s economic policies, early signs are positive, although it is too early to tell for sure.
“Both Keiko and Humala campaigned on a reform platform, and were a vote for change. Humala’s difference is that he believes the state has an economic role to play. The question is, how much will he tinker?”
Mr de Soto’s most heartfelt current subject, though, is the Peruvian Amazon. In a country that is the world’s second-largest producer of copper and silver, the Amazon is the scene of some 200, often bloody, social conflicts.
Some of these are crude battles for local power, fomented by smugglers. But most relate to protests by local indigenous groups against foreign investment in mining and hydrocarbons. How to anticipate and prevent them is the theme of Mr de Soto’s next book, The Amazon is not Avatar.
Its provocative title shows his undiminished promotional flair. But, contrary to popular myth and James Cameron’s blockbuster movie, Mr de Soto believes indigenous life and globalisation are compatible.
After months of fieldwork, Mr de Soto found that indigenous people do feel their poverty and isolation, do want better education and health services, and do want property and businesses.
When conflict arises, it is usually because of a feeling of powerlessness.
Mr de Soto’s solution is better property rights, a view that draws on his original insight in The Other Path. Most poor people, given the chance to participate fairly in a capitalist system, would do so rather than stay outside. Yet any sense of inclusion also requires a legal system that people feel is on their side. One way of ensuring this is to give full legal protection to poor peoples’, usually de facto, property rights.
A common example is untitled slum dwellers. For the Amazon, Mr de Soto gives this example: “A foreign investor comes to Peru. He secures title to a project under Peruvian law. Moreover, because of tax treaties, this legal title carries multilateral weight. With that in hand, the investor can raise funds easily, anywhere.
“Contrast that with what indigenous people have: property titles unrecognised outside their communities. We know of a case of a mahogany tree sold for 3kg of sugar, about $3. By the time it reached California, that same tree was worth as much as $50,000.”
Critics might say shaky property rights have not stopped China’s booming economy. Mr de Soto admits the Amazon presents special problems. Many indigenous titling systems do not provide precise locations, contain naming errors and are inaccessible. Communal-ownership rules often differ, even between neighbouring groups, which in themselves are diffuse.
Nonetheless, Mr de Soto says that attempts to confer legitimate title must be made if there is to be a real attempt to avoid the kinds of protests that left more than 30 people dead in the Amazonian town of Bagua two years ago.
Mr Humala’s government is equally sensitive to the subject. One of its first pieces of legislation was a consultation law, which gives local communities the right to be consulted about proposed investments.
“That’s all every well, but who do you consult with?” asks Mr de Soto.
The implication is that this can never be clear while property rights remain insecure. It is only with secure title that indigenous groups can choose between turning their backs on the world economy, or engaging with it.
“Once title has been established, at least you have a choice,” he says. “Without it you have nothing.”
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