Capitol Ideas/From Mercantilism to Markets

...government officials and development experts don't understand that elections alone are not enough, he said...

...I attack like a mad dog when I hear the word 'culture,' " he told me later in his Washington hotel...

...In the past 150 years private property has been widely attacked as beneficial to the rich...

...There had to be something more objective, more concrete, something above all that could be changed...

...There were so many rules on the books that it was as difficult for a newcomer to become a legal tradesman as it was for him to join the country club, and for the same reason...

...In Peru, de Soto studied 130 books on poor people, but not one of these books mentioned the key point that they always worked illegally...

...He found that all these people were working illegally...

...Some of them do know perhaps 25 percent of the pie, but they don't go further than 25 percent...

...Yet secure and transferable private property rights are in fact the cornerstone of economics, to use de Soto's metaphor...

...Do we really want them to descend to our own ignoble level, with our high-rise condominiums and plastic appliances and Kentucky Fried Chicken outlets...

...He said it would have two key features: institutions that make government accountable to the people (he cited: public access to government deliberations—forbidden in Peru...

...It has already sold more copies in Peru than any other book in Peruvian history (so de Soto told me...

...U.S...

...De Soto could see that in the U.S., in Switzerland, in Germany, there were legal institutions that influenced decision-making by those in power, rendering them accountable for their decisions...

...The institutional circumstances of the poor were always overlooked...

...Not an inferior one, mind you, not really a deprived culture at all...

...Since then, little has been heard on the subject...

...And what he called the "enfranchising state," meaning chiefly secure private property rights for all, and freedom of contract for all...

...So once again he asked questions...

...There is this jar with the label 'culture' on it, and a lot of ignorance goes into that jar...

...De Soto's name for the Peruvian system is mercantilism, "a politically administered economy in which economic agents [are] subject to specific, detailed regulation...

...It is the same in other Latin American countries, de Soto told me...

...It is not that free markets in these countries have been tried and found wanting...

...You say that in Peru it took you 207 bureaucratic steps to get property rights to a sand dune for some poor people...

...We don't think anyone has yet got that blueprint...

...by Tom Bethell H e went to the University of Geneva, went on to graduate school (international studies), graduated high in his class, briefly became president of an international organization...

...And a lot of my Third World friends weren't either...

...Frederic Bastiat said much the same thing in France, in the inauspicious year of 1848...

...it is usually not even thought to be part of economics...

...government from the Cato podium...

...In his thirties he was managing director of Switzerland's largest consulting engineering firm...

...Yet you knew that de Soto was talking about something much larger than Peru...

...Until the big commercial banks learn it, their debts will remain unpaid...

...So you lost all prejudice...

...De Soto was talking about the Peruvian economy, not the most pressing problem in State-of-the-Union Washington, with President Bush not too many blocks away, still assembling his familiar old Jerry Ford-built team of go-along-to-get-along, nice-guy Republicans...

...At first he thought his own country was merely more romantic...

...Secure property rights protect the small property of the poor from the expropriation of the rich...

...But no primer described these institutions...

...For about twenty minutes he described some of these institutions and you could have heard a pin drop...

...Earlier he had gone to private school in Switzerland...

...These things are not written down in any book, said de Soto, because they evolved spontaneously...

...Even if they did (so great is the THE AMERICAN SPECTATOR APRIL 1989 13...

...This is what exists in Latin America today...

...his father, a diplomat, was living in self-imposed exile there...

...Why was this...

...The law...

...Whenever we have tried to find one American who could tell us what the golden rules of rule-making are, or the same thing in Switzerland or Germany, there was not one who could give them to us," de Soto said...

...Until the development experts learn this lesson, they will be wasting their efforts and the Third World will remain poor...

...If someone is injured in the streets, it is difficult for him to recover damages: legally, the "company" involved doesn't exist at all...

...But it has the feel of a classic in embryo...

...After paying essential bribes and filling out myriad forms, they calculated that one person would have to spend 289 days, six hours a day, to become certified...

...1=1 H e told me in Washington that "the purpose of the Institute for Liberty and Democracy is as humble as this: to help put in place the first cornerstones of a blueprint showing how to make the transition from a mercantilist to a market economy...

...a free press...

...THE AMERICAN SPECTATOR APRIL 1989 11 He went out into the streets and began to interview street vendors and the minibus drivers, the workers of the "informal" economy...

...It was very difficult to say that somebody because of his race or nationality or culture was better than another...

...He may have come from a poor country, he realized, and one that may have been "culturally deprived," or whatever it was supposed to be, but he wasn't deprived at all...

...Here is the evidence The book was on top of the bestseller list in Mexico, and Octavio Paz told him, "All you have to do is change the names and you're describing Mexico...

...without them he could not have organized his Institute for Liberty and Democracy, raised money, recruited researchers...

...As a matter of fact," de Soto said, "rule-making procedures and property rights are the two cornerstones of the West, as opposed to elections...

...They tried the same thing in New York and it took two hours...

...When property is reduced from a right to a privilege, as also happened in British-ruled Ireland, disorder will always follow...

...rarely has it been defended as indispensable to the poor...

...They have not yet been tried.self-loathing of many Western intellectuals) it is far from clear that they would approve of others imitating such institutions...

...checks and balances...

...An optimist, he felt sure that change in Peru was not only necessary but possible...

...he tacitly accepted the cultural argument himself...

