Global liberalisation

Anti-poverty campaigner Hernando de Soto believes that globalisation, with all its faults, can only help the poor. But property laws will need to change first.

by Morice Mendoza
Last Updated: 23 Jul 2013

Economist and former business leader Hernando de Soto is president of the Institute for Liberty and Democracy, an internationally recognised and influential think-tank headquartered in Lima, Peru, which is committed to creating legal systems to help the poor access property rights, assets and capital. Named one of the leading innovators in the world by Time and Forbes magazines, de Soto has advised heads of state in some 20 countries on property reform programmes. He is the author of several books and papers on economic policy, including the seminal work The mystery of capital, which explores how the legal structures that govern property arrangements are the foundation on which economic development is built.

World Business: Are you an optimist or a pessimist with regard to globalisation?

Hernando de Soto: I believe, beyond all the doubts and discussions about the benefits and non-benefits, the global ups and downs, that we will have to continue with globalisation because it is the most efficient way of doing things. It's gone beyond the issue of enabling cheaper production and the creation of larger markets - it's really about the idea of civilisation.

Countries that depend on one another are less likely to go to war with each other. It is as simple as that.

How fast can this be achieved?

To get there, countries that are currently excluded from the globalised economy will have to make huge adjustments to their legal systems and governance in order to fully benefit. The West did it over hundreds of years, but we do not have the time for that. Globalisation as it stands today is not inclusive - it allows participation of only about two billion people out of six billion. Roughly speaking, one billion is in the North Atlantic, Japan and the four tiger economies; the remainder is in the developing world and the former Soviet Union. They are trying to copy the West and become what it has become.

Meanwhile, four billion people, or 80% of the world's population, are not included in the system. There is simply no way they can participate.

For instance, you cannot trade unless you can sign a bill of lading or make a bank transfer. You have to have a proper address to make a deal.

Four billion have no property rights. Without a fixed identity, they cannot get credit. These people might easily come to see the system of international trade as an abuse against them. They can be whipped up into a frenzy against the West or globalisation, and that underlies every global problem that exists.

Is this new?

Yes, because we have only just started to make the connection between the huge legal framework that needs to be addressed before more people benefit from globalisation and the other problems we see in the world.

I believe that the issue is behind the rise of religious fervour and terrorism.

What will make things change for the better?

The need to create the legal systems to underpin economic inclusion must be put firmly on the agenda of institutions such as the World Bank. Heads of state are beginning to recognise how important this is. We have to start realising that if the global modern system is to triumph, it must have a lot of legal work built in - the plumbing, if you like. The emphasis at the moment is to provide charitable support to the developing economies - and, of course, there is nothing wrong with this and it is to be encouraged.

But people should realise that charity has nothing to do with development.

Does the rise of countries such as India and China make any difference?

China and India are both part of the current problem. Only 250 million out of 1.3 billion Chinese have property rights and the right to hold assets in the private sector. The relatively few have sustained 10% real growth, while the remaining one billion are not included in the legal framework. There have been, according to some reports, 75,000 revolts in China last year alone, which is not surprising. Latin America imitated the West and found it was relatively easy to bring in the first 20% of the population into the world economy, but the issue was how to get the other 80% into the system. In Tanzania, 2% are in the legal sector and 98% are excluded.

What triggers change in the right direction?

The end of the cold war was the incentive for countries such as Poland and the Czech Republic to transform their economies, and they made the change in 15 years. Japan changed after having two atom bombs dropped on it. In the late 1940s, Japan, Korea and Taiwan were relatively poor feudal states, but they were shocked into change.You have to be shocked into changing your legal infrastructure.

What message would you send to business leaders?

The message has to be that countries need to work on the rule of law.

This is about legal standards. They need to remember, we all need to recognise, that it is the Turks who do not get to Germany or the Mexicans who do not get to the US who are the fodder for anti-globalisation and anti-western movements. Be in no doubt, they are all attracted to the West for its way of doing things, its freedoms and its affluence. In countries as far afield as Algeria, Tanzania and Mongolia, people are migrating to the cities, which is the closest to western life and technology that they can find.

