Yale Bulletin and Calendar

April 25, 2003|Volume 31, Number 27

Hernando de Soto used an apple to illustrate his point that property laws are vital to a market economy.

Inclusion is key to economic success
of developing countries, says expert

The greatest assets in developing countries may be the ones nobody is counting, said Hernando de Soto, adviser to former Peruvian president Alberto Fujimori, in an April 16 talk at the Law School.

De Soto is head of the Institute for Liberty and Democracy (ILD) -- what he described as "a think-tank turned action-tank." Headquartered in Lima, Peru, ILD helps developing and former Soviet nations make the transition to a market economy.

His talk, titled "Incorporating the Excluded: A Solution to International Poverty and Terrorism," was sponsored by the Downey Fellowship of Timothy Dwight College.

While the United States and other "northern" countries based on a market economy have thrived, developing nations -- including many in Latin America -- have found it difficult to shift to such a system, said de Soto. This, he added, leads many to wonder if it is "only pink Protestants who can make capitalism work."

To be successful, a market economy needs a legal system that supports it, explained de Soto. To illustrate this point, he showed the audience an apple.

Although witnesses could testify that the fruit had been in his possession all day, "there is nothing on Hernando's apple to say it's his," he pointed out. Therefore, legally, he could not sell it, trade it or sell shares in it, he said. "What gives the apple any commercial meaning is not the apple, but would actually be a title to the apple. A stolen apple looks exactly like a legitimate apple."

De Soto explained that "value and capital do not exist in the physical world, but in the representative world. ...

Every time you make an important transaction in the United States, there's a piece of paper, a blip in the computer, and it's that blip that allows you to take the value with you, and that blip is a property document."

Therefore, "the stuff that begets stuff ain't the apple, it's the legal system," he said, adding, "When people in northern countries created property law to defend their possessions, they didn't know that basically they were also creating the market system, but more than anything, they were creating capital."

Without this "rule of law," there is no way even to know how many people in any nation own property, he asserted.

For example, when working for the Egyptian government, the staff of ILD began by walking the nation's streets, explained de Soto. They discovered that thousands of structures had been built illegally on agricultural land or burial sites, and extra floors had been added to public housing units constructed by the government. They also discovered thousands of "underground" businesses, such as sewing shops.

ILD concluded that fully 92% of Egypt's lands and buildings and 88% of its businesses were illegal or extra-legal -- assets valued at $245 billion. This, de Soto noted, is "55 times greater than all foreign direct investment in Egypt since Napoleon's time, including the Suez Canal and the Aswan Dam."

This situation is common in developing nations, de Soto told the audience. "The problem is nobody knows who owns what, so you can't use it."

Noting that it is poor people clustered in urban areas who hold many of these assets, de Soto said, "They're the key to real development. There they are, and nobody's counting them."

He added: "I am very sure that when you finish doing the inventory in Iraq you're going to find that what the poor in Iraq have is much more than the oil that's underneath the ground."

The key to tapping into this internal wealth is "to put the poor inside the system," De Soto said.

For example, he noted, it was not surprising to find so many illegal structures in Egypt, given that individuals seeking permission to build must deal with 31 government offices and take out scores of contracts -- a job that he contended would take "17 years working 8 hours a day." He and his associates advised the Egyptian officials to start by simplifying that process.

Asked by an audience member if democracy is necessary for the creation of a market economy, de Soto asserted that "democracy is an important part of this" but cautioned that there are many forms of democracy. "We in Latin America have elections all the time, and it looks like we have democracy, but we don't because we elect our dictators every few years."

The leaders of the developing nations that ILD works with usually don't want to hear that their countries need to convert into democracies, said de Soto. He and his associates concentrate on getting these leaders to understand that "you can't get a good system of property rights in place unless you have participation from the people."

Once this process of inclusion begins, noted de Soto, the hope is that eventually it will become "a habit."

-- By LuAnn Bishop

T H I SW E E K ' SS T O R I E S

Yale cited for its 'dramatic steps' in internationalization

Study suggests there are more genes in the human genome than predicted

Inclusion is key to economic success of developing countries, says expert

Levin book explores role of a university

UNIVERSITY TEACH-INS ON THE WAR WITH IRAQ

Study shows Icon molecule may offer key . . .

Unique argument pays off for winning Law School students

Alumni to focus on Yale Engineering

Works by 'Cha-tic' offer detailed view of Native American life

Play explores transformations brought about by 'Changes of Heart'

Kumpati Narendra lauded for his work in engineering

Guggenheim Fellowships are awarded to five faculty members

Research shows antipsychotic drug risperidone may reduce . . .

F&ES events look at the role of fire in forest management

Research reveals dramatic rise in number of doctors pursuing . . .

Juniors honored for 'good labor in the world' and musical gifts

Richard Sewall dies, was first master of Ezra Stiles College

Pioneering immunobiologist Dr. Charles Janeway Jr. dies

New award will honor creativity of School of Nursing students

Concert to help raise funds for year-round, overflow homeless shelter

Campus Notes