TCS Daily

Will the Real Hernando de Soto Please Stand Up?

By Ivan Osorio - February 3, 2005 12:00 AM

Stop the presses! Hernando de Soto is harming the poor!

So argues John Gravois, a reporter for the Chronicle of Higher Education, in a recent Slate article. Gravois sets out to debunk the man he considers "the patron saint of the global elite." He makes some good points -- more on those later -- but his charges against de Soto are off-base.

Gravois accuses de Soto of selling this elite -- gathered at powwows like the World Economic Forum in Davos, Switzerland -- an economic snake oil panacea that has been "packaged and peddled all over the Third World." That snake oil is "one solution -- individual property titles -- for all kinds of poor people in all different kinds of poor places," by which "dead assets are turned -- voila! -- into live capital."

This is a gross distortion of de Soto's ideas. To say that something is necessary is not to say that it is also sufficient. Gravois implies that is what De Soto is doing. Gravois acknowledges that, "De Soto is right to point out the importance of legally sorting out who owns what in the Third World." But then he goes on to build up "titling-is-all-you-need" straw man around De Soto.

Case Specific

The book that first brought de Soto international note, The Other Path: The Invisible Revolution in the Third World, is written in the form of case studies in de Soto's native Peru -- complete with names of people and neighborhoods. The cases are so specific, that no sensible reader could take away from it a carbon-copy model applicable everywhere.

Indeed, as de Soto writes in The Other Path, on what he terms the informal sector of Peru's economy:

        "Peruvians, in general, and informals in particular, have specific preferences, 
        skills, and patters of behavior which can be regarded as social, cultural, or 
        ethnic factors that dictate the existence of informality. They also have 
        preferences for specific goods and services, which can be regarded 
        as economic factors." (p.184)

In addition to culture, he also notes that legal institutions are crucial:

        "All the evidence suggests that the legal system may be the main explanation 
        for the difference in development that exists between the industrialized 
        countries and those, like our own, that are not 
        industrialized." (p.185)

Without rule of law, any reforms -- including titling -- cannot occur in anything resembling a sound manner. In many countries, like de Soto's native Peru, land title reform faces huge hurdles because of the country's tenuous legal system. And this is the problem with Gravois's main criticism.

Gravois does give some credit to de Soto's ideas as being sound in theory, but calls them ineffective or downright harmful in practice. However, the examples he provides are weak at best. At worst, they represent misapplication so gross as to render comparison absurd.

Ineffective? Harmful?

First, the allegedly ineffective. On lending, Gravois notes that, in some countries, "Faced with a massive surge in legalized but tenuous properties owned by poor people, banks have simply adjusted their criteria for lending, and in some cases care more about stable employment than a land title." That banks care most about income is obvious. So is the fact that they also care about collateral. Would Gravois argue that an employed laborer with a land title is no better off than an employed laborer without one? He doesn't say. Also, to find work, individuals need to feel secure enough in the land to be able to leave it.

Now, the allegedly harmful. Forced evictions, like those he cites in Phnom Penh, are not the result of titling, but of a lack of security in those titles due to a lack of rule of law. No system of private property worthy of the name involves private parties "buying squatter-occupied state land from various government officials," much less while those officials "pocket the money, thus looting the land both from the state and from the poor." To say that such monstrosities are honestly "inspired by de Soto's work" -- even when those countries' ruling authorities say they are -- is like placing the blame for sectarian violence on entire religions rather than on a few fanatics' twisted interpretations.

Gravois rightly condemns gross misapplications of land titling. So would de Soto. In the preface to The Other Path, he notes that he wants to push "those on the right to realize that the free market is not enough, that modern political and judicial institutions must accompany liberalization if economic growth is to take place, if it is to be sustained, and if it is to be accompanied by social justice." This is pushing land titling at all costs?

Gravois also misrepresents de Soto by suggesting that, for de Soto, animating "dead capital" is everything. Yet land titles animate something else -- incentives, which Gravois doesn't even mention, even though de Soto has articulated the incentive value of property as clearly as is possible.

        "Contrary to the belief widespread in Latin America, the economic importance 
        of property rights is not that they provide assets which benefit their 
        holders exclusively, but that they give their owner sufficient incentive 
        to add value to their resources by investing, innovating, or pooling 
        them productively." (The Other Path, p. 178)

Further, the approach Gravois endorses, British urban planner Geoffrey Payne's plan to introduce improvements before titling to give those titles greater value, could very well complement de Soto's titling approach. But even then, secure property rights are crucial to make any improvements last.

The Other Path, Indeed

Hernando de Soto's policy proposals are not perfect -- nothing is -- so failures will happen and successes will tend to be qualified. But success is often undeniable, and de Soto's policy successes are real. Just ask the now-moribund Shining Path.

So why does Gravois show such distaste for de Soto? Apparently, because he has marketed his ideas better than has Payne: "[S]adly, the Davos set doesn't have a crush on Geoffrey Payne, and de Soto has never sat down for a debate with him." Gravois doesn't say whether de Soto has actually rejected such an invitation. But greater discussion is always welcome.

Gravois makes some valid points. There are no panaceas for economic development. Policies can be misapplied. And there are other things besides property titling that are necessary to lift people out of poverty. On this last count, he unfortunately fails to mention an essential element -- so glaring by its absence in his Phnom Penh example -- the rule of law. But these are hardly revelations, so never mind, keep the presses rolling.

Ivan Osorio is Editorial Director at the Competitive Enterprise Institute.



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