Quo Vadis Hernando?

A Critique of One of Peru’s (and the World’s) Most Respected Intellectuals

— By Diego de Soto 
Special to the Peruvian Times 

Hernando de Soto has been a public figure in Peru for more than twenty-five years. Many informed Peruvians are familiar with his ideas on property formalization and bureaucratic streamlining of various types, and, more recently, his application of these ideas in the area of social conflicts related to extraction of natural resources. His ideas have taken him and his NGO, the Institute for Liberty and Democracy (ILD), across the world, consulting with governments of countries as diverse as El Salvador, Ghana, and Russia. He has been lauded by extremely powerful politicians, elite think thanks, and many respected international publications.

However, if one begins to examine the philosophical and ideological underpinnings of De Soto’s ideas, as well as the empirical evidence for the success of his programs, problems quickly emerge. Instead of presenting a pragmatic, almost magical formula for addressing poverty,  De Soto’s ideas and their implementation appear to be ideologically motivated and philosophically ill-founded strategies that ignore broader problems which lead to poverty, and, in some cases, his programs unwittingly exacerbate poverty. It is also worth examining the implications of these problems for De Soto’s latest initiatives in Peru regarding social conflicts related to extractive practices.

The Philosophical Foundations: A Myopic View of “Reality”

When presenting his ideas, De Soto often refers to his belief that economic systems are based on representations of reality. This approach is largely rooted in the ideas of American philosopher Charles Sanders-Peirce. De Soto claims that in order for economic systems to function effectively, they need subsystems of informational “tools” that yield accurate information about economic value. These subsystems can be paper (or electronic) records of physical phenomena, like land or cattle, and on a more abstract level, securities, like stocks or bonds. Once these tools are codified in systems like rules, laws, and regulations, De Soto goes on to say, they allow individuals who wouldn’t otherwise trust each other, or who don’t even know each other personally, to enter into legally binding economic agreements, thus paving the way for increased economic activity and increased economic growth. And as these systems of representation become more sophisticated, that is, as more interrelationships are created between these tools and their owners, such as limited liability and complex financial instruments, there are increased opportunities for overall economic growth.

Hence De Soto’s prescription for poor countries: by streamlining bloated bureaucracies and integrating unregistered property owners into the formal systems, more accurate representations of economic reality are created, thus allowing for more opportunities for reality-based economic transactions, and thus more growth.

This line of reasoning seems intuitive and self-evident until one begins to examine what De Soto calls “reality”. If we boil it down, De Soto’s reality is an economic one; that is, he aims to find systems of representation, or tools, that allow people to determine the true economic value of resources, goods, and other types of assets. For instance, by titling a plot of land, one creates market value, which can then be leveraged into greater economic value, such as using the land as collateral to get a loan. In short, for De Soto, reality is market value.

The problem with this assessment of reality is that it divorces the asset from the historical context in which it exists. Going back to the example of a plot of land, the market value of the land doesn’t reflect whether it was obtained in an ethical and/or legal way. Was the plot of land obtained as a result of expropriation? Was it purchased informally with the help of a bribe? In short, what is the history of this plot of land?

If we ask these questions, we can see that if we want to create a system that reflects reality in an holistic and ethical way, we need tools that first evaluate the historical dimensions of assets. Otherwise, we risk only rewarding the current owners of assets, which may have acquired these assets in unethical ways.

It should now be clear that applying the ILD’s programs without this historical recognition of reality in all likelihood perpetuates existing inequalities, particularly in countries with histories of colonialism, which is the case for the vast majority of poor countries. If countries do not come to terms with their collective pasts, then it is very likely that old resentments and unjust social situations will continue. In fact, introducing programs that ostensibly produce greater economic opportunities for those with unjustly acquired assets could just exacerbate tensions.

De Soto may argue that he focuses specifically on the poor, and thus is contributing to closing the gap between elites and disadvantaged populations. While this may be theoretically true for some people (I use the word “theoretically” because there is plenty of empirical evidence suggesting otherwise – more on that later), the fact that this theoretical perspective is ahistorical in nature means that it is likely to fail to address the collective traumas and wounds of societies, and thus will not address the root problems of these countries, ensuring that they will crop up again, or that those suffering unjustly will be forgotten by history and/or simply die off.

