De Soto, Hernando 1941-

BIBLIOGRAPHY

The Peruvian economist, Hernando de Soto, best known for his work on the informal economy and its negative effect on poverty amelioration, was born in 1941 in Arequipa. After his father left Peru in 1948 following a military coup, de Soto was educated in Switzerland and did not return to Peru until 1979. He founded the Institute for Liberty and Democracy (ILD) in Lima the next year and serves as it president.

De Soto has written two major books expounding his ideas: The Other Path: The Economic Answer to Terrorism (1986) and The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else (2000). For both, the subtitles are as significant as the titles. Terrorism is a topic with which de Soto is familiar. He and the ILD have been attacked (physically, not just intellectually) by the Shining Path, a leftist revolutionary Peruvian movement.

De Soto discusses five mysteries of capital in The Mystery of Capital. The three most significant are missing capital, the lessons of U.S. history, and legal failure. The basic argument is that the problems of the poor—whether in Peru, Egypt, Haiti, the Philippines, or elsewhere—are not due to lack of possessions or assets but to lack of legally recognized property rights. His researchers have documented the problems that the poor face in major cities, where it takes too long for them to get a license for a legitimate business and their capital is dead capital, preventing them from benefiting from standardization, legal transferability of property, and the use of property as collateral. De Soto claims that over half the grievances of the poor in Peru concern difficulties of getting legal title to real estate: houses, offices, factories, and agricultural land. He claims that the changes in the developing world since the 1960s rival those of the Industrial Revolution since they have involved a massive migration of four billion people leaving their traditional way of life.

De Soto and the ILD have been involved in designing and implementing programs to empower the poor in many areas of the world: Africa, Asia, Hispanic America, the Middle East, and the former USSR. The Other Path (a title chosen as a deliberate antithesis to the Shining Path) argues that the real enemy of the poor is not capitalism or “feudalism” but mercantilism: the predominant system in Europe in the early modern pre–Adam Smith (1723–1790) era and a continuing socioeconomic system in postcolonial Hispanic America. It was in The Other Path that de Soto first developed the ideas behind the informal economy: “informal” because it is not formally recognized by the law but functions outside it. It includes informal housing, informal trade, and informal transport.

De Soto points out the hidden costs of informality and the significance of the law as a determinant of development, and he critiques the redistributive tradition, which he associates with the early mercantilist system. He contrasts the relatively peaceful resolution of socioeconomic problems in England (and the United States) with the much more violent revolutions in France, Spain, and Russia. The unlearned lesson of U.S. history was its implementation of widespread property rights in the late nineteenth century.

Numerous criticisms have been made of de Soto’s theories and of attempts to implement them to empower the poor. He has been accused of favoring a “single bullet” approach, and the statistical basis of his data has been questioned. Some critics argue that it is difficult to establish who owns what in an informal economy and that some ILD reforms (such as those in Bogotá) have not improved conditions for the poor. Critics also argue that de Soto ignores the importance of culture and that, while he may be correct in his vision of property rights, the sequencing of reforms is just as important as the need to pay attention to local social context.

In response de Soto (as well as a prominent colleague of his, Madeleine Albright, former U.S. secretary of state) have countered that arguments for the importance of legally recognized property rights do not imply “a silver bullet” but a “missing link.” De Soto argues that heads of state want his help in quantifying the informal sector and that ILD is the only organization doing such detailed research. Perhaps the best summary of de Soto’s views would be that he has the correct diagnosis but an as yet imperfect prognosis; nevertheless, he has started the important process of documenting the (legally) unrecognized assets of the poor.

SEE ALSO Capital; Development Economics; Informal Economy; Land Claims; Poverty; Property; Property Rights

BIBLIOGRAPHY

PRIMARY WORKS

De Soto, Hernando. [1986] 2002. The Other Path: The Economic Answer to Terrorism. Trans. June Abbott. New York: Basic Books.

De Soto, Hernando. 2000. The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. New York: Basic Books.

De Soto, Hernando. 2003. The Economist versus the Terrorist. Economist, Feb. 1: 62.

De Soto, Hernando. 2003. Listening to the Barking Dogs: Property Law against Poverty in the Non-West. Focaal: European Journal of Anthropology 41: 179–185.

SECONDARY WORKS

Albright, Madeleine. 2007. The World in 2007: It’s Time for Empowerment. Economist, 21st special yearly edition: 65.

Institute for Liberty and Democracy (ILD). http://www.ild.org.pe/home.htm.

The Mystery of Capital Deepens. 2006. Economist, August 24: 58.

Rossini, R. G., and J. J. Thomas. 1990. The Size of the Informal Sector in Peru: A Critical Comment on Hernando de Soto’s El Otro Sendero. World Development 18 (1): 125–135.

Samuelson, Robert. 2001. The Spirit of Capitalism. Foreign Affairs 80 (1): 205–211.

Woodruff, Christopher. 2001. Review of de Soto’s The Mystery of Capitalism. Journal of Economic Literature 39 (4): 1215–1223.

Calvin Hayes