Transcription:
Herbert London - Let me just introduce a couple of people. Grant Aldonas, the Under Secretary of International Trade Association is here. Tom Bassett, the National Commander of the Salvation Army is with us. I thank you for being with us. We have Max Singer, a board member at the 91ÆÞÓÑ Institute. Always happy to see Max. He was one of the founders of the 91ÆÞÓÑ Institute. Grover Norquist, the Americans for Tax Reform. Alex Chafuen, who has been working with us very closely from the Atlas Economic Research Foundation, happy to have him as well. My dear friend, Jack Kemp who I think will be here momentarily. Jack, as some of you know, is one of the great figures in Washington. Of course, Ken Adelman, who is here for a variety of reasons. Not the least, of course, is that his wife is going to be making the introductory remarks. But it is always a pleasure to have Ken with us as well, who is formerly associated with the Reagan Administration. So, thank you all for being here. ItÂ’s really a pleasure to have you.
Many of you, perhaps all of you, know Hernando de Soto. He does not need an introduction. But let me make a couple of remarks nonetheless. It is fitting that he joins us at the 91ÆÞÓÑ Institute where we have put a great emphasis on free market principles. On the idea that developing societies can prosper with free market principles. In fact, Herman Kahn, the founder of the institute, believed that the developing world gained more from modernization than the developed world. This modernization is what our distinguished speaker is here today to talk about, on the eve of his trip to Egypt, where he will be participating in the unveiling of a new plan for property rights, and business law modernization.
I remember Hernando de Soto speaking at the Council on Foreign RelationsÂ… a couple of years ago. At that point, he pointed out if in fact title existed for the property of poor people in Egypt it would be more than the entire value of the entire stock market in Egypt, a point that IÂ’m sure he will make this afternoon. I also noted when I was chatting with Mr. de Soto just a little while ago that my first introduction to him was a rather imperspicuous occasion. My friend Mark Malloch Brown invited Mario Llosa, who was then running for President of Peru, and yours truly to a lunch. I said to Mario Llosa, “tell me a little about your economic plans for the future of Peru.” He looked at me and he said, “well I can say it to you very simply, Hernando de Soto. He has already provided the architecture for the future of PeruÂ’s economy.” For the last two decades Hernando de Soto has been a central part of the entire debate on property rights, which is really a debate on development and nation building. During that time, as he and IÂ’ve already indicated, Carol Adelman, one of our Senior Fellows here at the 91ÆÞÓÑ Institute, collaborated on promoting his important work on developing countries while Carol was at USAID. Now, IÂ’m going to ask Carol to provide the introduction. But, let me say again, it is a great honor and a privilege to be in the presence of Hernando de Soto, [who] I consider one of the great economic voices in the world today. Carol the floor is yours.
Carol Adelman - Thank you, Herb and welcome to everybody here. I first met Hernando through Peter Schaffer, Hernando’s representative of the Institute of Liberty and Democracy here in Washington, DC. I was overwhelmed by his ideas, having worked in the field of foreign aid and development economics. The new way that he had for us to look at development, understand what was working, why what we were trying wasn’t working, more importantly, and what we needed to do. So, Peter suggested that we have a dinner and try to help introduce Hernando to some influential thinkers but, more importantly people who loved the world of ideas. So, we put together a dinner with then, Senators Dan Quayle and Pete Wilson, then business executive, Don Rumsfeld, and then Congressman Dick Cheney of course. They proceeded to be overwhelmed as well. I remember at one point in the dinner, Mr. Rumsfeld turning to someone and saying, “who is this guy?” Hernando made a wonderful impression then, as he continues to do. It was at that dinner that we learned that Hernando had started off with many hats and had been the CEO of a Swiss engineering firm. It was in his European experience that he asked (inaudible)... and the very brilliant people ask brilliant questions. His question was, “why are Peruvians economically well off in Europe and not economically well off in Peru. What is happening here? Something must be going on. I know my countrymen and I know that they are smart and know that they can make it.”
That then led to his book the Other Path, which really explored the business infrastructure constraints, the reasons for the black market, how to get people out of that black market, and into the prosperity of a market economy. Then he was later given a platform by President Fujimori of Peru to implement that plan, which I think really was fundamental in the defeat of the shining path guerilla movement. His second book, The Mystery of Capitalism, was really a more in-depth exploration of the ideas in the Other Path. It was really looking at what he terms “the hidden architecture of capitalism,” primarily, property rights and the importance of property rights to wealth creation, again, to the bubble up, trickle up theory of development. He will talk about all of those things today. I think that it is not surprising that the Egyptians did want to work with Hernando and he has been doing that over the last two years. He’s going to talk about that today - the plans and what he has been talking about with them. Not surprising that they wouldn’t be impressed with this. He is off to, after this talk today, to a conference in Egypt that will be occurring in about four days time. It’s not just the Egyptians. Hernando and his ideas are leading leaders throughout the world. I don’t know if many of you tuned in or saw copies of President Bush’s speech yesterday in Monterrey. But, I want to read you what was in that speech. It is indicative of his influence on not just our then Senators and Congressman but on the current leaders and our current President. In the speech, President Bush said, “we must also chart a clear course towards a vibrant free market that will help lift people out of poverty and create a healthy middle class. We must increase the credit available to small businesses that generate the majority of jobs in all of our economies, and reduce the time that it takes to start a business. We must strengthen property rights so that land can be leveraged as a source of capital to start businesses or hire new workers.” So, I would say that this is not plagiarism but this is a direct lift, out of your two books. (Laughter) So, without any further a due, I want to introduce one of the greatest thinkers of our time and a great practitioner, which he’ll tell you about today, and a dear friend. Welcome Hernando.