Ideological Foundations: A Question of Priorities

De Soto is, above all, a promoter of capitalism in its purest form, where people everywhere can have access to free markets, and where this unfettered market activity would reward individuals and contribute to optimal economic growth. He believes that many systems that are nominally capitalist are in fact subject to a new form of mercantilism, where, instead of the governmental centralization of classical mercantilism, a small elite exercises mercantilist control over the market. By removing bureaucratic obstacles and creating informational tools that accurately reflect economic value, he believes, we can contribute to a more equitable world.

Again, on the surface, this seems like a solid idea, and within an appropriate context, it is. The vast majority of people would agree that it is very important for societies to create markets where innovation and wealth creation can occur. But the problem is one of context.

If one looks at the evidence, it becomes clear that there are virtually no functioning democracies in the world today. Of course there are many examples of overtly authoritarian societies, but the more insidious cases are of countries that are nominally democratic, but are in fact controlled by large-scale corporate interests. In these latter cases, people vote for politicians, but aside from policies stemming from referendums, the elected representatives work largely to further large-scale corporate interests.

The United States is probably the most overt case of this; a statistically significant study by Princeton and Northwestern University political scientists Martin Gilens and Benjamin I. Page demonstrates that average citizens have little to no influence on policy-making. While this type of empirical evidence certainly isn’t available for all countries, most citizens of nominally democratic countries are aware of the undue influence of large-scale corporate interests on the political process.

Incidentally, this state of affairs certainly begs the question of whether the subtitle of De Soto’s book The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else is at all accurate; given the evidence, wouldn’t it be more accurate to say that neo-mercantilism pervades the West as well, albeit in a more veiled way?

So De Soto espouses the free market, but how can a free market truly be free if it functions in the context of either authoritarian or corporatist structures that restrict it? One could argue that integrating people into the formal economy will eventually result in the merging of the elite-controlled markets and the formerly informal markets, but there is no evidence that this has happened in countries where bureaucratic obstacles are minimal and where there are essentially no informal economies. The U.S., which is widely considered to be the most capitalist country in the world, has suffered from rising levels of economic inequality since the 1970s and wage stagnation since the 1980s.

Therefore it seems fruitless to concentrate on the types of efforts made by De Soto and the ILD if we acknowledge that they exist in almost universally undemocratic contexts that are impervious to efforts to create greater economic justice.

De Soto may argue that regardless of the political context, his programs are a step in the right direction since they lift people out of abject poverty. However, as we will see in the next section, there is scant empirical evidence of this.

The Evidence

Economics is a fairly quantitative discipline, thus allowing theories to be tested through quantitative analysis, and when one looks at the evidence base for De Soto’s approach, serious problems emerge almost immediately. While there is empirical evidence that property titling can contribute to social and economic progress on a micro level, there is also substantial evidence that overarching patterns of behavior by economic elites and middle-class opportunists significantly vitiate the progress of the beneficiaries of property titling on a macro level.

One instructive case is Cambodia. A 2005 article by John Gravois on Slate.com offers the following narrative on a series of events in Cambodia related to a property titling program:

“In places where real estate markets are buoyant, [property] titles turn out to be quite a hot commodity. Too hot, in fact. In June of 2002, for example, the World Bank kicked off a several-year project to distribute over a million titles throughout Cambodia. In Phnom Penh, the capital, untitled land near the city center has been selling for about $20 to $30 per square meter over the past few years. Titled properties nearby have been selling for around 10 times that much. For a poor squatter in the middle of the capital city, the promise of a title would seem to be a road to riches […]

“In the nine months or so leading up to the project kickoff, a devastating series of slum fires and forced evictions purged 23,000 squatters from tracts of untitled land in the heart of Phnom Penh. These squatters were then plopped onto dusty relocation sites several miles outside of the city, where there were no jobs and where the price of commuting to and from central Phnom Penh (about $2 per day) surpassed whatever daily wage they had been earning in town before the fires. Meanwhile, the burned-out inner city land passed immediately to some of the wealthiest property developers in the country. […]

“Since then, a similar pattern has continued elsewhere in the city, says Alain Durand-Lasserve, a land-management expert who has worked in Cambodia during the last couple of years. Investors have been buying squatter-occupied state land from various government officials in Phnom Penh, who pocket the money, thus looting the land both from the state and from the poor.”

