de Soto, Hernando (1941–)

RECIPIENT OF THE Milton Friedman Prize for Advancing Liberty, Peruvian economist Hernando de Soto is an extraordinary individual. Returning to his native Peru in 1979 following a successful business career in Europe, de Soto began to study the question of poverty and asked why some countries are developed and affluent and others are not.

He noted that in Peru there was no lack of entrepreneurial drive among the people. In addition, the people had assets. The problem was that the people did not have government acknowledgement of what they produced and owned. In his 1986 book, The Other Path, de Soto argued that workers, successful as they were in the informal economy, were essentially locked out of the formal or legal economy: they may have houses but they were not officially titled, they grew crops for sale but had no deeds to the land, and they ran successful businesses but did not have the documents of incorporation that would provide legal status.

De Soto formed the Institute for Liberty and Democracy (ILD), an organization devoted to the study and analysis of inequities in the business dealings of countries in the developing world. In Peru, attempts to obtain rights of ownership for land and businesses from the national government were extremely difficult. Without formal title to their property, individuals were not able to use their assets for collateral or obtain bank loans to expand their operations. De Soto and his colleagues at the ILD call these untitled assets dead capital. The ILD estimated in 2004 that dead capital in the developing countries totaled over $9 trillion. De Soto contends that capitalism is not inclusive of all those entrepreneurs in the developing countries whose property is untitled and therefore not usable for acquiring loans for much-needed business expansion.

De Soto and his colleagues did extensive fieldwork in the cities and rural areas of the developing world in [Page 258]order to determine the extent of dead capital in existence in these places. Their findings were astounding. In Egypt, for example, the assets of the poor merchants operating in the informal economy were found to be 55 times greater than all foreign investment. Despite this accumulated wealth, the merchants are not able to transform their assets into liquid capital, which would allow for the generation of new wealth through increases in production, the growth of new businesses, and the eventual alleviation of poverty. Property must be officially documented and affirmed by the national government before it can be fully incorporated into the capitalistic system.

In his article “Why Capitalism Works in the West and Not Elsewhere,” de Soto points out that assets outside the West are held in “defective forms.” For example, houses are built on land whose ownership records are incomplete or missing. Not being properly recorded, land of this type and the buildings on it cannot be easily sold to raise capital for other uses. In addition, without proper title the land cannot be used as collateral for loans. Without these legal representations, de Soto claims, people in the developing countries and the former communist regimes have not been able to fully embrace capitalism. As such, their economies are stalled and growth cannot be maximized.

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