Over the past 16 years, CIPE has worked with the Institute for Liberty and Democracy (ILD) in Lima, Peru, on a variety of projects in support of developing nations around the world. Hernando de Soto, President of the ILD, was in Washington in November to participate in a luncheon gathering on Capitol Hill. Senator Richard Lugar, Senator Connie Mack, and Representative Donald Payne sponsored the event, which was organized by CIPE.
Background
Ten years ago, de Soto told members of Congress and staff, the collapse of the Berlin Wall was heralded by many as the symbol of a fundamental shift toward open economic systems. Over the past decade, however, with the failures of so many former communist countries to convert successfully to a free market system, public opinion in many of these countries is experiencing a backlash against the whole idea of capitalism. What began as an opportunity for economic freedom and a better quality of life for the average citizen is seen increasingly as a mechanism for building the wealth of the privileged, while the economic well-being of the average citizen is declining.
Out of concern for growing social inequality, de Soto noted, increasing numbers of intellectuals in Latin America and elsewhere are warning the public "not to be deceived any longer by calls for capitalization and globalization." Although flashy malls and luxury items are appearing in emerging markets throughout the world, de Soto explained, the number of poor in these countries is growing faster, and income distribution has worsened, over the last decade. The popular support so essential to market-oriented reforms, he said, is absent because most people feel they still do not have a stake in the economic future of their country.
ILD's Efforts to Bolster Capitalism
One of the least recognized facts in developing countries and emerging economies is that the poor often have assets - property, in particular. Typically, these assets just are not formalized or recognized and, as a result, they cannot be converted into capital. In fact, many emerging economies lack the infrastructure that allows physical assets to become capital.
The ILD has pioneered a conversion process that enables developing and formerly communist nations to bring assets held in the "informal" (gray) economy into the formal market economy, where their owners can use them to generate surplus value. This process enables a nation's poor to become entrepreneurs which, over time, leads to open markets and democratization.
The first stage of ILD's intervention in an emerging economy is to do an inventory of all the physical assets being held by the poor. Once the inventory is completed, dollar values are assigned to this inventory. "In Egypt, for example," de Soto explained, "we sat down with government officials and said, 'Let's look at the visible assets that you have in your country.' When everything was tallied, the poor owned $241 billion in assets - or 64 percent of all the assets in Egypt."
Granted, not all of these assets are legal. Squatters, for example, may have constructed housing on restricted land, or built buildings in excess of height regulations. De Soto likened this situation to the pioneers days of the United States during the 19th century, where people were developing settlements not always consistent with the existing law of the land. "By the time the California Gold Rush was over," de Soto said, "the people - not the government - had divided the land into 800 jurisdictions, each with its own authority, its own ways of recording land, and so forth. It took the rest of the century to sort it all out and bring the whole country under one law and one system."
"You weren't the only ones to do it," de Soto continued. "In 1946, the Japanese in 10,100 different hamlets organized, legalized ownership of the land, and reported this information to the authorities at the next level up, who recorded it and reported it to the next level up, and so forth. So this concept of democracy growing up from the grassroots is not just idle talk. That's what people had to do to find out how assets were owned and to introduce them into the common market. This is what the Germans had to do in 1806, and it took them nearly 90 years to do it. The Swiss finalized their efforts in 1908, after 20 years' work. And this is the revolution currently being faced in developing countries."
De Soto cautioned against viewing this process as a mapping exercise only. In particular, he noted, the property ownership information gleaned should not be used solely for the purpose of taxation. "People don't like being mapped," he said, "because all they get with those maps is the tax." The information must be used, he continued, to create capital markets whereby the value of a given asset has the capacity to generate wealth.
There are other institutional changes that accompany this process. De Soto noted that many developing countries have restrictions on the sale or transfer of property that limit their economic usefulness. He also cited streamlining laws, bureaucracies, and the legal system as other areas in need of reform to support economic development. Again using Egypt as an example, de Soto shared this observation, "Say you have your owner's certificate and you want to introduce it into the stock market. You have to visit 31 different government bureaus and go through 77 different transactions, which would take you 15 years - and not 15 years of waiting, but years of shuffling papers and going through the process. You have got to modify your institutions."
De Soto is optimistic that developing countries can learn from the examples of other nations and that this legalization process will happen more quickly as a result. He noted, however, that the process will not be easy, as vested interests resist shifts in the balance of power that accompany this process.
"I think that if we are able in the next two or three years to indicate just how large these underground economies are," de Soto stated, "that they're not going to go away, and that people have continuously decided to go outside the legal system because the legal system - which has traditionally favored the elite - won't let them in, then you can create the first important condition for reform: the political will." De Soto explained that as the total assets of the poor became known in Peru, and as the numbers were released to the public, it became clear that the poor held a significant amount of the country's resources. Political reforms then became a "win-win" situation for lawmakers. De Soto expects that the same is true for other countries around the world. "Once those figures come out," he said, "I am optimistic that it will take little time to make reforms because the technical difficulties are not that great."
In concluding his remarks, de Soto noted, "For the moment, the meaning of capitalism for most Latin Americans is that it's a private club. The moment you can demonstrate that capitalism is a lot more than that, and that it affects everyone, then we can break through these barriers and accomplish in 10 years what the Europeans took 400 years to do: democratize capitalism."