Fine words, flawed ideas
Economist Hernando de Soto is hailed as a saviour of poor countries. But he is nothing of the kind
By Madeleine Bunting
Hernando de Soto has pulled off a remarkable feat. You may not have heard of him, but governments around the world are apparently queuing up to hear what the Peruvian thinker has to say. Egypt, Romania, Haiti and Mexico, as well as his home country, are seeking and implementing his advice in a bid to transform their economies. Geoff Mulgan, head of the Number 10 policy unit, had him in to Downing Street. The World Bank is pouring huge sums into his projects. The Economist ranks his Lima-based institute as the second most important thinktank in the world. De Soto is pitching himself as a third way guru and it's working. With the launch of his new book, he's flavour of the month.
The third way needs him. The weakest assertion at the heart of the bundle of ideas lumped together by a loose alliance of Tony Blair, Bill Clinton, Gerhard Schröder and other left-of-centre leaders such as the Brazilian Fernando Cardoso, is that capitalism can distribute wealth widely. The evidence is to the contrary; recent history seems to be proving the Marxist claim that, inevitably, a capitalist system concentrates wealth in fewer hands, thus sowing the seeds for its collapse.
Walk on de Soto. His appeal lies in large part because he doesn't challenge the status quo; he accepts capitalism is the only economic system on offer. What he focuses on is the huge black economy that operates outside the legal system in all countries, particularly in the developing world and former Soviet bloc. In the extralegal economy, the poor accumulate huge assets in their shanty homes and small businesses, but because they have no legal protections, they cannot access credit nor can they safely invest. Their assets are thus "dead capital" as opposed to "live capital" in the west. The big idea can basically be summed up as: "It's property law, stupid."
De Soto has made a useful point. The underground market in Russia and Ukraine accounts for 50% of GDP and 62% in Georgia. According to his institute's inventory, as much as 90% of Cairo's economy is extralegal. In his emphasis on the enormous entrepreneurial energies of the poor, and that they know better than any policymaker how to improve their lot, de Soto should be shifting the minds of politicians and donor governments in the right direction. Perhaps he can help uncouple the ideas of poverty and laziness that still lurk behind some compassion fatigue towards developing countries. After all, in many countries it is the entrepreneurial resourcefulness of some of the most marginalised - women traders in west Africa for example - who ensure that millions of people are fed and clothed.
But what this most certainly does not amount to is a big idea to solve global poverty. Gathering around de Soto is a semi-hysterical spinning that ludicrously compares him to Adam Smith and Karl Marx. His book, The Mystery of Capital, is breathless, grandiose, and claims to have fathomed "secrets" and "mysteries". But if that's what it takes to get a book that baldly states that globalisation is not working for five-sixths of the world's population on to the US bestseller charts, then more power to his elbow.
Governments do need to devise ways to hook the extralegal economy into the formal economy. Opt into the system and you get access to credit to invest in your home and business, and you don't have to pay bribes to the mafia. De Soto claims his theory is backed up by what happened in the fast-track scheme he designed for small business under President Fujimori's government in Peru, when 276,000 businesses voluntarily opted for legalisation.
But what de Soto doesn't acknowledge is that the balance of benefit between staying out of the system and opting in can be delicate or even tipped firmly against. Perhaps for shanty dwellers in Brazil or market stall holders in Kiev, the local mafia has far more clout than any government. To them, legalisation only doubles their burden, adding taxes to the bribes they will have to carry on paying.
The laws a country makes and how they are enforced reflect the disposition of political power - and that is determined by who has economic power. De Soto's work is an elaborate smokescreen to hide the uglier truth. The power, political and economic, lies with the globalised elite in developing countries who are often employed or bullied by western multinationals, and who run those countries for the maximum extractive benefit of the west. We import their raw commodities at rock bottom prices, and export back to them manufactured goods; we restrict their manufactured exports and we charge high levels of interest on their debts. None of that, of course, gets a hearing in de Soto's work, which is no doubt partly because his CV includes a stint as an economist for Gatt (the precursor of the WTO) and as the chief executive officer of "one of Europe's largest engineering firms". This is touchy, feely capitalism with a heart. Handle it with care.
The Mystery of Capital by Hernando de Soto is published by Bantam Press.
madeleine.bunting at guardian.co.uk
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Carl
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