...His book, The Other Path: The Invisible Revolution in the Third World, just published in the United States by Harper & Row, may be one of those rare books that change the way we look at the world...

...This is not a Peruvian book...

...At the end of his talk the Cato Institute's David Boaz said these were the nicest things yet said about the U.S...

...But he also has the instincts of a journalist...

...de Soto...

...Among your big academic experts," de Soto told the Cato crowd, "we have not found one person who can find out how your rules are made...

...This is a Latin American book...

...Is there not something rather stirring and authentic about these sons and daughters of the Inca greatness, these blanket-draped peasants sitting outside their honest hovels with the Andean peaks rising up in the background...

...At the end of speeches abroad, members of the audience would stand up and typically say: "Mr...

...Whenthere is no extracontractual [tort] law to cover informal activities," de Soto writes in The Other Path, "or such law is inadequate or improperly used, informal economic activity can be very costly to the larger community...

...When it works reasonably well, people don't see it...

...The development experts and the outside observers show up in Lima and concede that, yes, the Americans are more prosperous, they have this thing called capitalism, but the Peruvians . . . well, they have a different culture altogether...

...In the course of his speech I felt a sense of relief, as one sometimes does when long bottled-up truth finally escapes into the atmosphere...

...CAPITOL IDEAS FROM MERCANTILISM TO MARKETS rr he Cato Institute was packed as I 1. have never seen it, with one or two standing outside in the February cold, their noses pressed to the window pane...

...Hard to believe the noble savages would choose such degradation, but you never know these days, so why take the risk...

...It soon became obvious to de Soto as he looked at these snapshots that Peru was poorer than most of the other countries—a lot poorer...

...I knew a lot of Germans who danced better than I did, but I was better at mathematics...

...The one thing that the poor had in common was always ignored...

...He began to interview people on the streets of Lima...

...So de Soto said: "Maybe the law has been the missing link that has prevented us from seeing what has been happening...

...It's not sufficient that the people be permitted to rotate tyrants every few years...

...It is a deplorable comment on U.S...

...Look in the indices of the leading economics textbooks today and you will see scant reference to property rights...

...The regulations functioned to protect the business activities of the ruling class...

...And so, in Peru, if you want to go into business you do so illegally...

...European mercantilism, from the sixteenth to the eighteenth century, was characterized "by the close ties that existed between an ever present state and a privileged and exclusive entrepreneurial clique...

...elites as presently constituted (and Western elites generally) that they do not understand how their own system works...

...When property can be seized, on the other hand, elections are inappropriately transformed into winner-take-all contests...

...Conversely, if the rule of law is secure, and private property and freedom of contract are inviolable, elections become far less important because what we have toiled to accumulate is beyond the reach of politicians...

...But you never knew who was going to excel in any field...

...Sometimes he is described as an economist, but he is rightly suspicious of the label...

...The problem with "culture" was that it was eternal, as hard to change as the genes...

...He thought it was insufficient as an explanation...

...Nonetheless, they went home for holidays, and they returned to school with photographs...

...The institution of private property is, generally speaking, not understood by the economics profession...

...There was scarcely a rustle as Hernando de Soto spoke...

...No one seemed to have the answers...

...De Soto, forty-seven years old, looks like a successful businessman, and in a way that is exactly what he is...

...Later it began to sink in that they were, above all, poorer...

...It enrages him to be told that he and his friends were "culturally not suited to the market economy system...

...At the International School, de Soto recalled, the students came from sixty-four nations...

...Here are the papers...

...One example was tort law...

...It wasn't that the Latin Americans danced better and the Germans were better at mathematics," de Soto said...

...Tom Bethell is The American Spectator's Washington Correspondent...

...So he did what the World Bank country teams would never condescend to do, with their domestic servants, their tax-free salaries, and their high-rise isolation, tinkering by computer with their imaginary, hydraulic economy...

...It was while he was at the International School of Geneva, when he was fourteen or fifteen years old, that de Soto began to learn what may be the most important lesson he has to teach us today: nations differ in wealth, yes, but this difference must be accounted for by something more precise than the vague, defeatist word "culture...

...Behind the arguments of the traditional development crowd," de Soto told Forbes magazine, "there's always racial prejudice...

...There was no reference to the law, and yet they were illegal...

...So he began to read books about development economics, and there, between the lines, he always found the same argument: culture...

...De Soto had considerable leadership and entrepreneurial abilities...

...That is what Hernando de Soto is here to tell us: the institutions that enabled the West to grow rich are institutions that protect the weak from the powerful...

...This leads to a widespread belief that the free market, or "capitalism," is inherently unfair, and that only government has the solution...

...It is too early for such a judgment, of course...

...And this has been his greatest asset...

...He would encounter sermons of the Oscar Lewis variety" 'Family of Sanchez' stuff," de Soto said, "telling us that the poor are really to blame because the father hits the kids, that kind of thing...

...The Peruvians had lots of sunshine and horses to ride, bigger mustaches and more gold in their teeth...

...Ninety-five percent of public transportation in Lima was provided by the private (but illegal) sector in 1984, but the bus and taxi drivers who provide this useful service (at low cost) are unpopular...

...Well I have just finished the same transaction in Colombia, and it took me 290 steps...

...He even calls himself a businessman...

...I am a builder...

...Experimentally, de Soto and his team decided to set up a small garment factory to document the costs of entering the system legally...

...Undoubtedly, for example, the Israeli government could swiftly tranquilize the West Bank by permitting Palestinians to own property there...