Hernando de Soto, advisor to Peruvian presidents, proponent of neo-liberal theories of development, serial wearer of the hats of politician and technocrat, speaks to Aziza Sami about globalisation, dependency and Marxism It was 9 am and the lobby of the five-star hotel was teeming with visitors. Hernando de Soto walked in. I went up to him and introduced myself, wondering if anyone else there recognised his bearded and mustachioed face. This was the face that had made the headlines one year ago, when de Soto was touted as potential contender in the Peruvian presidential elections against Alejandro Toledo. Although de Soto had higher approval ratings than Toledo in opinion polls prior to the elections, he never actually ran for president, owing to the extensive and time-consuming candidate-registration procedures. It was, as well, the face of the man who had wielded considerable influence over Peru's domestic scene for more than 12 years as a policy advisor to successive Peruvian presidents until he split with Alberto Fujimori, two months before the latter was ousted from power in 2000. This was, above all, the face of the man whom high-profile Western publications from The Wall Street Journal to The Economist have acclaimed as one of the most influential Latin American innovators in the field of socio-economic development. He has been hailed as a modern-day Adam Smith by the enthusiasts, described as "the darling of Western funding institutions", and his name has been proposed in critical reviews as a candidate for the Nobel Prize in Economics. Click to view caption The former CEO of a major multinational engineering company based in Europe, De Soto, now aged 61, returned to Peru in 1982 and established his Lima-based think tank, the Institute for Liberty and Democracy (ILD), which devised what is viewed as a ground-breaking strategy to reform legislation in Peru to make it "more responsive to the needs of the people, and not only the privileged few". From 1988 to 1995, de Soto and the ILD designed and managed Peru's property registration system, overseeing the issuing of land and building titles to 1.5 million families and "legalising" some 300,000 "informal" businesses. For the very same reasons that de Soto is the darling of the neo-liberals, he has been criticised by those on the left of the development spectrum -- a minority these days, to be sure. De Soto's detractors criticise his development theory on the basis that it is directed towards incorporating the poor and marginalised into the international capitalist system. And owing to the theory's clear policy applications, it is particularly potent. De Soto first outlined his theory in The Other Path. He says that in his native Peru, his ideas ultimately led to the "defeat, by purely intellectual means, of the alternative route to development which was proposed by the [armed] Maoist group the Shining Path". De Soto posits that the poor own sizable assets that are not recognised because they are held as illegal property. When ownership of these assets is legalised, they become capital with the potential to be used in producing surplus value. The assets can be used by the poor to obtain credit or they can be invested. De Soto calls this the "revival of dead capital", describing his theory as one which is about "the emancipation of the poor within the context of a globalising world". "I do not deny the reality of dependency. I just do not think that the traditional dependency authors of Brazil or Argentina had the right solutions. The proof: they are nowhere to be found today except at the universities, and not the very good ones at that" Why did he fall out with President Fujimori? From his briefcase, de Soto extracted a cartoon that was published in the Peruvian press depicting Fujimori telling him, "Nobody influences by position". Another cartoon has him saying: "I would like to make clear, once and for all, that he is the formal president. I am just the informal one." In 1990 the ILD "went global". De Soto's programmes for "formalising" the informal sector have been picked up with enthusiasm by funding institutions like the World Bank and the United States Agency for International Development (USAID). And for his project in Egypt, which he describes as "our most important one so far", USAID, for the first time in the ILD's experience, is the sole funding agency. De Soto is also advising on programmes in Mexico and Haiti with "first incursions being made into Russia and Ghana". He is scouting new terrain in the Philippines, Malaysia, and perhaps Kazakhstan, where he will be heading after Cairo, "to look into the potentials there". His nine-day visit to Cairo in the middle of June was to follow up on the project entitled "The Formalisation Project in Egypt", jointly undertaken by the ILD and the Cairo-based Egyptian Centre for Economic Studies (ECES). Actual work began in 1999 with USAID funding provided within the context of its programme supporting the ECES. In his best-selling book The Mystery of Capital -- Why Capitalism Triumphs in the West and Fails Everywhere Else, de Soto writes that "the wealth... the poor have accumulated in Egypt is worth 55 times as much as the sum of all direct foreign investment recorded including the Suez Canal and the High Dam." He asserts that the value of real-estate assets accumulated by the poor in Egypt since the end of World War II is no less than $241 billion and that 92 per cent of all real estate in Egypt is held outside of the legal system, while 88 per cent of all businesses operate outside the law. De Soto writes of Cairo as "a city of dead assets" since the capital that is present here cannot be used to the fullest. "When you step out of the Nile Hilton", he writes, "what you leave behind is not the high-technology world of fax machines and ice-makers, of television sets and antibiotics. The people of Cairo have access to these. What you leave is the world of legally enforceable transactions on property rights. The institutions that give life to capital -- that allow one to secure the interests of third parties with work and... assets, do not exist." As part of the ECES-ILD project, an assessment was made of Egypt's informal real estate property. Recommendations will be presented to the government within 10-months