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Mr Hernando de Soto
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"Chancellor, radical economic thought and radical political action can take many different forms. There is no doubt that we are here today to honour a famous modern radical. But, however transforming his influence, however rooted in the problems of the early 21st century and however forward looking his social agenda, I know that he will take it as the compliment that is intended when I say that he is a true son of the 18th century. For at that time, before the pressures of the age of steam and urbanisation had produced conditions suited to the growth of collectivist thinking, radical reformers wanted for all what had painfully and through much civil strife been achieved for a few - secure property rights, the rule of law, constitutional government and thus empowerment of the individual. In the work of Hernando de Soto we can observe the continuing echoes from the English Revolution and the Scottish Enlightenment. |
Mr Hernando de Soto
received his Doctor of Letters
honoris causa
in January
2005. The text which follows is taken from the formal address given
at the graduation ceremony.
Hernando de Soto was born in Peru but at the age of seven he moved with his parents to Europe. He was educated in Switzerland and, after graduating from the Graduate Institute of International Studies in Geneva, he worked as an economist and business executive. As a professional economist he has served several international institutions including the General Agreement on Tariffs and Trade and the Copper Exporting Countries Organisation. As a businessman he became Managing Director of the Universal Engineering Corporation. It was not until 1980, thirty years after he had left, that he returned to work in Peru, and his experiences of adjusting to the conditions that he found there were to have a profound impact not only on him personally but on his country and on the wider world.
Doing business in Peru was a hugely complex exercise in traversing, or more likely circumventing, an immense swamp of regulations that clogged virtually every artery of trade. Surveying this swamp in more detail, he discovered astonishing examples of the poisonous effects of regulatory activity that have since become infamous. Obtaining permission to set up a two sewing machine garment factory in a Lima shantytown took him 289 days and cost 31 times the monthly minimum wage. Faced with such daunting prospects, vast areas of business in Peru were 'extra-legal'. Peru was a dual economy with an 'official' legal sector having the appearance of modern sophistication and with links to the international trading system, and an 'extra-legal' sector in which the majority of the population eked out a living unable to take full advantage of the opportunities of a market system.
In his investigations, Hernando de Soto, noticed one factor of overwhelming significance. Activities in the extra-legal sector were inhibited by the absence of clearly defined, individually assigned and privately exchangeable property rights. This was why 'extra-legality' did not represent a simple means of avoiding over-regulation. People had the choice of wading through the swamp and facing the cost of bureaucratic regulations, or going round the swamp and facing the cost of trading in assets with no official legal title. As another honourary graduate of this University, Ronald Coase, would undoubtedly observe, and as Hernando de Soto immediately perceived, economic activity will in these circumstances become distributed such that the cost of the marginal transaction will be the same in both sectors, and the marginal transactor will find it difficult to decide which of these two dismal prospects he or she prefers. Government activity, by raising the costs of establishing, protecting and trading in property rights was operating in a way precisely contrary to its classically understood purposes and was impoverishing the population. The key to unlock the development potential of the country was to drain the swamp, reduce the regulatory burden and give legal recognition to the already existing property claims of hundreds of thousands of poor people.
These extra-legal property claims were, and remain, massive. Across the entire developing world, Hernando de Soto estimated in the mid 1990s that they were in excess of $9.3 trillion. He also displayed his genius as a polemicist by pointing out that this sum was similar to the total combined value of all quoted companies on the stock exchanges of the twenty richest countries. And he attached to these assets an unforgettable label. They represent, he told us, 'dead capital'. The message could not be clearer and you did not need a degree in economics to understand. Huge quantities of capital existed in the hands of the poor but, unlike the capital of the west it was inert and lifeless. Life came not simply from the physical existence of the assets themselves but from the accompanying legal institutions without which markets could not develop and operate effectively. Markets were facilitators of trade not simply of things but of property rights in things.
Hernando de Soto developed these ideas in The Other Path a book that created a sensation in Peru and elsewhere when it was published in 1987. It transformed the way that people looked at their economic situation. In doing so it brought Hernando de Soto and the Institute for Liberty and Democracy, the organisation that he had set up to pursue his work in the early 1980s, into direct conflict with the revolutionary Maoist network of terrorists and guerrilla fighters called The Shining Path. Instead of passive proletarians without hope for the future except by way of a shining path to communist revolution, De Soto described a mass of active and pioneering entrepreneurs developing substitutes for the rights that they lacked, producing vast quantities of the nation's output and yearning for the other path, towards clear property titles and absorption into the legal system.