The four billion excluded people of the world are moving to the market economy, but they don't have the legal framework and tools to make the leap. In the West, we spend a lot of time studying the upsurge of violence, the mobs and the terror. The door is not open to enough people to create much wider and deeper global prosperity.

Does anything specific address this problem?

I am co-chairman of the UN's high-level commission on Legal Empowerment of the Poor, with former Secretary of State Madeleine Albright, which explores how nations can reduce poverty through reforms that expand access to legal protection and greater opportunities. This is very important as it will help to get the issue even more firmly on to the global agenda.

I am also involved in a project in which professionals in developing countries will be trained in governance issues.

Why do you think there has not been more improvement for the poor in Peru following the efforts made to bring people into the legal sector since the 1990s?

There has been some improvement to the non-official net profits for the poor. There has been $17 million of investment made that has created $10 billion of net benefit for the poor. Many have benefited, but it is not enough. One of the problems is that it was a pet project of President Alberto Fujimori (1990-2000). As soon as he went, there was less emphasis put on getting people into the legal sector. The interesting thing is that today there is no opposition to the ideas we have been discussing all these years from all quarters including the rising political representatives of the excluded majority.

How do you measure success?

We benchmark in three ways. First, we look at the level of awareness toward the issue. In other words, the extent to which leading figures in the media and politics recognise the problem and agree that the solution is to bring people's property and commercial activity into the legal sector.

There is no measure of how many people are in the legal or extra-legal sector. So this is an important way of determining success. The second measure is the extent to which political leaders make it a part of their programme and put in measures to move things along. Indeed, the US, Europe and Japan all went through this phase. The third measure is the real change when people begin to insert themselves into the economic system.

Where have the greatest successes been in recent times?

China is moving in the right direction. The real issue is whether it can move fast enough. It has 250-300 million new property owners and business owners. This represents about 25%-35% of the population, which is helping to make China grow at an average of 10% a year. India has also made important inroads, but again the number of people included in the legal system is small. Thailand has dedicated great resources to bringing the excluded into the legal sector. And in South Africa, the ANC has programmes to bring dead capital alive.

Do you think all countries can become capitalist economies?

From our experience, I'd have to say yes. Take Tanzania, for instance: this is one of the poorest countries in the developing world. Yet when we worked there, we discovered that people were already implementing their own legal system at a local level. Special committees run by local officials known as mwenyeketi issued documents to establish legal property and business rights of individuals in the rural areas. They even had documents that enabled people to use their land as collateral for borrowing money. We found it hard to find a cow or bull that did not have private property markings. So, in my view, no culture is incapable of going the same way as the rest of the world.

HERNANDO DE SOTO

- on globalisation

It's about civilisation. Countries that depend on one another are less likely to go to war with each other. It's as simple as that

- on the pace of change

In the late 1940s, Japan, Korea and Taiwan were relatively poor feudal states, but they were shocked into change. You have to be shocked into changing your legal infrastructure

- on the message for leaders

We all need to recognise that it is the Turks who do not get to Germany or the Mexicans who do not get to the US who are the fodder for anti-Western movements

- on poverty

The four billion excluded people of the world are moving to the market economy, but they don't have the legal framework and tools to make the leap

- on the success stories

China is moving in the right direction. The real issue is whether it can move fast enough. It has 250-300 million new property owners, which is 25%-35% of the population

- on capitalist economies

Tanzania is one of the poorest countries in the world, yet we discovered its people are already implementing their own legal system at a local level

ECONOMIST AND CAMPAIGNER

There are only a handful of economists in the world at any given time that can claim to offer an idea that might change things for the better. The Peruvian economist Hernando de Soto is one such man. For more than 20 years, he has argued that the process of globalisation won't be long-lasting unless the 4 billion or so of the world's poorest people are included in the system and feel that they benefit.