Hernando de Soto - Thank you very much, Herb and Carol, for your very kind words and for talking about my ideas. In fact, my ideas are nothing more than your ideas because all I do is ... IÂ’m sort of your ghost of Christmas past. All I do is inspire myself in your 18th and 19th century. I keep on reminding you that was a very important part of your history. That you should remember it, since you are the only world power, as frequently as possible. What I would like to come to talk to you about, because as Carol said, IÂ’m on my way to Egypt, is whatÂ’s going to happen with this project that started to be designed some five years ago. That has involved about 20 Peruvians and over 100 Egyptians. We have been designing directly with the Egyptian government over this long period of time and is now going to be presented officially, shall we say, to Egyptian society. On the 17th of January, we will be meeting with the Egyptian economic cabinetÂ….The Minister of Finance, Medhat Hassanain, who has been our continual interlocutor, Youssef Boutrous-Ghali, the Minister of Trade, etc. Then on the 18th of January, we will be meeting with about five hundred people, the inner circle of people who run the Egyptian political system to talk about the project for one whole day. This will be led by the Minister of Finance himself. We will have two champions of private property also present. One is the State Secretary for International Development of Norway and the other one is Jack Kemp. At the request of the Egyptians themselves, on the 19th of January we will meet with the Prime Minister and the Cabinet and all of this is in preparation for a May conference already with a thousand people, and authorities are invited from all over the Middle East. As the Egyptians plan on their own with our technical support to propose extending what they are doing to other Middle Eastern countries, we would like to very much help them. That is why talking about this with Carol and through Peter some weeks ago, they said this would be interesting for a US audience. I talked to my Egyptian counterparts and they thought it was also a great idea. So, I come here fully authorized. (Laughter).
The plan is about essentially ... about taking all of the extra legal sector of Egypt and integrating it under the rule of law. That means taking all of their enterprises… from street vendors to cottage industries into a new legal system. It will involve cutting business costs by about seventy five percent, providing new mechanisms for the enforcement of contract, the Swiss settlement of commercial disputes, and of course, the settlement of a property rights system. This actually started off, interestingly enough, at the initiative of the Egyptians themselves between 1995 and 1997 when we were [still] very busy actually looking at things in Peru. The Egyptians kept on calling us, but Egypt was so far away and at the end we got very curious. They had read the Other Path, which had been translated into Arabic. They said, in spite of what Samuel Huntington says, [that] “we seem to have many things in common.” We would like to find out what these things are. What these things are about. We got very curious about the whole thing. We went to Egypt. The Egyptians said, “why don’t we do the first thing that you’ve already done in Peru and El Salvador and let’s find out how big this extra legal sector is in our country.” We agreed to that. That was our first major foreign contract outside of Latin America. It lasted about a year. We called it the diagnosis. What we do there is simply find out how many people are inside the law. How many businesses are inside the law. How much real estate is inside the system because these are, of course, the major assets or the stalk of assets of any one country. Then on the basis of that, if the government is satisfied that these numbers are right they generally ask us so forth and then go to the second stages, how do we correct all of this. All of this in the case of Egypt is the fact that we found out that about eighty-eight percent of all businesses in Egypt operated outside of the legally system. Ninety-two percent of all real estate actually was not inside of the records. It doesn’t mean they don’t have title. It means that the title isn’t recorded. So, it’s like walking around with someone else’s credit card. It’s about officially forty percent of all workers.
As Herb was mentioning, the total amount of the assets of the extra legal sector, has a value of two hundred and forty-eight billion dollars of replacement value. Those two hundred and forty-eight billion dollars are, as Herb said, “much bigger than the Cairo Stock exchange.” It’s thirty times bigger than the Cairo stock exchange. It’s thirty-seven times bigger than all world back loans received (all hundred and twenty-three of them) by Egypt. It’s fifty-five times the value of foreign direct investment in Egypt which includes the Swiss Canal and the Aswan Down. When you get news like that, you find out that your own citizens have participated, and you’ve got the best technicians of Egyptians on your team, you obviously want to change that, because if you are a government you find out that you are actually not ruling most of the activities. You’re not in charge. You want to become in charge. That is the reason of being of a state. It’s a collective of people and territory and you have to have the rule of law. Now the other thing, of course, in detail is most of the people that were close to us ... this also meant that all of a sudden the idea of a market economy wasn’t just simply an idea imported from the United States. There was an Egyptian constituency but, it wasn’t in touch. This was the moment of bringing it in touch with their own particular cultural traits. The idea, of course, that they liked about it [is] that we didn’t propose to simply photocopy, which is what we generally do in Latin America. All of the laws that we find that are neat in the United States and Europe, [but when we] translate them to Spanish try and enact them, nobody follows them, because they’re not rooting the peoples beliefs. But, actually going to the extra legal sector and saying well you are all private enterprise. You are obviously not following the official rule but you are following other rules. Otherwise you couldn’t make contracts. You wouldn’t be able to produce. So, what we are going to do is systematize it. We’re going to modernize it. We’re going to professionalize it, we’re going to add ... (inaudible) If there is any changes we are going to talk to you. Because otherwise, we know they can’t be enforced because they will be outside of the social contract. That is basically what we are talking about. Making a social contract. The idea is to then also find out from our point of view, because we are very curious. We were told that there is something about the Latin American culture that is not compatible with capitalism. We don’t see that. It would be interesting what results we do get in the Middle East because there are also other people that believe that you are part of another reality.
