ANALYSIS

GMA’s de Soto: Rich People’s Reformist

Peruvian so-called “development expert” Hernando de Soto, tapped as President Gloria Macapagal-Arroyo’s newest economic adviser, articulately and energetically peddles the populist myth that everyone can be a capitalist and that capitalism brings wealth for all. For this he is well loved by political, economic and developmental elites worldwide.

BY SANDRA NICOLAS
Bulatlat.com

ILD’s] prescription offers a clear and promising alternative to economic stagnation...” In 2002, then US President Bill Clinton declared, “The most promising anti-poverty  initiative in the world is that being advanced by the great Peruvian Economist, Hernando de Soto.”

The World Bank (WB) put its money where its mouth is and in 1997 alone financed ILD with US$37 million for its work. In June 2001, the Center for International Private Enterprise of the US Chamber of Commerce reported to the Board of the National Endowment for Democracy that ILD’s projects ranked number one of the 700 projects they funded worldwide over the last 17 years.

Similar praise has come from presidents, prime ministers and other heads of state: Richard Nixon of the US, Margaret Thatcher of the United Kingdom, Vladimir Putin of Russia, Vicente Fox of Mexico, Ricardo Maduro of Honduras, Jean Bertrand Aristide of Haiti, Hamid Karzai of Afghanistan, Hosni Mubarak of Egypt, Abdelaziz Bouteflika of Algeria, John A. Kufuor of Ghana, Olesegun Obasanjo of Nigeria and Thaksin Shinawatra of Thailand.

Our own President Gloria Macapagal-Arroyo joined this rogue’s gallery of dubious endorsers as early as 2001 when, after a visit to the Philippines by de Soto, she declared that the poor can be “wealth generators.” This follows the lead of former President Joseph Estrada. Last week she called de Soto “the great Latin American social scientist.”

Secret to success

The secret to de Soto’s and ILD’s popularity among political, economic and developmental elites ultimately lies in their unashamed conservatism, defense of the status quo and promise of capitalist wealth for the world’s poor and exploited.

De Soto articulated his ideas in two books: The Other Path (1986) and The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else (2000). His reasoning begins from the premise that people are poor because, as he said in a 2003 interview with the Asian Development Bank (ADB), “they do not have the instruments with which to participate in a market economy.” He counts 4 billion out of 5 billion people in the third world – out of the 6 billion global population – as so “disenfranchised.”

He continues, “They cannot participate in a market economy because to participate in a market economy you basically have to be able to come into the market with a property right.” De Soto argues that poor people actually have assets if only laws recognized these as such. He says that this “dead capital” is “mainly real estate assets” – such as peasants’ agricultural land and urban poor housing – but can also include other property like vending carts, bicycles, chickens and the like.

Hence his development prescription – almost a silver bullet – that the single biggest step towards poverty-eradication is to reform property-related laws so that these physical assets are fully recognized and effectively converted into capital for the poor. Creating an inclusive legal system of property rights will unleash the magic of the invisible hand.

De Soto claims that “the loss of potential is immense” and throws up the catchy figure of US$10 trillion as the value of this erstwhile “dead capital” worldwide. If only, he argues, all this could be used as “collateral for getting a loan, a mortgage, or a guarantee to get credit, as a security to be able to engage a foreign investment, as a point of reference to collect bills, for example, for the supply of electricity or the supply of clean water” and so on.

When de Soto visited the Philippines in 2003, it was reported in the press that he estimated the country’s urban poor to be sitting on “dead capital” of some P100 billion in 2000. Elsewhere, ILD’s country representative, Jose Leviste, cited estimates from an ILD study of  “US$132 or US$133 billion of dead capital in Metro Manila alone.”

But notwithstanding the gushing praise from so many prominent but developmentally dubious characters, there are a host of problems with de Soto’s approach.

Capitalist utopia

The appeal to elite interests is that De Soto’s advocacy bolsters the populist myth that everyone can be a capitalist and that capitalism brings wealth for all.

