Living in Peru : your everyday companion

Hernando de Soto advises governments who want to get a clearer picture on the economic potential of their own countries. To achieve that he and is co-workers use their experience gathered in Peru in the 80s. Back then the Institute for Liberty and Democracy (ILD) found out that nine out of ten small businesses weren’t registered; 85 percent of all taxis and buses were driven without a license, six out of ten shops were operated unofficially. And these businessmen also informally created the greater majority of real estate and companies in this country – without ever being annotated in a cadastral or trade register. Officially they owned nothing. In reality they possessed great values.

Since then, in all countries de Soto and his team went to work meticulously, they discovered possessions of immense values that were disavowed by the State. In particular the value of unregistered land and real estate property in “third world” countries and the ex-Soviet Union is, according to de Soto’s estimates, about 9,300 billion US dollars.


Recently de Soto was hired by Tanzania’s president Benjamin Mkapa for putting his country under the microscope. His team of ILD researchers and 42 Tanzanian supporters found out that approximately 14 million companies operated in an economic shadow and about 1.4 million pieces of real estate – which covers 90 percent of the country – were owned by somebody but remain undocumented and are guaranteed by either a multitude of self-organizing mechanisms or by elected local officials. The researchers sifted through thousands of documents, categorized them in 17 archetypes and estimated that the Tanzanians had values of almost 30 billion US dollars at their command.

After finishing his inventory de Soto concluded that the currently existing laws and regulations do not fit the needs and prevailing practices on a local level. Therefore his main recommendation for the government was standardizing and simplifying regulations and practices in order to decrease costs for all form of economic activity.

In his opinion this includes for example the transparent and generally accessible storage of standardized real estate documents or the draft and distribution of simple accounting rules. To put these recommendations into action de Soto suggests the creation of an independent and private foundation – financed by national funds and also by international investors – that manages the conversion of the shadow economy into legality according to an ILD-drafted master plan.

Peruvian Hernando de Soto is regarded as one of the most influential economists worldwide. Born in 1941, the son of a diplomat grew up in exile in Switzerland. He studied in Geneva and made a career at international companies and organizations. He led one of Europe’s biggest industrial consulting firms; he was an adviser for Swiss banks and worked for the GATT, today’s World Trade Organization (WTO).
He returned to his home country in 1979 as director of Peru’s Central Bank. In 1980 he founded the Institute for Liberty and Democracy (ILD) in Lima which is highly regarded as one the great ‘think tanks’ in the world. The free market oriented ILD started off with a remarkable examination: de Soto and his team legally tried to found a small sewing business. To get a license, the average Peruvian had to work 289 days and spend 31 monthly wages. Result: because of the abysmal bureaucracy a free market economy cannot develop, only the shadow economy and black market flourishes. De Soto concluded that the development and growth requires of functional system of legal proprietorship. Later on the ILD helped millions of Peruvians legalizing their properties. De Soto and his ideas are acknowledged by left- and right leaning politicians. “Time Magazine” named de Soto one of most influential personalities worldwide. “The Economist” praised he has written the “most intelligent book until now” on problems of capitalism in the third world.

Amazon.com:

(Hernando de Soto: The Mystery of Capitalism;
Why capitalism triumphs in the West and fails everywhere else)


tags : Peru HernandodeSoto deSoto literature economy world Tanzania Lima capitalism ILD

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1 Comments

# Enrique Mendizabal says :
2 February, 2007 [ 09:30 ]

De Soto's narrative is loved as much as it is loathed across the world. The simplicity of his message (both the problem and the solution) is inspiring and remarkable. In the development sector, and in particular those of us working in the research community, struggle to come across as clear as he does. This, however, does not mean that he is right. Nor that his advice is right. In human behaviour (and in the challenges faced in the quest for development -in general and not simply economical) the simplest explanation is seldom right. Informality, for example, is not the consequence of barriers to 'becoming formal' but ALSO to the cost of remaining formal. And, yes, property rights can potentially free up the capital of the 'property' of the poor; but this does not mean that banks will lend to people living in poverty (having a house does not mean one can pay a loan) nor do they resolve exclusion based on ethnical, religious, sexual cultural, social or political grounds. De Soto tells a good story; but in doing so he, like most economists, simplifies the world to make it fit the model. New research (that is research with methodology and even some footnotes -is there any in his books?) has opened new alternatives and new thinking in this area. Collective behaviour and complexity theories may help explain the formation of informality clusters and why informality remains high despite the reduction of barriers to formality. The Power Distribution (or the long tail) points at demystifying the ‘poor’ or the ‘informal’ and doing a proper micro-economic analysis to understand what really goes. Furthermore, de Soto missed the point. The revolution that he speaks of is killed by the politics he promotes. The immense imagination and innovation of the informales is killed by forcing them to join the formal sector –bound by western rules and institutions. Rather, the formal sector should find ways to become more organic, more flexible, and more real. The real revolution would be to develop a system that celebrates the other path… not one that tries to close it down. 

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