John Blundell's latest article in The Scotsman. Economists can rarely claim to be heroes. Few, very few, can have suffered murder attempts for their views. Too many economists get lost in their footnotes.
From the relative obscurity of Lima, in Peru, Hernando de Soto has been working on critiques of poverty and the techniques persistently deployed to keep people poor. To me, he is a true hero – both intellectually and physically.
The tasty biennial Milton Friedman Prize of $500,000 has just been awarded to Mr De Soto by the prestigious Cato Institute in Washington DC. I think the accolade will enhance his name, bring his message to the fore, and eventually transform millions of lives.
I think De Soto has useful lessons for the developed world, even though we think ourselves far from the misery of the failed states. This explains why as a judge for the prize, I cast my vote for him unhesitatingly.
First, let me outline his life. A middle-class Peruvian, he had a successful business career in Europe. At 38, he had made more than enough to retire. On returning to Lima in 1979 he was jolted by the poverty. Why was it so different from Europe?
The people were as energetic and as dexterous. They wanted to make life better for their families, yet outside of a tiny elite – all very close to the Peruvian state – everyone was officially poor.
What De Soto found was complex in detail but simple in essence: the poor lacked property rights. “They had houses but no titles; crops but no deeds; businesses but no statutes of incorporation,” he wrote.
Some 95 per cent of Peruvians are locked out of the highly regulated formal or legal economy. Of course, the informal economy is thriving. It is the reality of the economy for most people in what we call the third world.
In short, they are all rather richer than we are told and could easily be vastly richer if they could only establish the property rights to the fruits of their labour.
De Soto has only two books to his name The Other Path (1989) and The Mystery of Capital (2000). These two texts are truly revolutionary. The key to bequeathing prosperity is to relax all constrictions and grant tradable property rights – the rights that the elites all enjoy.
So, when you look at the shanty towns that thrive outside every third world city, you have to realise that while highly elaborated property rights are evolving and are recognised by everyone (except the state), they are just not transferable.
Imagine if you held no transferable rights to your home. You would instantly suffer the loss of security everyone endures in Peru. Moreover, the absence of legally enforced property rights enhances the power and influence of the criminals.
In 1980, De Soto created the Institute for Liberty and Democracy. It seems to me to have transformed Peru’s understanding of itself. Yet De Soto’s influence is far wider than his Andean city. He is tendering his ideas on every continent. He exasperates Conservatives and Socialists alike. This is because his sensibilities are left- wing – to lift those in poverty – but his prescriptions are radically libertarian.
Gamal Mubarak has asked him to offer bold policy reforms in Egypt; Vicente Fox, the Mexican president, seeks his advice; Philippines president Gloria Arroyo values his help.
In every case, he avoids the usual mixture of charity or alms. The poor do not need the transfer of goods but the transfer of rights. The oppressed of the poorest nations just need functioning markets and the rule of law.
“Five-sixths of the worldâ€™s population are locked out of the capitalist system. Most are as marked off as apartheid once separated black and white South Africans,” he writes.
His ideas lead to conclusions that upset the Marxist brutalists who want to obliterate all property rights.
The Shining Path terrorists have tried to kill De Soto several times. The corrupt agencies of the Peruvian state have tried to ruin him. Drug barons hate his ideas as they would empower the poor peasants who currently grow the coca bean.
He remains ruefully amused at the cruelty of the stupidity of it all. Condescending “aid” programmes or “development” experts are positively damaging. Men and women of the third world are not children or incompetents; they simply lack the institutional tools we take for granted such as the enforcement of laws and the transferability of property. How can banking or credit fulfil its functions without contracts? The poor lack collateral as their assets cannot be traded.
If these all seems a bit tropical and far away, how would De Sotoâ€™s ideas apply here? We see a micro-example in the attempts of some island communities to buy out estates. This can go awry. Eigg seems to be decaying into a little Soviet. Colonsay seems a happier model.
The point is to let people own property. They will husband it far more attentively. The experiments in letting people buy their council houses has something of Mr de Soto in it.
I haven’t asked him, but my guess is he would nominate Scotland’s local authority schools as a good example of how the absence of property rights and choice renders the billions poured into it wasted.
Let every parent select the teaching they want – and pay for it. Talented teachers would quadruple their income. The dud ones would go elsewhere. Literacy and numeracy – long suppressed in “schools” – would flourish again.
Reading De Soto is an enjoyably subversive experience. He teaches that every formal institution has vast informal consequences. The grander the title and the more superior the claims, the less competent will any public agency be.
In Scotland we can see a venture like “Scottish Enterprise” has noble intentions, but the reality is dross – expensive dross.
Our capitalist system evolved and emerged by a series of accidents. We learned to assert or discover property rights and courts that were more than the playthings of the Crown.
In most of the third world, property (I don’t mean just real estate) cannot be enforced as the courts are too slow, too expensive or simply corrupt. I hope we can bring De Soto to Britain and set him the task of assessing our institutions. Our complacent Establishment will wobble.
John Blundell is the director general of the Institute of Economic Affairs