Providing Structure To Unstable Places; Hernando de Soto puts destabilized countries on the right path by securing citizens' confidence in property rights and easing legal hurdles to market entrance

Insight on the News, July 8, 2003 by John Berlau

Byline: John Berlau, INSIGHT

After living in Switzerland and studying in the United States, Hernando de Soto returned to his native Peru in 1979 to find his home country being ravaged by the Marxist-Leninist "Shining Path" guerrillas. Looking closely at Peru's vibrant underground economy and the legal barriers keeping the country's poor from realizing their potential, de Soto proposed to counter the Marxists with a system to secure property rights for all of Peru's citizens. The ideas in his best-selling 1987 book, The Other Path, made him an instant assassination target of the Shining Path. But many of his ideas were implemented, Peru experienced dramatic growth in the 1990s and the Shining Path now largely is in the dustbin of history.

In 2000, de Soto wrote the international best seller The Mystery of Capital, applying his ideas developed in Peru to countries across the globe. Today he is president of the Lima, Peru-based Institute for Liberty and Democracy and is focusing on the rebuilding of Iraq. The lively de Soto tells Insight he has been a fan of the music of Elvis Presley, Little Richard and the Everly Brothers from the time he was a teen-ager, and says he has a special fondness for the music of the Doobie Brothers.

Insight: The mass media seem to be heavily focused on the chaos and looting in Iraq. Are you an optimist or a pessimist about what's going on there now?

Hernando de Soto: For the moment, reports are too conflicting, but I am convinced that Iraq cannot be very different from any of the destabilized countries on which I have focused my studies. Personalities aside, for instance, there is the fact that Saddam [Hussein] was a murderous tyrant. Take that away, conditions must be pretty similar [to other unstable countries]. Whether efforts there are going to be a success will very much depend on the ability of the coalition forces to identify a constituency. Even so, it's going to depend very much on how that is handled.

Think in terms of the rebuilding process. It's not only about the physical rebuilding of Iraq, but the building of the nation. Among other things this will mean setting up a new legal system. Iraq is little different from Egypt, Peru, the Philippines, Russia or Kazakhstan in that there must be an enormous number of people who believe they have been excluded from the legal economy. These are the natural constituencies for creating a modern republic.

I have a lot of clear ideas about development of an effective legal process, and very few about who should get the new sewage pipes.

Q: What was the state of property rights under Saddam, and where do they stand there today?

A: I don't think anybody knows. The Institute for Liberty and Democracy has been told we're going to be called in to look at the situation in Iraq, and the thing we're going to do is try to answer your question.

But let me tell you what our experience has been. When we started off in Peru trying to find out how much property was registered in the official records, the conventional wisdom was that our black market accounted for about 12 percent of the economy. When we got the numbers, we found the black market was 70 percent.

When we began in Mexico, we were told that it was about 25 percent. And when [Mexican President Vicente] Fox called us in to help, we found the black market accounted for 78 percent of the economy, now an uncontested figure. In the case of Egypt, nobody really knew, and the official figures are now ours: 90 percent.

So I have no idea what the actual economic situation is in Iraq. But I find it very difficult to believe Iraq would be much different. If the Ukraine, which was totally managed and vertically organized by a Communist regime, still does 65 percent of its business in the black market, how much more efficient can Saddam Hussein have been at controlling the marketplace? My feeling is that we're going to come out with numbers very similar to those of other nations run by autocrats and dictators. They may have excellent recording systems, but 70 or 80 percent of the people don't like command economies and don't record their transactions.

Q: So securing confidence in property rights for both the peasants and the elites will have to be an essential part of rebuilding Iraq?

A: Absolutely, in the same way that it was the cornerstone for the creation of modern Japan. Back in the 1930s and 1940s, over a million-and-one-half Japanese families migrated to two Latin American countries that were open to Asian migration. One was Peru, and the other was Brazil. Among these families was the Fujimori family, which in the late 1930s produced a son, Alberto Fujimori, who became president of Peru from 1990 until 2000. Now, here's a question: Why did Fujimori's father migrate to Peru, and why did my father not migrate to Japan? Because Peruvians had a GNP [gross national product] per capita 20 percent higher than that of Japan, while Brazilians had an economy 30 percent higher. We were wealthier countries.

But something happened in Japan between 1945 and 2000, because Fujimori has gone back to Japan, where he has found a country that now is 10 times more prosperous than Peru.