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Reason: How does the institute approach the ecological problems in large cities like Lima, where non-free-market environmentalists blame much of the decay in the quality of life on the abundance of informal entrepreneurs and the lack of government regulation of their activities? De Soto: I am going to give you an answer related more to the countryside than to the city, simply because the argument comes out more clearly there. But the principles are the same and are applicable to the city problems. The answer is to establish property rights which are formalized and, along with them, establish both incentives and responsibilities on the part of the property owner.
One of the great worries of anyone concerned about the environment is that at the very sources of the Amazon one finds an enormous amount of pollution due to the dumping of thousands of tons of sulfuric acid, kero- sene, and other such chemicals. Well, these chemicals are there simply because that's where peasants manufacture coca paste.
The major reason they make coca paste is that these entrepreneurs have no security with respect to their property, because it is informal property and therefore not "legal." They have no incentive to plant, for ex- ample, oil palms, which in five years will give them an economic benefit six times greater than planting coca. To produce palm oil, you have to be able to wait five years, while coca grows like weeds, without any need for care and time. And if you don't have clear property rights, you can't get the credit necessary to grow crops that require more investment capital than coca. Finally, if you have a coca field, and the police go after you, you know it is better to have your coca in small lots.
Reason: So that when the police arrive and you flee, your losses are relatively small.
De Soto: Exactly. But the problem is that if what you own as an informal entrepreneur is only a couple of hectares, you can't start growing, say, commercial cocoa, because the Hershey company is not going to bother buying the amount of cocoa that you can produce there. The end result of all this is that the informals have all sorts of negative externalities because they do not have the legal infrastructure of a market economy that would allow them to solve the difficulties associated with production. From the moment you give these people property rights which are well-protected and transferable, you not only give them incentives to increase production, you also make them accountable and responsible for what they do produce. Look, you turn on your TV and see a program like Miami Vice, where these two good-looking gentlemen go in their beautiful cars after drug dealers. They search for the "Colombians" at 353 Sewer Street, but find that the drug dealers are gone, and now have moved to 301 Huntington Drive, and so the heroes go again after them--all you hear are addresses. But when you see the police in the Alto Ballague in Peru, you see them in a helicopter, floating above the tree tops. There are no addresses. It has been said that there is no workable police force without addresses. Well, there is no workable market economy without addresses, either. And for that you need property rights. The first characteristic of an outlaw is...
Reason: That he does not have an address.
De Soto: Exactly. Until you have universal, well-protected, clear, and transferable private property rights, you cannot have a market economy in Peru, in the ghetto, or anywhere else. And you are going to have all the problems those places have.