Making Capitalism Inclusive

On April 1, 2004, Hernando de Soto, the Peruvian economist who has devoted his life to bringing real property rights to the world’s poor, became the second winner of the Milton Friedman Prize for Advancing Liberty. That prize is awarded every other year to an individual who has made a significant contribution to advancing human freedom.

The prize is a rare honor, but then de Soto is an extraordinary individual. It’s not every economist that finds himself the target of terrorist bombings and assassination attempts. Because of his scholarship and activism on behalf of the world’s poor, in the late ’80s and early ’90s, de Soto was repeatedly targeted by the Marxist terror group, the Shining Path.

It’s not hard to understand why Marxist radicals found de Soto’s ideas so dangerous. They threatened the monopoly the political left (Marxist and non-Marxist) held over solutions to the problems of the world’s poor. For years, statist development experts had sought top-down solutions, operating under the implicit assumption that poor people in the Third World were largely incapable of entrepreneurship. De Soto utterly rejected that patronizing viewpoint, and, beginning in his native Peru, focused on the lack of formal property rights as the source of poverty in poor countries. As an author and an activist, and later as advisor to Peruvian President Alberto Fujimori, de Soto worked to bring impoverished Peruvians out of the shadow economy, and unlock their potential for wealth.

In 1979, after a successful career in business in Europe, a 38-year-old Hernando de Soto returned to a Peru plagued by poverty and Shining Path terrorism. Having made enough money to retire, he could now devote himself full-time to solving the riddle of development: What is it that makes the “North” rich, and the “South” poor? De Soto knew that Peruvians did not lack for entrepreneurial energy. The bustling underground economy of Lima was a testament to that. Nor did they lack property, per se. From countryside to urban shantytown, ownership was governed by a system of informally evolved and acknowledged property rights.

But as de Soto explained in his 1987 book The Other Path, these de facto owners were locked out of the formal, legal economy-and that was the root of the problem. “They have houses but not titles; crops but not deeds; businesses but not statutes of incorporation.” And the more de Soto and his fellow researchers at the Institute for Liberty and Democracy investigated, the more they realized that dealing with the Peruvian state to obtain legal recognition of one’s assets was maddeningly difficult, if not impossible. Thus, the poor “do not so much break the law as the law breaks them-and they opt out of the system.”

Lacking formal legal title to their property, the poor are unable to use these assets as collateral. They cannot get bank loans to expand their businesses or improve their properties. Their potential is locked up in what de Soto calls “dead capital.” He and his colleagues calculate that the amount of “dead capital” in untitled assets held by the world’s poor as “at least $9.3 trillion” — a sum that dwarfs the amount of foreign aid given to the developing world since 1945.

The Shining Path is moribund, but de Soto remains. Through books like 2000’s The Mystery of Capital, and hands-on work with the Institute for Liberty and Democracy in Egypt, Mexico, Haiti, and elsewhere, de Soto has pushed developing-country governments to simplify and streamline the process of granting title. Bringing formal property rights to the poor can bring them out of the sway of leftist demagogues and into the extended order of the modern global economy. “Are we going to make [capitalism] inclusive and start breaking the monopoly of the left on the poor and showing that the system can be geared to them as well?” That’s de Soto’s challenge, and his life’s work.