Hernando De Soto Interview

In seeking to make life easier for millions of Peruvians, Hernando De Soto has made his own life difficult. De Soto, the best-selling author of The Other Path (1989) and founder/director of Peru's Institute for Liberty and Democracy, is a champion of market economics and property rights in a part of the world that historically has shown little interest in such ideas. His efforts have led not only to political attacks from enfranchised power elites but to physical attacks from leftist groups, such as the Maoist Shining Path, who have placed him on the top of their hit list. His description of market mechanisms and the way they empower people has ramifications beyond the borders of Peru: Americans, De Soto wrote in The New York Times, have taken their economic and political systems for "granted, losing their ability to recognize and teach the importance of these institutions." When I went to interview De Soto last July, the armed soldiers at the institute entrance ordered my taxi driver to park half-way down the block. A car bomb had recently killed several people at the site, and the soldiers were not taking any chances. After getting out of the taxi, I walked along the concrete wall surrounding the property over to the guard booth controlling access to the courtyard. I showed my passport, and the officer in charge made a phone call to the house inside while another soldier asked me to open my briefcase. When the officer learned that I was expected, he became friendlier. As I walked across the courtyard, I could see the debris that still cluttered the area: a memento of the Shining Path's bomb.

Reason: Your institute once interviewed a sample of 80 landowners in Peruvian agrarian communities and found that 70 of them did not regard themselves as belonging to the propertied class. How do you explain this curious self-image?

De Soto: Let me place that survey in context. When The Other Path was published, it became clear that, in Peru, there were two economies, one formal and one informal. The informal sector constituted between 50 and 60 percent of the total.

We examined the situation in the various government ministries and discovered a pattern of "invasion" of lands in Peru [owned by absentee landlords or by the government]. Who were these invaders? We found that they were farmers--informal agricultural entrepreneurs. From among the leaders of the invaders we selected 80. They were the most prosperous and therefore those with the most authority among these informals. Talking to these informal leaders, we asked them the question, "Do you consider yourself a member of the private sector?" "No," most of them answered. "Do you then consider yourself a member of the public sector?" we asked. "No," they said, "the public sector is the government, the state." Then we asked, "Who do you think belongs to the private sector?" "Los de arriba," those above, they said.

The contradictions were remarkable. For example, a prosperous informal businessman, president of the Peruvian Drivers' Federation, representing 300,000 drivers, was also member of the Central de Tra- bajadores del Peru [Central Union of Peruvian Workers], which is controlled by leftwingers. One day I asked him, "Look, you own a bus, but you talk as if you were a proletarian. You know that a union supposedly defends the salary of the proletarian against an owner, and tries to reduce the so-called surplus value, but you live off your own business. I'm sorry, but you are a capitalist!"He answered: "No, I'm not. Haven't you heard of autoempresa ["self-entrepreneurship"]? I am a worker in autoempresa." "Yes," I said, " I know about the autoempresa. In fact, I have a friend who has an autopizzeria ["self-owned pizza shop"], another who has an autotienda [self-owned store], and so on. I'm sorry, but there's no difference between you and them, except for the fact that you are marginalized by regulations, whereas they are afficially licensed by the government."

This perception originates in the fact that in Peru there indeed exists a private sector, but it exists largely on the basis of competing for government favors, contracts, and privileges, and its economic approach is to try to exclude or marginalize competitors--not by outproducing them in quantity, quality, or prices, but through political means, from legislation to outright use of the many resources of legal coercion at the disposal of a modern state. This is why I have characterized the official Peruvian economy not as a free-market economy but as a mercantilist economy. The informal economy is much closer than the formal to what we call a market economy. Not only does it not function on the basis of political favors, but it often functions in spite of a government opposition incited by participants in the formal economy.

The organizations of Peruvian informals are much larger than such "proletarian" organizations as the Peruvian unions. Until seven or eight years ago, however, they had a similar vocabulary. For example, the itinerant informal entrepreneurs called themselves a sindicalo de ambulantes [syndicate of traveling salesmen] and had a red leadership. The transportation entrepreneurs called themselves frentes de defensa del trans- porte [fronts of defense of transportation]. The rhetoric which served as the discursive basis of this vast informal movement of businesspeople was actually left wing!

Reason: In the United States, local governments are often against informal businesses as well. I recall the case of a well-known newsstand in Chicago, which for many years had sold newspapers and magazines on one of the busiest avenues in the city. In 1992, the politically well-connected bigger stores in the area used the local government to eliminate this informal businessman under the pretext of "improving the appearance of Chicago's downtown."

De Soto: In Peru things have been worse, because the informal sector is much bigger and government regulations are more retrograde. When The Other Path was published, Lima's mayor was a man who considered himself a Marxist-Leninist (today we are very good friends). In order to "help" the informal salesmen, he and his council passed a set of regulations. After a bit of research, we showed him that at least one third of his "progressive" piece of legislation was in fact made up of ideas indistinguishable from ideas developed by the Peruvian legal system during the time of the Spanish viceroys--from 1617 to 1670. We told him: "You know, these ideas of yours aren't very modern for a communist."

In fact, what this man wanted to do would hurt the informals he said he wanted to help: With the regulations and the taxes he was imposing on them, he would cut into the growing profits which had allowed them to open more than 331 new markets in Lima alone.

Little by little, we've been gaining ground. Of 112 informal organizations that we tried to win over, 111 have by now aligned themselves with us to fight in favor of what we call a market economy. We have been less successful with the formal organizations. We tried to unite the formal and informal entrepreneurs in what we called the Confederacion de Empresarios del Peru [Confederation of Peruvian Entrepreneurs]. We wrote down the free-market principles and interests shared by all entrepreneurs. We pointed out that the problem which both formals and informals had to face was not a "class struggle" but rather how to handle the intrusion of the government in the activities of all businessmen in Peru. When we called a meeting, the informal organizations attended, but no formals showed up. Then we asked the formals: "Are you going to open your chambers of commerce to the informals?" They rejected the idea. These two groups continue to see themselves as making up two different social classes. One way of looking at this situation is to see the informals as the Boston Tea Party of Peru and the formals as the English entrepreneurs of King George III.

But we have at least opened the way for the eventual creation in Peru of a large, comprehensive entrepreneurial class like that of the United States, where a "small businessman" wants an America which is "good for business" and a "big businessman" wants the same thing. Of course there are differences between the two, but not an opposition, which is what has been happening traditionally in Peru between the informal and formal sectors.

Reason: What would you say is the difference between the institute's agenda of granting official property rights to their land to the informals and the old left-wing idea of "agrarian reform"?

De Soto: Agrarian reform is a process by means of which government assigns lands to the peasants. But when we talk about titling and registering those who have already occupied the lands, the "squatters," we are talking about a different phenomenon. The squatters have already created their own revolution. They do not need anybody, neither a party nor a government agency, to carry out a revolution for them. I am going to show you the real magnitude of this revolution so that you can see that this is not the sort of resolution that can be negotiated: 90 percent of the agrarian sector in Peru is informal.

Reason: Ninety percent?

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