Now, weÂ’ve done that and IÂ’m going to talk to you about what it is that we found out. The interesting thing, of course, is that weÂ’ve also tried to see how far this can go. In other words, what kind of a difference will it make to Egypt if we integrate their extra legal sector under an efficient rule of law. We actually, sort of share the belief with many economic thinkers in the United States, that itÂ’s not necessary to quantify the future effects of policy reforms, if you know that the impact and direction of these reforms can be determined. In other words, life is much too complicated to be captured in a numerical formula. What we have are concrete results which were only bringing together and sprucing it up. TheyÂ’re disbursed throughout the world. First of all, the effects of our own projects in Peru with seventeen million dollars from USAID and 1.2 million dollars from SEIP.Â… There will be a study coming out of this shortly officially, some of it coming from the World Bank itself that indicates with that money that we received from you and additional twenty-eight million dollars that the Peruvian government that is from the World Bank we were able to produce net benefits for the poor of 9.4 billion dollars. That is to say, that it would be equivalent of an annual rate of return of one hundred and seventy three percent. ThatÂ’s pretty good. All of that by simply changing two regimes. Not as much as we would have liked to because we were cut back. We had severe losses here and there. But, nevertheless, we were able to increase the value of homes. We were able to increase, as a result of it property rights under the better business law, the access to credit and the access to investment. The incomes interestingly enough in all homes in Peru that are titled there are two incomes for home and of those that arenÂ’t titled there is only one income. Because for very simple reasons that, like you leave the wife at home or leave the husband at home, you donÂ’t perceive that you have a total property right and you better be around so nobody takes it from you. When you do believe in the rule of law and the title that is given to you the record corresponds. Somebody else goes out and works and then your income starts doubling. So, all of that is in those 9.4 billion dollars. There are other things, of course, which are not in the 9.4 billion dollars which were recently brought up by a magnificent Princeton study that was done without our participation, which we actually only found out through a one page that was given to the New York TimesÂ…. In homes that are titled and in businesses that are authorized, of the sons and daughters of people that own the homes, twenty-eight percent of them go to school which they wouldnÂ’t if it werenÂ’t titled. ItÂ’s the same way that your wife goes out and gets the job if you are titled. You also let some of the children go to school because they donÂ’t need that much more defense. So, in fact of all titled homes, child labor has gone down by twenty-eight percent. We havenÂ’t quantified that. That is not in the 9.4 billion dollars. But, we have also seen other figures that are starting to come together.
Like for example, in China today, per capita income for Chinese farmers has increased from 1978 to 1988 by about one hundred and ninety-two percent. The productivity growth of all total crop output in China in titled farms, even though they donÂ’t have a fee simple, but they have shorter titles and now they reaffirmed that recently, has increased by forty-eight percent. In Japan after the reforms that were encouraged and some times formulated by MacArthur and his intellectual teams, the farmer income between 1952 and 1958 of those who were titled went up by about eighty percent. In the Ukraine, just recently of the 6.7 families working in communes, three million were privately titled. Their income has gone up in the last three years eighty-one percent above those that have not been titled. We generally know that we are going in the right direction. Recently, we were also given by the Rural Development Institute of Roy Prosterman in Seattle, the Russian numbers, which is that reforms have gone very slowly in Russia. But, the five percent of land that has been titled mainly, of course, in the agricultural sector, which is the number that they have today produces, fifty percent of all the gross agricultural output of Russia. All the signs are there that it is not a bad thing. It is a good thing.
Nevertheless, it’s a little bit like when I go to the doctor and say, “ok doctor what are the chances that you can cure what I’ve got with pills without going putting me through surgery.” He says, “I don’t know. We’ll have to see.” But, I say, “give me percentages.” He says, “well I think we have ninety percent.” I feel good. I’m sure the doctor has no idea if it’s ninety percent or sixty percent. He’s just giving me something in the air. So, we also found out that our clients wanted to know what are the chances of growing in spite of the fact that we believe that there is no real way of predicting. It’s just going to be a lot better.
When we have collaborated, we have been very happy with the help we have gotten from all the way from Heritage Foundation, the Frazier Institute. We’ve talked to Harvard Professor Robert Barrow, Al Harberger at UCLA, and the McKenzie Global Institute, who have by the way, come to the [same] conclusion on the base of it’s productivity studies, not in the extra legal sector but just in general economic growth. That [is] if people were to adopt our reforms (this is the way it is stated by the India Financial Express), our reforms would produce in a country like India an increase in the gross domestic product per capita five percent per year after the fifty years. If you go to richer countries like Brazil, it would be a two percent growth. Having all of those figures floating around, of course, the Egyptians demanded numbers. We did a joint venture with the Frazier Institute and the University of Florida and managed in a short time to take their cross country regression out of this model, and take four of our twenty reforms and then predict what would happen to Egypt if only four of the twenty packages that are reform proposals were put forward. If they were implemented in Egypt, the result is that Egypt’s gross domestic product per capita output would be two percent by the fifth year. In other words, we could double just by giving the poor their homes, their title for their homes, and their businesses. We could double the growth rate, with only four of the whole twenty reforms. Our own microeconomic growth model indicates that total benefits after ten years will actually be over thirty-two billion dollars. So, all of the signs are good whether all this comes out or not. At least, all of the churches of microeconomic schools seem to be pointing in the right direction. Now regarding, the reforms themselves, most of these reforms are basically about identifying what are the costs to the poor. This takes a long time because it means living with them. It means actually getting objective measurement of what it cost them to live with Egyptian law. There we have found out, for example, the [cost of] building a home in a sand dune, not unlike Peru or any other country in the world. In other words, Egypt is no different from any other developing countries. It takes seventeen years to get authorization to build a home or if you want to have authorization to build a bakery it could take up to five hundred forty nine days. Those are only the entry costs. Apart from that there are the operation costs, there’s the expansion cost, and there