De Soto served as an economist for the General Agreement on Tariffs and Trade (GATT), as president of the executive committee of the Intergovernmenal Council of Copper Exporting Countries (CIPEC). He later became managing director of Universal Engineering Corporation (a consultancy engineering firm), a principal of the Swiss Bank Corporation Consultant Group and a governor of Peru's Central Reserve Bank. He also established the Institute for Liberty and Democracy (ILD) in Lima, which has for the past 20 years offered consultancy advice to governments in countries as far afield as Afghanistan and Russia. Some 30 heads of state have sought its help, and it is considered by the Economist to be one of the two most important think-tanks in the world.

When he returned to his native Peru, he started to investigate the reasons for the high levels of poverty and was surprised to learn that the problem was not with the slum-dwellers. They were, he concluded, bursting with entrepreneurial talent. The problem was that they were unable to lay legal claim to their property or to obtain the basic documentation they needed to engage in trade. Without these rules of governance, they could not raise capital. To test his theory out, de Soto set up a tiny, two sewing machine garment factory in a Lima shantytown and discovered that it would take 289 days and cost the equivalent of a monthly minimum wage to get a legal license to operate even such a small enterprise.

He and his colleagues then walked the streets of Lima to find out how many people were operating businesses outside the law.

They discovered that 90% of all small industrial enterprises, 85% of urban transport, 60% of Peru's fishing fleet (one of the biggest in the world) and 60% of the distribution of groceries emerged from the city's extra-legal sector. As a result, the ILD was called on to advise the then Peruvian president Fernando Belaunde Terry to end the country's legal and bureaucratic bottlenecks.

If countries in the developing world could give the poor such rights, the result would be dramatic, de Soto argued. The ILD found that in Egypt, for instance, 90% of the population held their assets outside the law and that these assets were worth an estimated $245bn - 55 times larger than all foreign investment and 30 times the value of existing legal business.

De Soto wrote up his arguments in The mystery of capital: why capitalism triumphs in the west and fails everywhere else, in which he provided a blueprint for bringing the world's poor out of the economic wilderness.

He has some critics, such as journalist John Gravois who wrote in online magazine Slate that the banks in developing countries were failing to invest in the legalised properties in shantytowns and that most of the new money was coming from the state. In other cases, such as in Cambodia, Gravois argued, wealthy property owners bought up the land after squatters had been relocated.

In Peru today, the case for globalisation is under threat. The nationalist populist politician Ollanta Humala of the Peruvian Nationalist Party is hoping to win the presidential elections in April on a protectionist and anti-big business ticket. Officially, poverty in Peru has fallen from 54% in 2001 to 51% in 2004, but this may not be enough to alter the popularity of figures such as Humala. Some people believe that Humala's rise is part of a regional trend in the rise of leftwing, anti-foreign candidates from Venezuela's Hugo Chavez to Bolivia's Evo Morales.

De Soto passionately believes that the work has not yet been done to bring the benefits of globalised trade to the 4 billion or so operating in the extra-legal sector. He hopes, therefore, that the need to do something will rise further to top of the agenda among the world elites from the World Bank to the UN. If this happens, he argues, populist leaders such as Morales would lose much of their appeal. Indeed, he believes that the billions of the world's poor want to join the western nations and enjoy the same affluence and the trappings of modern life. They flock behind populist, anti-western leaders or even turn to violence because they are not included, not because they don't want to be.

De Soto, still a darling of Davos, has some leverage to change things through the UN High Level Commission on Legal Empowerment for the Poor, which he co-chairs with former US Secretary of State Madeleine Albright.

He hopes that this will help to bring the issue of legal empowerment higher up on to the world community's agenda. He believes that the only way to end war and terrorism is by finding an answer to the question of exclusion.

The results claimed by the ILD are impressive: 6.3 million Peruvians below the poverty-line legally own their real estate, the value of which has increased by $2.2 billion. Formalised real estate owners have obtained $300 million in additional loans and 380,000 businesses belonging mainly to the poor were formalised.

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