time on the institutional reforms needed to "formalise" this sector. Egypt's informal real estate sector includes illegal buildings built on agricultural or desert land, storeys constructed on old or new public housing without permits, flats rented at fixed-rates dating back to the 1950s, and villages built in rural areas, to which no one holds clear legal title. An assessment was also made of entrepreneurial activities undertaken by the poor in Egypt outside the framework of the legal system. De Soto calls this the "informal business sector". It is comprised of small-scale, low-capitalised activities such as shoe workshops, auto-mechanics, fruit sellers, ironing shops and coffee shops. Egypt's bureaucracy is also being scrutinised with a view to presenting recommendations for streamlining procedures. A major insight provided by de Soto pertaining to both Egypt and Peru is that the multitude of administrative fees and time spent wending one's way through the bureaucratic labyrinth to open a small business -- a process that can take as long as 11 years -- are a primary obstacle inhibiting the poor from "going legal". How does de Soto assess the Egyptian government's ability to translate the project's recommendations into policy? "This is a very long-term project involving things operating 'in the shadows'. We are talking to people who are basically hiding from the government. Obtaining information is a complicated process, but one which we know how to do, along with our Egyptian colleagues." When the project is completed "a full map should be ready, defining Egypt's extra-legal economy seen from a legal point of view. Proposals will be made on the different options [for integrating] this portion of society into the legal system. We can help with the implementation." The culmination will be "the issuance of laws and formation of organisations to carry out the job. Organisations must also be created to explain to people the advantages of the law. There are currently no organisations in Egypt to do that". "During discussions in Cairo, people presumed I was defending American capitalism. 'I am not a representative of JP Morgan or Bill Gates', I replied" De Soto had attended several "round-tables" with members of the press in Cairo to discuss the newly- issued Arabic translation of The Mystery of Capital. What were the reactions? "People presumed I was defending American capitalism, although the book is not an ideological treatise in defence of capitalism. 'I am not a representative of JP Morgan or Bill Gates', I said. This is a book about the formation of capital. It is about the fact that the poor in Egypt, like most countries, possess enormous amounts of value whose potential cannot be realised because the existing legal system does not allow it. It is a book that accepts the fact that there is not a single country in the world today -- from China to Albania -- that does not consider itself capitalist. I work within the context of that reality, and at a technical level. Since practically every country includes liberalisation in its policies, then we must ask why capitalism works in some places only and not in others." Why does he believe so much in the validity of capitalism and globalisation -- in their inevitability -- I asked. "I am not sure I believe they are inevitable. But we have been undergoing globalisation for the past 400 years, at least. Here we are in Cairo sitting in an American hotel -- originally a palace designed in the 19th century by a German architect -- beneath pictures of Cleopatra, a queen of Egypt who was half Greek. We have been globalising for a very long time. The two people who were most explicit about this were Adam Smith and Karl Marx. They saw that the inevitable trend of mankind was to head towards a more extensive division of labour among more countries and parts of the world. Everything indicates that this is the way we are heading, whether we like it or not." Is he a pragmatist, opting to adapt to the current trend rather than challenge it or be at odds with it? "I am simply saying that the division of labour makes sense. It may be unsettling and confusing. It might weaken nationalism and sovereignty. But it is also more productive to specialise. I am trying to see how we can bring in those who are excluded from enjoying the dividends of globalisation to participate if they so desire. In my part of the world, Latin America, the poor want to be a part of this process." De Soto's theory has been criticised as being reductionist and an oversimplification of reality. In focusing on the legal perspective, allege his critics, he negates other equally important factors, international and domestic, which determine the position of the poor in society. "The goal of the book was to make things simple. It was written as a 'purpose strategy', but this does not take away from the complexity behind it. Those who claim that the theory behind it is simplistic have not read it. In it we have included the results of [legal] reforms [adopted in Peru] for the extra-legal sector. Peru's GNP became the world's highest with growth at 12 or 13 per cent. A lot of this growth was internal, from the bottom up -- not because of external factors like tourism. Instead of devoting 20 pages to saying this, I just pointed it out in a couple of paragraphs. The 'critics' probably skipped these." He hails from Latin America -- home to the famous "dependency theory school" that sees less developed nations' predicament as being due to systemic causes related to their "subordinate" position within the global capitalist system. What does he think of dependency theory? "I do not deny [the existence] of dependency. In fact, I believe that until you create your own popular capitalist class you will always be dependent. I just do not agree with the traditional dependency authors of Brazil or Argentina who say that the solution is in correcting the balance of payments, and resolving the problem of technology transfer. I do not think they had the correct solution. Proof is that they are nowhere to be found today except at universities, and not the very good ones at that. In most international organisations, no one would dare talk about [that kind of] dependency." His particular "vision" of dependency is gaining increasing acceptance