are the exit costs. Because you’ve got to be able to get out and reconstitute a business if things are clear. So, what we have done is basically eliminate seventy five percent of those costs. We’ve taken three hundred dispersed laws and decrees that refer to how you operate businesses and property [and] how you run property into one and only one set of laws. We have taken fifty-six different uncoordinated government agencies and proposed that they be, some of their functions be put into just one organization, a one stop sort of licensing system. We have a system so that the time required to enforce a pledge by the judiciary could be reduced by seventy-seven percent. The time required to enforce a mortgage… has been reduced by fifty-five percent, etc. This is real stuff. Because the real cost reduction is probably as Al Halberger has said, “the major thing you can do for development. Just lower transaction cost of all sorts.” But, I would like to tell you what is behind these measures instead of giving you an enumerable, an unfinished list which will be unending. Essentially, we are aiming at three things. We are aiming at making sure that all Egyptians have a right to divide labor among themselves inside their organization. Number two, we are aiming at seeing that all Egyptians are allowed to specialize in an expanded market and not just the neighborhoods, which is what happens when you don’t have law. You’ve got to know your clients. You’ve got to know your partners. The third thing, is that they have property rights. These are the three objectives. Now the division of labor is a very old concept but, it’s a very crucial one in our part of the world, and all of the former Soviet Union. This is was well illustrated by Adam Smith when he had said that, albeit on the basis of personal observations, that when one or more people run a pen factory, they are lucky if they get to produce one pen a day. But, he had seen that when eleven people had gotten together to produce pens, this is again back in the eighteenth century, they were able to produce up to forty eight thousand pens a day. How was that done? He said, “the division of labor.” Division of labor, of course, is a concept that goes all the way back to Plato and even before Plato. It talked about how husband and wife should divide labor and how productive that was. Then Aristotle came and said, “not only husband and wife but how you divide it with your slaves as well.” It’s gotten more democratic since then, but, this is more or less the tendency. What Adam Smith was trying to say and Marx, concurred is, “why all of a sudden have we begun to have re-growth in Europe?” They said, “we have just found better ways of dividing labor.” In that context, the pen factory they said, “is when we saw eleven people things just got better?” So, as Smith explains how one would purchase the wire, another person within the eleven would draw the wire to make sure that it was perfectly stretched out, another person would cut the wire, two others ones would put a point in the wire, another one would put the head on the wire, and at the end because you divided labor in a chain, you were able to do forty eight thousand pens versus one pen a day. He said, “that is the source of it all.” That is why Marx comes along and says, “yes, it’s the division of labor.” That is why Lenin follows and talks about the socialist division of labor because there is no doubt that is where it’s at. But, now the question that we have asked ourselves in Peru, as we start saying well why can’t Peruvians divide labor as well as, everybody else? How important it is to have a business organization? You see, most of the people who are poor in the world work within an organization, the family. In the family, it is very difficult to work because it is mixed up with emotions, and with other functions. So, for example you can go some place and say “who is the CEO of this family?” It looks like the father and somebody looks around and says, “you know, I really think it’s the mother.” Somebody comes back and says, “grannies influence on all of them is absolutely crucial.” You don’t really know who you are dealing with [or] who really controls the funds. How much of property can you actually commit or engage or not engage is a problem. You may also not be able to associate for the best people in the neighborhood because you have no way to contract them. They have to come work your families. So, you are obliged to work with your retarded brother and the scoundrel of your brother-in-law… whether you like him or not. But, these are the only people in which you have peer pressure.
What happens, if all of a sudden, you are given business organization? Well, if you’ve got a business organization, you know who is the CEO, and what he’s accountable for. You know who is share holders are. You know who holds the assets and which ones can be committed for credit. You know who can issue shares and therefore, you know where to invest. You’ve got clear rules that protect mortgages, that protect workers, [and] that protect investors. You’ve got clear company policy. You’ve got statutes that determine what you can and what you can’t be charged with. You’ve got perpetual succession, which means when you make a deal with a company and if dad dies it doesn’t matter, because, as Vasquel used to say, “we finally created an immortal person, which is the moral person.” It can just keep on going if it’s successful. Well, if you make a deal with someone in Peru or Egypt, you better go out and give them a medical examination to find out if he’s going to last, because if he doesn’t last past tomorrow, you’ve got a very bad deal.
There is no asset for partitioning. There is no protection and innovation. It is of course, extremely difficult to get eleven people under one roof. It is very hard to have a family where you have eleven able people. Therefore, the possibility of making Adam SmithÂ’s pen factory is very small. If it takes you five hundred and forty-nine days to adapt that legal structure, to buy your rights to that legal structure, thatÂ’s only the cost of entry in Egypt. Obviously, you have very low productivity. So, one of our first objective is to get people into enterprises. The argument against us is always but you are destroying traditional family values. But, then weÂ’ve gone back to the statistics and eighty percent of US companies are still family run, so obviously it doesnÂ’t destroy the family. On the contrary, it helps it, because not everybody has to run the family business. You create an unemotional space in which to deal with business and emotionally spaces in which to deal with other family stuff. So there is no such thing as this thing going counter to all of these values. The first thing that we do with all of our objectives is ... (inaudible) how do let people quickly get, to have the possibility of dividing labor internally in the same way that Americans only got a right to in 1840s? Before 1840, in the United States you could only do it with an Act of Congress or the local Congress. Before that with the Brits, it was with the King. The Brits only got a right to do without political authorization in the 1870s and the French in about 1848. This is a brand new right that is only about one hundred fifty to one hundred sixty years old. But, it is a right that doesnÂ’t exist for the majority of the people in the third world and the former Soviet Union. So, how do you expect the market economy to work, if you donÂ’t have the shell, the contraction that is needed to do the division of labor which according to every economist in the world is the very first source of productivity?