The ILD often touts Peru as an example of the success of property titling, but again, there is substantial evidence contradicting this assertion. For example, Gravois’s article also states:

“Out of the 200,313 Lima households awarded land titles in 1998 and 1999, only about 24 percent had gotten any kind of financing by 2002—and in that group, financing from private banks was almost nil. In other words, the only capital infusion —which was itself modest— was coming from the state.”

De Soto may counter that property titling is only one piece of the puzzle, and that the ILD can’t be held responsible for the World Bank’s misguided venture in Cambodia. However, there is also evidence of similar problems in Manila, in the Philippines, where the ILD has done substantial work. Gravois writes:

“… speculators or middle-income groups went out before titling programs took effect and bought land at slightly better than informal prices directly from the squatters, who happily sold off for a bit of cash. Then the investors just waited for the titling program—and the attendant leap in value and legal security—to come their way.”

Again, the problem seems to be context, of not looking for holistic solutions, and as we can see from the Philippines, these omissions can actually hurt the people who are supposed to receive help.

Social Conflicts in Peru
With social conflicts over natural resource extraction rife, De Soto and the ILD have presented initiatives on how to deal with the violence and economic problems that are plaguing many areas of Peru. Once again, they have focused on property rights. Clearly delineating the property rights of the communities and individuals that have access to natural resources and integrating these systems into national systems of registration, the ILD claims, will give owners of natural resource-rich land a level playing field when negotiating with extractive interests, should they choose to do so. And once again, De Soto and his colleagues fail to see the wider context in which this problem exists, namely an overarching democratic deficit which will stymie these issues.

The social conflicts focus on two main issues: appropriate compensation for the resources extracted and environmental damage. Concomitant to these two issues is the issue of artisanal mining, which carries its own risks, such as the well-being of the miners and environmental damage.

The ILD’s formalization agenda is not necessarily misguided. Perhaps communities and individuals will agree that formalization is the way to best profit from their mining, as well as the way to secure access to government services like infrastructure and utilities, as well as safety standards. But the ILD may do well to pay greater attention to the fact that it’s called the Institute for Liberty and Democracy.

There is ample evidence that Peru suffers from a marked democratic deficit, and it stands to reason that social conflicts over extractive activities are a symptom of this root problem. This deficit is perhaps best illustrated in a 2010 paper entitled “Corporate Rents and the Capture of the Peruvian State”, published in the journal Business Politics and Public Policy by Francisco Durand, who is currently a professor at the Catholic University in Lima. The paper examines how large-scale corporate actors exercised control over policy-making in Peru from 1990 to 2007 through:

“a process-tracing case methodology constructed from semi-structured interviews, congressional documentary analysis, tax court decisions, news reports and secondary studies. In addition, and more importantly, it is based on the author’s personal experience as a consultant of two congressional investigative committees on economic crimes, formed during the Toledo administration (2000-2006).”

Durand states that corporate capture of state policy-making has moderated since the Fujimori administration, but he concludes that corporate-based concentration of economic power as well as institutional problems were still endemic in the Toledo and García administrations. The Humala government obviously has problems with corruption, and there is of course the presence of huge regionally and locally-based corruption, which is in turn facilitated by the legal inaction of the Peruvian central government.

In a system which is rigged to benefit large-scale corporate interests and small and large-scale corruption, people obviously have little incentive to integrate themselves into formal structures. Though some wealth may trickle down as a result of formalization, indigenous communities still won’t get their fair share, and it is also likely that environmental standards will not be satisfactory, particularly in areas where multinational extractive interests operate.

