Review of de Soto's Mystery of Capital

[Hylton White <hjwhite1@xxxxxxxxxxxxxxxxxxxxxxx>]

>From the Daily Mail and Guardian (www.mg.co.za), Sep. 20, 2000:

Fine words, flawed ideas: Economist Hernando de Soto is hailed as a saviour
of poor countries. But he is nothing of the kind

Madeleine Bunting

Hernando de Soto has pulled off a remarkable feat. You may not have heard
of him, but governments around the world are apparently queuing up to hear
what the Peruvian thinker has to say.

Egypt, Romania, Haiti and Mexico, as well as his home country, are seeking
and implementing his advice in a bid to transform their economies. Geoff
Mulgan, head of the Number 10 policy unit, had him in to Downing Street.
The World Bank is pouring huge sums into his projects. The Economist ranks
his Lima-based institute as the second most important think tank in the
world.
De Soto is pitching himself as a third-way guru and it's working. With the
launch of his new book, he's flavour of the month.
The third way needs him. The weakest assertion at the heart of the bundle
of ideas lumped together by a loose alliance of Tony Blair, Bill Clinton,
Gerhard Schruder and other left-of-centre leaders such as the Brazilian
Fernando Cardoso, is that capitalism can distribute wealth widely. The
evidence is to the contrary; recent history seems to be proving the Marxist
claim that, inevitably, a capitalist system concentrates wealth in fewer
hands, thus sowing the seeds for its collapse.

Walk on De Soto. His appeal lies in large part because he doesn't challenge
the status quo; he accepts capitalism is the only economic system on offer.
What he focuses on is the huge black economy that operates outside the
legal system in all countries, particularly in the developing world and
former Soviet bloc.

In the extralegal economy, the poor accumulate huge assets in their shanty
homes and small businesses, but because they have no legal protections,
they cannot access credit nor can they safely invest. Their assets are thus
"dead capital" as opposed to "live capital" in the West. The big idea can
basically be summed up as: "It's property law, stupid."

De Soto has made a useful point. The underground market in Russia and
Ukraine accounts for 50% of gross domestic product and 62% in Georgia.
According to his institute's inventory, as much as 90% of Cairo's economy
is extralegal. In his emphasis on the enormous entrepreneurial energies of
the poor, and that they know better than any policymaker how to improve
their lot, De Soto should be shifting the minds of politicians and donor
governments in the right direction. Perhaps he can help uncouple the ideas
of poverty and laziness that still lurk behind some compassion fatigue
towards developing countries. After all, in many countries it is the
entrepreneurial resourcefulness of some of the most marginalised - women
traders in West Africa for example - who ensure that millions of people are
fed and clothed.

But what this most certainly does not amount to is a big idea to solve
global poverty. Gathering around De Soto is a semi-hysterical spinning that
ludicrously compares him to Adam Smith and Karl Marx. His book, The Mystery
of Capital, is breathless, grandiose, and claims to have fathomed "secrets"
and "mysteries". But if that's what it takes to get a book that baldly
states that globalisation is not working for five-sixths of the world's
population on to the United States bestseller charts, then more power to
his elbow.

Governments do need to devise ways to hook the extralegal economy into the
formal economy. Opt into the system and you get access to credit to invest
in your home and business, and you don't have to pay bribes to the Mafia.
De Soto claims his theory is backed up by what happened in the fast-track
scheme he designed for small business under President Alberto Fujimori's
government in Peru, when 276 000 businesses voluntarily opted for
legalisation.

But what De Soto doesn't acknowledge is that the balance of benefit between
staying out of the system and opting in can be delicate or even tipped
firmly against. Perhaps for shanty dwellers in Brazil or market stall
holders in Kiev, the local Mafia has far more clout than any government. To
them, legalisation only doubles their burden, adding taxes to the bribes
they will have to carry on paying.

The laws a country makes and how they are enforced reflect the disposition
of political power - and that is determined by who has economic power. De
Soto's work is an elaborate smokescreen to hide the uglier truth.

The power, political and economic, lies with the globalised elite in
developing countries who are often employed or bullied by Western
multinationals and who run those countries for the maximum extractive
benefit of the West. We import their raw commodities at rock-bottom prices,
and export back to them manufactured goods; we restrict their manufactured
exports and we charge high levels of interest on their debts. None of that,
of course, gets a hearing in De Soto's work, which is no doubt partly
because his CV includes a stint as an economist for the General Agreement
on Tariffs and Trade (the precursor of the World Trade Organisation) and as
the chief executive officer of "one of Europe's largest engineering firms".
This is touchy-feely capitalism with a heart. Handle it with care.

The Mystery of Capital by Hernando de Soto is published by Bantam Press


-- The Mail&Guardian, September 20, 2000.

Hylton White