in the Third World, de Soto says. "The problems of development are internal. No matter what you negotiate to stop the dependency of industrialists or businessmen abroad, you are only talking of some 10 per cent. What I am concerned about is the dependency of the 90 per cent who are not even inside the economic game." What does he think of the perception, still prevalent in the Third World, that business elites there thrive because of their ties with global capitalism -- those whom dependency theory has labelled "the comprador class"? "Oh yes. I believe that the oligarchies and the exploitation exist in all of our societies. I just do not think that the people who wrote about dependency knew how to beat them. I believe I have a much better formula. I am not working for [such] vested interests, but for change." I asked how he views Egypt's business class. "Those that I do know are the progressive ones, like those in the ECES, who are enthusiastic about my project. There might be dinosaurs, but I do not know them." He intimated that he would feel more at ease talking about Latin America "where my dreams are. Outside, I am just a 'great technocrat'". He sees Latin America as a "mercantilist continent. There are no capitalists there, just mercantilists. It is not like the US, Japan, or the Asian tigers where everyone has opportunities. Everyone can become Bill Gates. In Latin America, people complain because they do not have a chance. It is similar to the situation [in Western capitalist societies] in the 17th and 18th centuries when the mercantilist class existed. Adam Smith and Karl Marx saw this class as their enemy because it makes its wealth based on political contacts and uses laws and regulations to create favoured and protected positions. In Latin America today, only 10 per cent of the people have 'opportunities'. When this happens, you cannot develop economically." De Soto resorts to Marxist frameworks to define the informal sector as a 'class' of marginalised people. Why does Marxism still appear to more adequately explain the realities of the developing world than do liberal frameworks? "First of all, even a man like [international financier] George Soros realises that most instruments of Marxist analysis are more relevant [to explaining reality] than the capitalist ones. I have used Marxist analysis in my work because one of Marx's very important contributions was that of class analysis. But I have looked at class analysis in a way that would be useful for development. In Peru, the proletariat, which is legally employed and 'exploited' by the bourgeoisie, is only five per cent [of the population]. The 'informal sector' which is discriminated against because it is outside the law is more than 80 per cent. In Egypt, 90 per cent of the people are outside the system. Those who are measured as being 'exploited' are actually the minority. This is why I consider Marxist analysis to be outdated. Today, there is a whole new class of 'entrepreneurs' which is discriminated against. The discrimination here is not by economic means but by what Marx would call the 'superstructure' of laws etc." In the Mystery of Capital de Soto mentions the historic example of squatters in 19th century America who were able to induce the government to recognise as legal the claims they asserted over the land they lived on. Is it possible to apply experiences from one society to another, even if conditions in each are vastly different? Does he believe that what was won in America by private initiative can be attained in developing countries on behalf of the poor by autocratic governments, which themselves are in need of extensive political, legal and administrative reforms? The case of de Soto's home country, Peru, which is still going through economic and political turmoil, perhaps gives credence to the claim that applying such experiences elsewhere is no simple matter. He admits that many of the reforms he recommended for Peru "were not finalised because of political resistance. The projects have not been cancelled, but they have not been managed as though we had been there." Still, he says, "The example I used was that of the US. But most cases of transformation were undertaken by governments on behalf of their peoples. This happened in Japan, Taiwan and South Korea. There is Germany in 1906 under the Kaiser, and France under Napoleon. These were autocratic governments. You can have a spontaneous grass-roots evolution from the bottom up, as in the US, or a more vertical one. Both work." But still, when de Soto was working in Peru, he was often vocal about the need for "fundamental democratic reforms" and correcting "flawed decision-making processes". Since this can be taken as tacit admission that the performance of political systems does determine the success of reform, how does he assess the Egyptian government on this count? "Concerning the quality of the [current Egyptian] government and whether this [enables it to effect this transformation] the difference between when I was working in Peru and now is that I am not a member of Egyptian society. I cannot pronounce myself on that. We are not here as citizens but as technocrats." He seems at ease with the roles of politician and technocrat yet acutely aware of the perils of blending the two. He says that he is currently receiving calls from several Arab heads of state who are "interested" in his programmes. Which Arab countries and which heads of state? "I think it would be indiscreet for me to tell you because apart from occasionally being a writer, I have programmes that I have to protect. I am also working for other heads of state who are not saying it, and I prefer to protect their identity." He can be the detached advisor, working in environments that do not necessarily exhibit the "transparency and democratic decision-making" which, in his native Peru, he had made an integral part of his political platform. But when he speaks of Latin America, he becomes the politician, the man involved. He was solicited by Mexican President Vicente Fox , he says, to "destroy mercantilism" in Mexico. "Fox said, 'I will do it and Hernando de Soto will help me'. The political message here is clear. But abroad, outside of Latin America, my expectations are purely technical. I do not get involved."