In this process of reforming the legal system the Institute for Liberty and Democracy played a leading role. Working with the support of successive heads of state it drafted reforms that reduced the time involved in obtaining legal title to extra-legal assets from twelve years to one month. A new business could be registered in one day instead of several hundred days. Over a quarter of a million hitherto extra-legal entrepreneurs entered the legal economy by the mid 1990s. In answer to the popularity and success of this programme the Shining Path responded in the way they knew best. A massive car bomb exploded outside the offices of the Institute for Liberty and Democracy in July 1992 killing three people and wounding many more. But the terrorists had forfeited popular support and those responsible were arrested and convicted. Peru provides a fine example of the defeat of terrorism through the application of a reformist and liberal economic policy.
The work of Hernando de Soto is a great re-affirmation of the power of ideas to change the world. We think of the publication of certain books and papers as defining moments. They do not necessarily have to contain entirely new theoretical insights but their importance derives from communicating a different view of the natural or social world to large numbers of people. Hernando de Soto did not discover transactions cost economics, or legal economics, or the economics of property rights or the new institutional economics, but he understands the importance of all these developments for explaining the process of economic growth better than the specialist scholars, and he communicated this importance to millions. His books are in the great tradition of political economy and, like Adam Smith's Wealth of Nations they are an attack on mercantilism and a demonstration of the power of what Smith called the 'system of natural liberty'. In place of the dry presentation of the modern textbooks, however, or the technocratic jargon of the national or international agencies which so often communicate little but a sense of irritation to the reader, de Soto related market processes to the everyday experience of ordinary people and they found him completely convincing. Those who assert that interests rather than ideas determine social change overlook the fact that it is ideas that determine how we assess where our true interests lie.
Hernando de Soto's work also illustrates the great importance of the so-called 'think tank' in pursuing the unfashionable research agenda and in communicating ideas to the public. In the UK, it was Hayek who persuaded Anthony Fisher that the hostility of the intellectuals towards markets required the setting up of an independent institution to explain the role of markets, and it was at the Institute of Economic Affairs that market liberalism survived during the 1950s and 1960s not in the mainstream universities. Similarly, South America is not devoid of universities yet it was at the Institute for Liberty and Democracy that the actual workings of Peru's economic system were uncovered and reform proposals developed. Perhaps this is simply another example of the well known problem of encouraging new thinking in large organisations. As has often been observed, it was not IBM that developed the personal computer. In the realm of ideas as well as in other areas new entry by the entrepreneur is part of the competitive process, and entry barriers are lower outside the formal university sector.
One of the most significant aspects of the legal reforms introduced over recent years is that they derive from close observation of the processes and procedures that the informal sector had already spontaneously developed. In this, Hernando de Soto, has tapped into a rich vein of thinking in both law and economics. That economic institutions such as money and property evolved spontaneously through the repeated interaction of free agents is a view well understood by the founders of modern economics such as Carl Menger in the late 19th century and can be traced back to David Hume in the 18th century. Similarly the historian of law, John Maxcy Zane wrote that 'nothing is more silly than to say that the law made private property. The fact is the exact opposite. Private property came to exist and it made the law'. (p.147). The work of the Institute for Liberty and Democracy recognises the practical implications of this thinking. Law cannot simply be foisted onto people. To quote the ILD website 'the problem with most property reform programmes is that they are carried out as if the reformers were landing on the moon. They presume that the poor have no property'. The ILD instead tries to build a legal system rooted in the existing informal property entitlements and extra-legal social contracts. As de Soto writes in The Mystery of Capital , "'Discovering the law' is precisely what my colleagues and I have been doing in various countries for the past fifteen years' (p.163).
The reform processes that are underway as a result of Hernando de Soto's efforts can now be observed across the globe. They are of obvious relevance to the old centrally planned economies and to the developing countries in Africa and elsewhere. The benefits from this movement are massive if impossible to calculate with precision. But his message also has relevance to the developed countries. If, by reforming the legal system, it is possible to breathe life into dead capital, it is also possible by legal activism to throttle the breath out of living capital. 'No group', writes de Soto of the legal profession, '- aside from terrorists - is better positioned to sabotage capitalist expansion. And, unlike terrorists, the lawyers know how to do it legally.' (p.180). In the western democracies, economists have fretted for some time that the law can act both as a lubricant of trade and as a powerful means of its suppression. Discovering and administering the Common Law, as in the idealised English tradition so beloved of many foreign observers such as Hayek, seems to many economists a rapidly declining part of the actual legal process. Hernando de Soto's work has done a great service to the developed nations by reminding them that their continued prosperity is dependent upon institutions long taken for granted.
Chancellor, for his influence on the process of legal reform in developing and transition economies; for his economic writing that has increased understanding of the institutional pre-requisites of a market economy; and, not least, in recognition of his intellectual and physical courage, I present to you for the award of the degree of Doctor of Science, honoris causa , Hernando de Soto.
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