The second thing has to do with fiscal allocation. People have got to be able to deal with other people that are not in their neighborhoods, so as to divide labor or if you wanted to exchange on the broader market. The thinker behind this is of, course, was David Ricardo, who kept on saying if you are able to trade on the basis of comparative advantage in ever widening circles, you can then specialize to the point that, of course, your productivity also rises. You can’t do that in the extra legal sector which predominates, as I said before, ninety-two percent of all real estate in Egypt and eighty-eight percent of their enterprises because you’re are not titled, you’re are not authorized to. I’m sorry, I’m going to use an example that some of you might have seen before…[about] when I came in here to the United States. At this time... I was asked at your immigrations desk, [and] as opposed to what Herb said, “Hernando certainly needs no introduction,” I did need an introduction, (Laughter) because when I said, “I’m just Hernando de Soto,” they said, “that is not enough.” In fact, this time they took my finger prints in addition. But I still didn’t get pass until I showed a standard document which identified me, which is my Peruvian passport. So, if you think about everything that moves in the world in the legal economy, whether it’s a value of your shares, whether it’s a person, everything moves including your automobile with a license plate of some sort. That’s the only way that a world of six to seven billion people we are able, we may be all brothers and sisters, but that is the only way to identify each other….There are just too many of us. The market only works with as much as you can identify yourself with other people. The question then is, “what happens when you do not have a passport? What happens when you don’t have a license?” You can only do a deal with your neighbors. If you do that, your chances of specializing in a wider market are of course enormously reduced. Not only that you can’t get credit. Who is going to give you credit if they don’t know what assets you own? You can’t get investment. How are you going to be able to get people to put money into what you’ve got unless you issue a share against that investment? You have no facts that allow you to think about how others think. The first thing you want to know is what your competition is or what your possible partners are going to do. If you don’t have a structured environment where you can look at statute and rules, there is no way that can be done. You’ve got to be able to look at the minds of others. You’ve got to be able to protect innovations and have trademarks. That is why we insist very much that it is crucial that all companies be licensed and clearly identified. To do that of course, we have to go deep into the extra legal sector, where there are a lot of facts and there are a lot of beliefs. But, there are no enforceable statements. In other words, I can find a lot of people that say, “I believe this property belongs to Carol Adelman,” but, it is very different if there is an enforcement statement that says this belongs to Carol Adelman. Then you can build a society and customer relationships on top of that…. (inaudible) Originally, the idea of forming corporations is, of course, a very old one in European history. The reason it was not accepted at the beginning, is because, contrary to these things, the anti-libertarians of that time, people were saying, “how is it possible to create a government within a government?” This was the main argument, because that is what companies are. There are many governments where people can freely decide how to govern their economic matters within the framework established by public government but you are able to create private government. There were long debates that lasted hundreds of years until finally in New York, for the first time, you were able to start recording companies without the authorization of government. That was only in 1840. That’s how people were able to grow. Now, the other side of the third thing, which we were insisting very much, of course, on is on property. Property is very different than just a brute fact. Property is as philosopher John Searle would say, an institutional fact. When things are a broad fact, a brute fact, I would use a traditional example given by analyzing autistic children. I saw it in one of Fritz’s books because a thought it was some parallel to our work. So, we looked at lot at what happens with autistic children. When a mother or father goes to a child and says, “Timmy who am I talking to?” the non autistic child understands that this is a stand in for a telephone. The autistic child who can not represent says, “why is mommy or daddy talking to a banana?” The thing is, that all things if adequately represented, can give you a lot more functions. So for example, when we took the Peruvian telephone company, and we finally titled and recorded according to international law, we were able to sell it at thirty seven times the value it had locally, when it didn’t have representation. All of a sudden the Peruvian telephone company was no longer a house that sheltered people and a lot of wires that actually unified building but, it was also something that you could represent into ventures. Shares that you could represent to raise capital. All of a sudden we found out that, just the fact that it didn’t come alone but, that it was represented in document that interconnected to a much wider market, so that it was no longer this. It was this. [It was] allowed to accomplish many more functions. Therefore, our insistence on good legal property rights because they allow you to do much more than a banana. They allow you to go much further. They allow you raise the value of things because you can recombine them all. That is, in effect, the three points of the Egyptian program.
I would like to draw some conclusions which I hope will be useful to you. These are conclusions that come from a friend of the United States. I am a friend of the United States and I say so very proudly. I would also not exist as an institution if it were for not the United States because most of our funding comes from here each time, which is a good sign for us - if it [weren’t] for the people in the US government, friends like the Adlemans, who have introduced us to all of these good people and put a good word in for us in different parts of the world. For the puff pieces, as you called them, that Ken Adelman wrote about me. I wouldn’t have been able to get linked. I say this with the best of intentions. I have a feeling that within the United States there is a good tradition and there is a bad tradition. The good tradition is a tradition of Jefferson. These are the people who took the long view of man. The long view of civilization. These are people who started saying today’s slaves, today’s people who have no rights - have they ever had rights? If we just change our institutions, if we just abolish primogeniture like he did in Virginia, people can grow. These are the people who when the California gold rush took place, they established eight hundred different jurisdictions, therefore eight hundred tribes, that’s what they were, all of these gold rush people. Instead of coming in like Samuel Huntington, and saying, “the tribe is the enemy of democracy and the western way found ways to absorb underneath one law,” he took the long view of man. These are the Americans who did the thirty-two preemption act that led to the homestead and integrated all Americas under one rule of law, instead of many. This is the tradition of Douglas MacArthur. He didn’t go into Japan saying, “these people are so different from us what are we going to do?” No what he did is, he made sure that people like William Edward Deming were able to study Japan and find out how US institutions and laws could be brought to that country. So, that within a feudal system that only benefited a few, the broad majority of people got precisely that whether they wrote it or not we studied it, got… a right to divide labor in small firms. Got the right to work on bigger market and got property rights. Basically, destroyed the feudal system. By setting in ... I mean when Fujimori came to Peru, his family did back in the 1930s, the reason why they came, was because Japan was poorer than Peru. Since the MacArthur reforms, Japan is now a lot richer than Peru. It’s one of the most economically powerful countries in the world. This was very much due to the fact that they changed the legal structures with the help of Americans. These are the Americans who believed in civilization... not in civilizations in the plural but that there is [one] civilization. Civilization was for all of us. It wasn’t just for you guys there and just those guys here. Civilization if defined generously could encompass all of you in kind - that is the long view. What we have seen is that if you take all anthropologists, most of them agree that first of all we human beings organize as hordes, then as gens, then as fratrias… and then gradually as tribes, etc. Then finally, finally of course, comes the family. When you get the family that is when all the incentives come to create property…. I still see pictures of my parents back in Peru and my grandparents when a family photograph were about sixty people in it. Now with a photograph of me and my family is just four. So, we have evolved along with you to become smaller unitary family. We do have the extra legal sector of property so we are ready for change. There are two types of Americans, one who say, “let’s give it to them according to what they know, that’s the final way of streamlining it.” There other ones that say, “lets retreat back because these guys are unhelpful, they’re not Christians, they are not this way, they are not ever going to make it.” That’s the tradition, of course, that I don’t very much like. That is also the tradition of Walter Lippman who said at a time of crisis between the thirties and forties, as well, we have lost our way, because we have not been generous with our ideas and we’ve created this space for communism, which belonged to a bearded old man. A restful bearded older man, a brilliant one working from the London library…. (inaudible) We have to find a way of extending it downward. All of that produced GI bills and all the mechanisms that allowed people to have property and setup enterprise in the United States. That’s your good tradition.
