Third Worlder on Free Markets

From: Technotranscendence (
Date: Mon Oct 15 2001 - 08:44:15 MDT

by Georgie Anne Geyer

WASHINGTON -- It may seem unlikely that a highly intellectual and unusual
Peruvian economist would have some of the long-term answers to terrorism in
the world. But Hernando de Soto, who has enlivened economic thinking and
challenged the misery of the developing world for several decades now, truly
has some original ideas.

During his most recent visit to Washington, he and I had our third talk in
the past few months. Only this time, building on his years of contacts with
leaders and thinkers of the poorest countries of the globe, de Soto had just
come from three and a half hours with the head of a faded superpower,
Russian President Vladimir Putin.

"I told him that all capitalism is a legal framework," he said. "If you get
it right, everything will fit together. But in fact, all countries start out
the same way. All countries start out with a black market -- until property
rights are established.

"So the first thing we do when we go into a country is 'measure it' and tell
the government where the problem is. It might be the mafias, because then
someone else is making the rules. We show them how to go from a black market
to a legal system."

Was President Putin, the ex-KGB agent who has never been noted for his
economic prowess, willing or able to accept de Soto's formula? "Putin was
terrific," de Soto said. "He understands perfectly.

"I told him, 'I don't know Russia, but let me tell you throughout history
what Switzerland and Germany did to create a market economy. They did a very
sophisticated job of creating the proper kinds of laws and on agreeing on
who owns what.'

"When you talk with Putin and tell him that this is what the Germans did
decades ago, it begins to register. So Putin begins to realize that you're
saying the black market is not the result of the Russian soul, but it's like
smallpox: Everybody has had it."

Hernando de Soto works out of his Institute for Liberty and Democracy in his
hometown of Lima, Peru, an institute that has been the bete noir of
terrorists for years (the brutal Maoist Sendero Luminoso bombed the offices
in 1998, knowing full well where their enemy lay).

But in the last six years, he and his staff have moved further afield,
across the underdeveloped world, into poverty-stricken countries or into
moderately developing countries that are falling behind because of
overpopulation. One of those, on both accounts, is Egypt.

But, true to his insights into the economic life of societies, de Soto found
new facts to analyze in that teeming and increasingly troubled society.
Since Sept. 11, the government has been terrified by the "Arab street" from
taking a position on terrorism.

"In Egypt," he wrote in his new book, "The Mystery of Capital," "the
wealth that the poor have accumulated is worth 55 times as much as the sum
of all direct foreign investment ever recorded there, including the Suez
Canal and the Aswan Dam." In fact, he was already, at the time of the
bombings, four and a half years into a five-year in-depth analysis of the
Egyptian economy, sponsored by President Hosni Mubarak.

Going beyond Egypt, "by our calculations, the total value of the real estate
held but not legally owned by the poor of the Third World and former
communist nations is at least $9.3 trillion," which is "about twice as much
as the total circulating U.S. money supply," and "very nearly as much as the
total value of all the companies listed on the main stock exchanges of the
world's 20 most developed countries."

The trouble is that the "mystery of capital," with its unique capacity to
regenerate societies by creating liberating wealth, never has the chance to

As de Soto points out, this is because, whether in Egypt or Indonesia or for
that matter in George Washington's era in U.S. history, "They have houses
but not titles, crops but not deeds, businesses but not statutes of
incorporation. And this is why many countries seem to be modern, but

They have adopted superficial products of capitalist society, but not the
"representational forms" underlying capitalist societies and freeing capital
in a "vast hidden process that connects all the assets to the rest of the
economy" and gives them a "parallel life in the creation of new assets."

Painfully little of this complex but creative -- and comfortably
quantifiable -- process is present today in the Arab and Islamic world
(whose banks spurn interest, for example). Only 4 percent of the investment
moneys of the world go into the Middle East, including Israel. No wonder,
then, that teams of violent youth haunt the mountains of Afghanistan and the
streets of Cairo and Djakarta.

Not much can be done, of course, in terms of the economic reconstruction of
developing countries while this "war on terrorism" is at its height. But in
the long run, if the countries of the world are to stabilize, the original
and practical ideas of this remarkable thinker are surely the place to

Originally Published on October-12-2001

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