Wealth and asset redistribution takes a back seat and the development thrust becomes converting the poor’s “dead capital” into living capital. It’s an enchanting image: by the wave of a legal magic wand, the poor discover capital they’ve always had, are turned into instant capitalists and join the ranks of the rich they’ve always served. Certainly President Arroyo’s 10-point agenda promise to create 6-10 million jobs via opportunities to three million entrepreneurs, for one, is inspired by this vision.

Elites get to keep the property they value so much and can continue exploiting and oppressing while the poor – and historically exploited and oppressed – are diverted from systemic struggles by the chimera of becoming wealthy entrepreneurs themselves.

It’s an approach that viciously aims to divide the working people. Pockets of wealth will be created as a few erstwhile poor are co-opted and take their entrepreneurial place on the fringes of the capitalist economy. Yet capitalism is an economic system that cannot but sharply delineate elites from the working masses, and indeed thrives on such delineation.

Wealth, property and power are most concentrated in elites. Their wealth, however, cannot but come from appropriating the bulk of the labors of the working masses precisely through the operation of current legal systems of property rights which legitimize such appropriation. The de Soto approach deftly distracts from the key problem that capitalist and semifeudal elites use property laws to justify their effectively stealing the labors of the masses.

And even beyond merely distracting, it deceives by subtly propagating the self-contradictory proposition that it is possible to have a society where everyone is a capitalist. But where would capitalists get their wealth if there were no workers around? Marx revealed this “mystery of capital” long ago. 

Fallacious reasoning is rife in de Soto’s analysis, such as in his appraisal of US capitalism and its implications for the third world. De Soto says that many of today’s backward neocolonies resemble pre-Civil War US when many 19^th century Americans owned property with no clear legal title, relying mainly on elaborate informal property rights. He then asserts that as the US government gave legal status to informal but verifiable claims, economic development flourished. Thus de Soto contends that today’s backward countries would likewise experience a burst of economic development if only the system of legal property rights were likewise expanded to cover already existing, though still informal, property rights.

Yet de Soto’s fairy tale of America’s rise is strangely silent on things like the century-spanning genocide of Indian tribes and capturing of their vast natural resources, on the vicious exploitation of child and immigrant labor, and on the imperialist plundering reaching as far east as the Philippines. Matched against these other late-19^th/early-20^th century events, the explanatory power of de Soto’s silver bullet is underwhelming.

De Soto replies to criticisms of his “silver bullet” that while “property law alone does not resolve the other problems… what is also quite clear is that without property law, you will never be able to accomplish other reforms in a sustainable manner.” Nonetheless the single-minded advocacy remains. Moreover, the “property law” proposed enshrines capitalist exploitation albeit decorated with populist rhetoric. Finally there is his insistent, patronizingly insulting claim: “The fact is, most poor people living in poor countries aren't poor.”

Acclaim not universal

The illusion of universal acclaim for de Soto and ILD is a testament not only to the utility of their message for exploiters, of course, but also of their public relations machinery. Yet there are criticisms of him from even the mainstream of development academia.

Robert Samuelson wrote in Foreign Affairs, “Unfortunately, de Soto strains too much. He wants to make property rights – or their absence – the center of everything.” In the International Development Planning Review, Alan Gilbert, Professor of Geography at University College, London, challenges de Soto with the finding that in Bogotá, for example, granting legal titles has created neither a more healthy housing market nor a better supply of credit for the poor. Gilbert warns of policymakers being persuaded to hand out title deeds and just letting the market take over.

Two economists from the London School of Economics, R.G. Rossini and J.J. Thomas, published an article in World Development questioning the statistical basis for the ILD’s estimates for the size of the informal economy shortly after The Other Path was published. Christopher Woodruff, reacting to the publication of the Mystery of Capital, argued in the Journal of Economic Literature that de Soto vastly overestimated the amount of extralegal wealth of the poor.