Your bad tradition to me is Samuel Huntington. By the way, let me tell you, we and the Egyptians agree fully on this. He represents, very much, another part and he basically has what we call the short view. He sees things as they are and as they are partitioned today. He is not able to distinguish the enlightenment concept of civilization in the singular - he sees it in terms of current affairs. Of course, in the terms of current affairs we’ll find here that some people [think] like this and thought that. And we can divide ourselves in a hundred different ways and go out and fight ourselves. A tendency in every country is, of course, that when we divide ourselves in such a way that when we have elections someone is going to win to fifty-one to fifty-two percent and somebody else is going to win forty-eight to forty-nine percent. The idea is to make sure those fault lines are reasonable ones, but, are not bad. Therefore, it is very important when you look at culture to distinguish between fundamental needs and characteristics of all human beings that are common to all civilizations and cultures versus the culture civilization which is local in time. The way human beings see is that there is a tree with a trunk which is what we all share. We all came from Africa. There are so many things that we share. If we can keep that as a definition as culture than we are fine. Then of course, you have branches which are culture and you have the twigs and the leaves which are civilizations. But, Samuel Huntington… is basically concentrating on the canopy and we think that it is absolutely crucial to concentrate on the trunk. To accept some of the findings of Marx, which are that the real division that exists in many countries like, in Egypt, and like in Peru, is a division of classes, but not classes in terms of labors and owners. In terms of those that have property rights, with those who have rights to enterprise, and those who rights to legal means and those who don’t. Then the world becomes a much more amiable place and your program then becomes more concrete. If your conclusion is that definitely a Latino cannot be part, the way Samuel Huntington says of western civilization, “what am I supposed to do? How do I get close to you guys? What am I supposed to do, stop eating chili peppers? How do I go about this? But, if you divide it into classes it all becomes reasonable and let me tell you a lot more solid. The fact of the matter is that in the last thirty years portal France(?) has grown seventeen times. Algiers has grown fifteen times. All of those people of the… (inaudible) that we see through the discovery channel and National Geographic magazine have moved and they’re on entrepreneurs. They are doing very much the things that you are doing… and the way you live in the United States because they are all entrepreneurs…. Everything that you can do to absorb them inside the system is going to allow them to make a freer world. That is one of the problems you see with culture…. Because of the lack of good law there is no way they can really exert themselves as individuals….But, if you are giving the choice and you can create your own mini government, most of them will take that other kind of government. But that means that you’ve got to put into place programs that actually create enterprise. That means also that you’ve got to conceive property and business not only as technical terms but actually as a threshold into the rule of law. If you come into somebody and say, “we are modifying the courts here, we are… getting the ministry of justice and we are separating it for the ministry of health and we are also now dividing the legislature into two chambers,” the majority of people in developing countries don’t care. It doesn’t touch them. But, if you say, “the law now is going to protect your home and it’s going to protect what you worked from and what you live from,” everybody will be interested in the law. Then they will want to find out who made the law and why they can’t elect the people who made the law. Then they want to find out how torts work and how justice works. That is the way of working your country. Before you actually got the law working ... I was recently reading a speech of Abraham Lincoln, [where he was] really feeling badly about his last entrance to Missouri where he said that the amount of corpses that hung from trees didn’t allow him to see the sky because there was mob rule in the United States. You didn’t have the rule of law obviously in many places in the United States. But, it gradually came into place. It has to be built up from the ground up. So, we were all third world countries at one time and that requires doing things. I’m closing now, I’m sorry I see that I have exceeded myself.
QUESTIONS:
(Inaudible question): What do you think the odds of generating _____ trade of our transition?
Hernando de Soto: These are not things that I have studied in depth. But, obviously what we are doing in Egypt have a lot to do with whose making the decisions. In other words, the interesting thing about ... and I think itÂ’s one of the reasons for the progress that we have been able to make in Egypt whether this succeeds this year or it doesnÂ’t. When itÂ’s picked up say three years or four years from now has been essentially that when you are talking about property and you are talking about business environments, you are talking about law. Law works if itÂ’s part of a social contract. In other words, people believe that the law is enforceable. They want it to happen. That law is obviously much easier if the government running the country is theirs. One of the interesting things that MacArthur did, as a matter of fact is that when he asked the Japanese to destroy the feudal systemÂ… he wanted [it] clearly set apart because he felt the feudal system had financed the Japanese military expansion throughout Asia. When it came to drawing up the property law consensus, it was the Japanese that did it. He left it to them. Therefore, because they did it in consultation with their people they were able to build up a system. By 1952, that setup such solid structure that it works until today. It has become contagious. It obviously also managed to capture the attention of Dang Siou Ping and that moved China in a particular direction which is probably just as important as the fall of the Berlin Wall.
I donÂ’t know how much you can do in Iraq. IÂ’m saying in terms of ignorance, how much you can do in Iraq until you have got an Iraqi government, until whatever works they feel is theirs, because that is where it all starts from. As a matter of fact, that is what you also did. There is always this impression that you Americans have that we inherited the institution of property from England. You may have inherited the notion of property from England. But, the institution, per se, you built yourselves. I mean, English didnÂ’t spread the property out so much. England still today has got the smallest middle class in Western Europe, I believe. Most of you through the, what do you call it, through the concentrations or the, I forgot what system is, but essentially that royalty and blue blood kept most of the landÂ… through the enclosures most of the Royalty kept with it. In the United States, starting with Jefferson, you destroyed primogeniture and you created all sorts of systems for everybody from the poorest on to have property. You created thirty-two preemption acts all the way up until the homestead act. It was very much American law that created your property system that exists today. It should be no different from other countries. I would guess. IÂ’m guessing, and IÂ’m not an expert on the subject, that the sooner you have a credible Iraqi authority in place you only then would be in a position to change it. Giving them all the instruments that are necessary but allowing them to form their social contract and cross your fingers and hope that is what they want to do.
