De Soto’s Work (2004)

Josino Moraes
Latin America Economic Researcher

If something is too good to be true, it iis  probably not true.

I am referring to the works of the Peruvian Hernando de Soto,
The Other Path,
1986,  and
The Mystery of Capital, 2000.

First of all, I must apologize to the author and his entire team at the Instituto
Libertad y Democracia (ILD) for the theoretical criticisms enclosed in this text.  All
of them deserve our deepest respect both for their work in spreading  libertarian
ideas and in their struggle against ‘The Shining Path’ ( El Sendero Luminoso), the
most sanguinary of all Latin American(LA) terrorist guerillas.  The very
first step,
however, to getting out of the LA tragedy is to have a correct
diagnosis. This must
be the very first step.  This can then be followed with a discussion of the possible

The other Path  

The author, falling back on Marx’s class analysis, points out that, “Most Peruvians
are not proletarians (i.e.,blue collar workers). Legally employed proletarians make
up less than 4.8 percent of the Peruvian population.  The real revolutionary class in
Peru is made up of the micro, small, and medium-sized entrepreneurs who during
the last half of the twentieth century began migrating from rural areas to towns
and cities to work in the fragmented market economies of the informal or
‘extralegal’ sector.”  In addition, “The Other Path is the story of how the poor in
one country are spontaneously creating a market society.”  What fantastic

Thus, the informal or extralegal sector would be the source of hope for the creation
of a free market economy in LA. The main factor explaining the origin of this
informal sector would be a strong process of migration from the countryside into
Lima combined with a bad formal legal system containing a veritable labyrinth of
regulations.  In fact, LA regulations, decrees, ordinances, and orders are in a state
of disaster, and it worsens as time goes on.  However the big question is whether
these are the main factors explaining the phenomenon.  In Brazil, informality arose
as something significant in the nation as a whole after 1980 with the main causes
apparently being economic stagnation and the lack of formal jobs; both of which
can be explained primarily by the enormous increase in public debt and subsequent
higher taxes.  These are the basic contributors to economic strangulation.  The
tremendous public debt leads to exorbitant rates of interest and lack of credit to
the private sector.  These factors, in addition to the labor laws, lead to
informality.  The remaining troubled legal system also plays its role, but on a
lesser scale.  In the case of Brazil, it has become consistently worse since the 1930’
s. Still, it is a fact that the 1988’s Constitution has been a catalyst for this
process.  Furthermore, the migration rates from countryside to city have been
decreasing over the last twenty years as informality has been increasing.

An interesting feature of the LA nomenklatura--privileged people who live off
taxes--is that they create bureaucratic difficulties to increase the necessity of a
their own larger team.  In that way, they open room for new sinecures--friends and
relatives.  The next step will be selling facilitation-- obtaining bribes to speed up
the bureaucratic process.  This aspect is not noticed by de Soto .      

De Soto’s perception of informality as a source of entrepreneurship does not make
sense.  He twice cites George Washington – next work –  concerning the informal
sector  with a pejorative bias.  The best example is: “ Banditti who will bidd
defiance to all Authority while they are skimming and disposing of the Cream of the
Country at the expense of many”.  Mutatis mutandis this thought is still  valid.  
Perhaps Brazil’s Movimento dos Sem Terra (MST)  is the best example today.

The informal sector’s people love property rights—and even more so--after they
have stolen another’s.  An extreme case is reported by De Soto: “ It is estimated
that almost half of Lima’s water and electricity supply is unaccounted for. While
there may be some leaks, most of these losses must be attributable to the
informals , who tap the water and electricity supplies illegally.”

De Soto traces a parallel between the  tragic state of present day Peru and the
past of European countries, which he associates with “mercantilism.”   It seems as
if he might be  referring to the patrimonial state.  It is interesting that he looks at
Europe simply as a unity.  He does not distinguish between the Reform and Contra-
Reform.  What happens today in LA is just the same process that the developed
countries would have experienced in the past, including the USA.

He emphasizes the importance of legislation, institutions and legal property as a
propeller of economic development.  If the extralegal properties had transformed
into legal properties, they would have been the fuel for capital creation. The “dead
capital” would have been transformed into “live capital”.

The Mystery of Capital

This book was published in 2000.  The main line of reasoning is basically the
same.  The author adds the cases of  the Philippines, Haiti and Egypt  to the
original Peruvian one, in order to confirm his main theses.

In the final part of this work, de Soto proposes a real revolution in the social
sciences attacking Max Weber’s ideas : “Think of Bill Gates, the world’s most
successful and wealthiest entrepreneur.  Apart from his personal genius, how much
of his success is due to his cultural background and his ‘Protestant ethic’?  And how
much is due to the legal property system of the United States?” Portugal and Spain
have had a good property system during the last centuries but just now, joining the
EU, they are finding the path to future.  Even in LA the legal property system is not
a relevant problem.

Why is the present Chile, in contrast to the rest of LA, doing well?  Mexico has had
a good perfomance in concerning economic growth--due to NAFTA--but otherwise it
is quite similar to LA countries.  The Chilean case should be an interesting and
easy subject for comparatives studies in LA today.

I am afraid the “mystery of capital” is the lack of knowledge of the concept of
social capital first developed by James Coleman: the ability of people to work
together seeking for common targets in groups or organizations.  The seminal work
of Robert D. Putnan, Making  Democracy Work: Civic Traditions in Modern Italy, is
very useful in this context.  Physical capital is just a consequence of the existence
of social capital.

De Soto’s  “radical ideas” could be an elegant solution--in the words of Kerry A.
Dolan (12.23.02, Forbes)--except for the fact that they are merely a virtual solution
to a real and tragic problem.