In short, a truly just system would be one where communities and individuals choose how to empower themselves through thoroughly democratic structures, as opposed to nominally democratic structures which are in fact subservient to a government that in turn is largely beholden to big companies. Individuals would decide, via consensus-based decision-making (which is really the broadest definition of democracy), how to manage their resources and every aspect of their lives, and through transparent election of representatives on higher levels, these decisions would scale up on regional, national, and even international levels.

Though this may sound overly idealistic, it’s what true democracy is about, as opposed to corporatist systems where there is a semblance of democracy. And no ideology is required by this organic approach to democracy; though people may have differing ideas on how a community should operate, and these ideas may be based on ideology, they will have to make decisions together with other members of their community on an equal basis, and it stands to reason that this type of decision-making will result in the most pragmatic and non-ideological decisions. The tenets of most ideologies function at such a high level of abstraction, using words like “freedom”, “order”, “change”, and others, that they become virtually meaningless, serving only as political Rorschachs for voters in elections that are going to result in more or less the same policies, regardless of which candidate is elected.

The current social conflicts are obviously not desirable, since they often involve violence. However, they are likely to be indications of an incipient movement toward assertion of the rights of individuals who are banding together in order to demand accountability and responsible behavior from a government that isn’t protecting their interests. Given the fact that governments in Peru are beholden to large-scale corporate interests, it makes sense that people don’t feel that they are getting their just due, and thus they are taking to the streets. There’s also plenty of evidence that the violence sometimes stems from abuses by security forces, which can be viewed as a legal extension of corporate power.

It seems that the ILD would be more effective in focusing its energy on building locally based democracy, and teaching people how to demand their just due from the government in nonviolent ways. While communities may decide to use formalization as one tool to assert their rights, gain economically, and protect their local environment, it seems that it would be much more efficient to give them the tools to decide on their own what’s best for them, as opposed to focusing on one issue.

There’s also another reason for not focusing on formalization. It stands to reason that formalizing certain populations before others may create market distortions that may hurt the communities that are excluded. Why should one community get property titles before another? Presumably the best way to do this would be to determine which communities need the titles the most, but determining this need seems operationally problematic. The only other option would seem to be giving every Peruvian a property title at the same time, but this is clearly impracticable at the moment, if we only think about how long it would take. The problems Peru currently faces clearly require more urgent action.

On the other hand, teaching communities how to organize democratically and to mobilize in order to get demands met is relatively simple, and it also stands to reason that if communities begin to enjoy success in getting their demands met, that these community-based mobilizations would spread quickly. And of course they wouldn’t require bureaucratic intervention by the national government, as is necessary for property titling. In an era of democratization of information, it seems intuitively true that solutions to problems will not be technocratic in any way, but instead will truly come from “ordinary” people coming together and finding these solutions.


Hernando de Soto and the ILD are right: the poor are not the problem, they are the solution.

However, they will not make meaningful progress as a result of property rights and bureaucratic streamlining if the larger systems are rigged against them, systems that are profoundly undemocratic.

There is also a deep fault line in De Soto’s supposed philosophical bedrock, namely his belief in economic “reality” representing all the facts, which ignores the often painful historical context of current economic facts. And with a focus on building true democracy on all levels of society, it also stands to reason that people will come together and hash out the past, and find their own equilibrium, one which reflects the past as well as the present, not to mention hopes and dreams for the future.

Times of great crisis are also times of great opportunity, and De Soto, instead of focusing on one issue, would do well to invest his time in giving back to the poor something they deeply deserve and require: the power to decide their own futures. Perhaps they will decide that property rights are most important, but wouldn’t it be more efficient to teach them how to demand those rights from the government and move on, as opposed to working with and through governments that are in essence controlled by interests that have little desire to help the poor?

Diego de Soto, a nephew of Hernando de Soto, is a Peruvian/Uruguayan/Italian freelance journalist and social entrepreneur. He is a graduate of the School of Foreign Service at Georgetown University, with a B.Sc. in international economics, and has worked at the World Bank and the H. F. Guggenheim Foundation. He is currently setting up an NGO based on his article “Cutting the Knot”, which was published in two major media outlets. He is on Twitter @OtioseDodge.

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