Michael Horowitz, The 91ÆÞÓÑ Institute: We give I donÂ’t know how many billions of dollars to foreign aid to Egypt and IÂ’m wondering whether it would help, in your judgment, if all United States foreign aid to Egypt were made conditional on successful progress along the lines that you are talking about? Will an American mandate help or hinder your efforts? To take it in a broader sense, we have a whole millennial standards in our foreign aid which to many of us have been for the most part unenforced. I wonder whether we should enforce it more and whether those standards incorporate the things you are talking about.
Hernando de Soto: IÂ’m not too sure that I would put conditionality to it, simply because itÂ’ll always then look like an American project versus an indigenous project. What I would certainly do is have more money available to do these things. That will be the encouragement for people who want to take it up. I would also encourage that they are able to create their own sense of what is property, because you see one of the disadvantages you have as first worlders, is that you, the generation of Americans, which today runs America, were not there at the moment of genesis. The moment of genesis, if anything, is very different than what happens later on. The people like Jefferson, who looked at property, saw in property something much more than a parcel. Over time of course, as you also began to specialize, some of the people became surveyors. Others became mappers. Others became people that related to recording. Others became people that related to mortgage. Other people started taking the settlement of disputes. So, youÂ’ve divided it in such a way that whenever an American expert, not all, but in many cases whenever the American expert goes away, he says the solution is mapping. Then of course, he runs against a problem which is that the Egyptians say sorry but we invented mapping three thousand years ago. When the Nile overflowed and erased all the boundaries, we had to redesign them. We did that, so why do we need you here as the Egyptian Academy of Science? Now of course, when you are talking about property in the United States, in Egypt or in Russia, etc. you are talking about the social contract. So, one of the things that you could do, of course, is make sure that those people that have fought us tooth and nail within the United StatesÂ… I said there are some good people and some bad people. [There] are the land tenure centers for example in the United States, who called our approach the wishy-washy philosophical approach. They donÂ’t get a chance to impose their conception of property which is measuring a specific parcel. Property is a legal and political exercise that responds to a bunch of other needs. So, what I think would be interesting is to make sure that this is not confused with land tenure [and] that this is not confused with boundaries and physical stuff. That it is not confused with bananas. That it should be identified as that which represents the banana so that this thing can travel and leverage things to become capital. Once that definition is changed in the case of your foreign aid you will start seeing that the rule of law which is so far an empty slogan starts becoming a very concrete one. That is the kind of change I would make if I were an American and in the right position.
Question: (inaudible) is your last point because the President would have then taken a very different prospective with respect to the land particularly to the poor in Brazil? But, it sounds very much like what she is talking about is land tenure as opposed to the broader notion of property rights. Have you thought about that? Is there an early evaluation of the approach in Brazil, because for a lot of us that gives us heart that [president] Lula is thinking about property rights in Brazil? On the other hand, if heÂ’s adapting a land tenure approach, it may cut against the actual broader notion of how you turn this into capital at the end of the day.
Hernando de Soto: Right. Well, interestingly enough we have been called in Brazil by different governors and mayors. The reason why we haven’t actually made a deal with them is because we believe a lot of the legislation and the regulations would have to be changed to make a property rights a very democratic institution - one that gives you access to rate a market economy are at the federal level. So, it is not good enough to just have them. We know that there is interest in what we are doing. We know that some people say continually, thanks to the internet, you’re continually informed of what is going on. They talk about Lula having actually adopted our philosophy. We know that he has adopted one part of it, which is that no property system is viable, if it’s only reserved to a few. So, [on] that part we coincide. But, of course, we go much further than that. We start by saying for that to occur, you don’t just have to redistribute land. You have, among other things first of all, to make an inventory of what works and doesn’t work - an inventory of who owns what. In other words, the kind of thing that we were sharing with the new prime minister of Canada, who is a friends of ours, and that he is using now in Canada as well is ... First of all, find out who owns what and how much. Then decide if you are a conservative or socialist. First of all, get a picture of what is going on [and] not just decide on the basis that this was good for Europe some fifty or sixty years ago. I don’t think that he’s got the full picture. But, the fact that he’s put it on the agenda to us is good news because we will get their eventually. The important thing is that it stays on the agenda and that is ceases being just simply a measurement issue, you know, a real estate agent issue, and it becomes a political issue. So, whatever the limitations of what Lula is going to do… he’s being surprised, really surprised…even some more. [This] will lead us, I think in the right direction. We’ll have to wait for a while. The other thing, of course, that we’ve been told, that this is a problem. For us in Latin America, [this] is a problem that we had with the Russians before when Yeltsin first called us in. It seems that when you’re thinking back to say, when we were coming in, somebody said, “what are we going to learn from [a] Peruvian? What are we going to learn from Bangladesh?” Now, Putin has finally called us in but it took them twelve or thirteen years to look like a Latin American government. I mean they even bombed their parliament. I mean they are much worse than we are. For them to all of a sudden become more humble and say, “hey we might be able to learn from these Latin Americans?” Now Russia is full of Latin Americans. Before Brazil comes around and comes to the conclusion that we are as good as they are, either time is going to have to pass or we will have to win the local soccer Latin American Championship over the next year or so. (Laughter).
Max Singer, The 91ÆÞÓÑ Institute: It occurred to me that of the people capable of using the institutions, I had thought the resistance comes from the people who invented it from the current arrangement. How in Egypt are you able to overcome this?