Criticisms of de Soto’s approach even from those who are uncritical of capitalism’s inherent failings are many and range from methodological issues, the false presumption that “property law” is acceptable across cultures and societies, and questions about their ultimate efficacy. Criticisms that are enough to, at the very least, make such declarations as by President Arroyo last week that “his principle has been demonstrated successfully in many other developing countries” suspect.

Diversionary path

The background of de Soto and ILD may provide insights into the peculiar longevity and “popularity” of his ideas.

Early in his career, De Soto worked as an economist with the General Agreement on Tariffs and Trade (GATT), the precursor of today’s World Trade Organization (WTO). He has been president of the executive committee of the Copper Exporting Countries Organization, managing director of Universal Engineering Corporation (one of Europe’s largest engineering consulting companies), a principal of the Swiss Bank Corporation Consultant Group and a governor of Peru's Central Reserve Bank.

Today, de Soto is principally involved with the ILD and its “capital formation programs” in Asia, Latin America and the Middle East. ILD has a staff of around 45 lawyers, economists, engineers, urban planners, and information technology specialists and is servicing, according to de Soto, requests from 25 governments to help map the informal sector in their countries.

ILD started its research in Peru’s shantytowns in 1981 and on the basis of this initial fieldwork gained national prominence in 1983 and 1984, capped by a personal request from then President Fernando Belaúnde Terry. ILD is unabashedly about, says its mission statement, “putting into place the foundation stone of a market economy – a comprehensive and inclusive property system.”

De Soto was the principal economic adviser of the former Peruvian President Alberto Fujimori until 1992. Fujimori, who is in exile in Japan, is wanted in Peru for corruption charges. ILD was heavily involved in proposing, drafting and pushing for various legislations within its area of expertise. ILD economists were among the strongest advocates of more deeply inserting Peru into the international financial system.

Beyond this – and as reported by The Economist – de Soto was instrumental in drawing up key elements of Peru’s anti-drug-cum-counter-insurgency program and getting the elder George Bush’s support. Among its components directed against the growing mass base of the Maoist guerrillas of the Sendero Luminoso (SL) were to recognize the peasants’ informal militias, grant them land titles and decriminalize the growing of coca.

The title The Other Path is actually a direct jab by de Soto against the SL or Shining Path. But if Peru’s development path since the 1990s is any guide the “Other” path is no path at all. In an interview with Liam Halligan of the Money Telegraph in September 2003, de Soto bragged, “What worked in my country can work wherever terrorism thrives.” Yet, as the Central Intelligence Agency (CIA) factbook notes, Peruvian poverty in 1991 of 54 percent of the population was radically unchanged and still at 54 percent by 2003. The Japan Bank for International Cooperation, in a 2001 study, also even found inequality increasing in the 1990s.

Rich people’s reformism

De Soto’s approach has been called the “poor people’s capitalism.” In theory and in practice though, it is nothing more than “rich people’s reformism.”

That President Arroyo has chosen to tap de Soto as her newest economic adviser only affirms the free-market, anti-people and pro-capitalist thrust of government economic policy. Indeed the Peruvian experience is an ominous one. Fujimori’s fascist rule since 1990 involved a cocktail of US military aid, CIA operations, paramilitary groups, anti-terrorism laws and widespread human rights violations in its “anti-terrorist” campaign.

Certainly, President Arroyo will realize that the de Soto approach will be little help in reducing the number of unemployed and underemployed Filipinos – 10.8 million in April. Calling these millions “potential entrepreneurs” is a cynical deception and does nothing to remedy the basic failings of an elite-dominated agricultural and pseudo-industrial economy, nor of mounting state neglect of vital social services – indeed it aims to divert from these.

The reason for spreading and deepening poverty, and mounting unrest, in an increasingly rich world doesn’t lie in the masses not having property rights but in the elite defending their property and their “right” to steal the labors of the people. Bulatlat.com

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