Hernando de Soto: The way we do that, and that is why it is important to get the facts first, is that, we draw a big circle, say if we are talking about real estate ... And then we show them, in this big circle you own eight percent of the total real estate holding in Egypt. They, the guys you are complaining about own the other ninety-two percent. Now, whether you are a general or businessman, you can see that on the long term these guys will win rather than lose. That’s number one. The next thing you do is draw circles for the past years and indicate that they have been losing each time more and eight percent isn’t their starting point. It’s how shorter it’s going to get. Then we show them what’s happening in the rest of the world and they are going to each time, have less. The best moment for cutting a deal, unless they have a time machine, is now. Once they cut a deal, then if ninety-two percent of them, of Egyptians, feel that they are protected by law. These ninety-two will become the partners of the eight percent because they all have an interest in the law preserving the state as well. That’s it. But, while they view themselves included they will try and damage that status quo. Then they do their numbers. The other numbers we do for them is how many of these ninety percent are building their own homes? Then it comes out that many of them do it and on a collaborative basis. The question is what is the value of a home, while much expended, in a home that is actually built extra legally considering that you’ve got to bribe, considering that you’ve got to protect yourself from the police, considering that you can’t get all of your material at the same time. You can’t get financing. You can’t get mortgages when it turns out that a home built by the poor is three times higher than a home built but a construction company owned by the eight percent. So, if all of these [were to] legalize, their business would be much more. What we do in every country that we go to ... this is our Marxist past ... what we start by saying there are classes and each class has a different objective interest. Of course, American companies also do “classes” all of the time. I mean you pin point your markets. You don’t have to read Marx to do this, I just say this as a provocation. The fact is, we go to each class of people and we sell it to them with a different argument. We have one whole argument and book that is addressed to the military. If you have addresses, is it easier to find Osama Bin Laden? Or without addresses? Then you go to the capitalist class if you are about to make an investment. You know, there’s a lot of millions of people here. Are you going to be able to get at them? Will you make them accountable? Will you, the banks, be able to give loans? Will you be able to enforce your mortgages once and for all? Each sector gets a message that indicates that this is a win-win situation, with one exception, which is, with those who run the property system today. This is also an important lesson for Americans which is kind of difficult to get across. But, if I said, here’s the real thing ... “please you know Grant, will you introduce me to the secretary of property of the United States it’s about time I met him?” you would tell me we don’t have a Secretary of Property. Well, you are the only country in the world that doesn’t. The rest of us have Her Majesty’s land registry, the Germans have the Grund Buch, the French they may not be ministers but let me tell you they run a lot of money and they collect the taxes. The French have les cours fonciers. Everybody’s got it. You Americans because of your particular system, like marriage, you don’t have a ministry or the secretary of marriage. It’s just one of these common law institutions that work extremely well. But, the rest of us do. Now when you are about to reform property in the developing country, what is the first thing we Peruvians ask for? [It] is [that] we want to work with you Mr. President and not with a ministry of property, because that is where Louie XIV is ensconced. We want to work outside. We want to catch him like American military do, through surprise and a good strategy. When your forces go out, USAID, and the likes, you make a deal with the Ministry of Property and you wonder what happens. That is where the enemy is - the other guys we can deal with.
Herbert London: You in the back. What was the first question, sir? Sorry, I didnÂ’t get it from you. You donÂ’t have a microphone. IÂ’m sorry.
Questioner: There seem to be similarities between undocumented immigrants in the United StatesÂ…. IÂ’m just wondering what your thoughts are on the similarities? What are your thoughts on the undocumented immigrants in the United States? Communities property rights and so forth? Obstacles to economic growth?
Hernando de Soto: I understand that this is a crucial issue to you people from the United States. I heard a long time ago that it is a very bad idea to come in and give an opinion on something in which you don’t have all of the facts. Interestingly enough, we got a recent request from both HUD Secretary Martinez, the outgoing secretary and on the other hand, from Fanny Mae to form a group of third world, shall we say researchers or reformers like ourselves, to look at the situation of those Americans who are outside the system. Because the feeling of the ... the first, sort of poke in the dark feeling of Fannie Mae is that the people that had dead capital in the United States were somewhere between twenty and twenty five million, that we, probably, with our insights and our enormous interest in your past, in your history, because we have nothing else to draw upon in terms of what works and doesn’t work, we’re supposed to look at it…. Let me tell you, this is a good story. It’s one of the things, at least I would talk to my kids about it, which is I had a meeting with Bono, the rock and roll member of [the band] U2. I told him this is an interesting proposal by Americans in very high places that third worlds get together and give them our best shot at what we think is happening along the Spanish border. What is happening in their, I want to say it politically correct, Native reservations? Native American Reservations, thank you. And in their inner cities. What Bono told me is don’t touch it, it’s as can of worms? (Laughter) I said, “why?” He said, “well because you get a lot of support from the United States.” I said, “so what?” He said, “but the Americans are very divided in this issue. Where you got now broad support, you will find out, that at least two thirds will leave you in whatever you say.” So, I beg out on that one (Laughter) for purely commercial reasons.
Herbert London: Three more questions.
Questioner: This is a counterpart to the other question. To what extent do you expect the people who are supposed to benefit from this might resist these reforms, because just as they might benefit and be protected by the law, they could also be persecuted by the law? Or at least, by in most cases, the predatory governments that most of these countries have.
Hernando de Soto: YesÂ…the law, of course, works both ways. Once you know where somebody lives, the police and the ideological police also know that. That is absolutely true. On the other hand, of course, once ... is one of the very arguments of the classics about having properties is thatÂ’s what gives you autonomy. So it is never a black or white situation. The idea is to always be able to draft a law in such a way that the pluses are bigger than the minuses. Of course, if all youÂ’re going to end up doing is giving people addresses and no way to defend their property, and this doesnÂ’t go parallel to other rights apart from property rights that go along with political rights. It wonÂ’t help. The only interesting thing about all of this is, of course, that most other rights begin when you have property rights first. So, itÂ’s not an ideal situation. But, itÂ’s a step in the right direct. People always forget when they talk about human rights. One of the basic human rights even in the UN Charter is the property rights and itÂ’s the one that nobody talks about inside the United Nations. TheyÂ’ve only begun now (inaudible).Â… according to our friend, Williamson, the Washington consensus were, as he had said, ten points. The two points, the last two points, nine and ten are access to enterprise and property rights and those are the ones not being implemented by the west or by recipient countries. But, generally speaking so far in history in the west, property rights have actually protected the individual against the worst abuses that have to do with the resources of the authority. We hope we can keep it that way. The important thing about the law the way we have drafted it now together with Egyptian partners, is that of course, first of all, it brings out the same guarantees, that the informal laws, like in the California gold rushes give you in the first place. The second thing it does is introduces all