CIPE at 40 Podcast: Reforming Right – Hernando De Soto on Empowering Latin American Entrepreneurs
Hernando De Soto is the Founder and President of the Institute for Liberty and Democracy (ILD) in Peru – CIPE’s first developing-country partner. ILD and De Soto shaped Peru’s economic modernization by influencing some 400 state initiatives, regulations and laws; CIPE replicated this success by forming thousands of partnerships with business associations, think tanks and civil society groups worldwide. For this podcast, De Soto joins CIPE Executive Director Andrew Wilson to discuss the importance of the informal economy, the central role of property rights, and the early successes of the ILD-CIPE partnership.Â
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Transcript in English available below
ANDREW WILSON (00:01):
Welcome to CIPE at 40, a podcast series celebrating the 40th anniversary of the Center for International Private Enterprise. In this limited podcast series, my colleagues and I will be looking at CIPE’s impact in addressing economic and social challenges over the years. That includes talking with many of the remarkable people who’ve partnered with us to lead key efforts in their countries.
I’m Andrew Wilson, CIPE’s executive director and your host for this episode. Today we’re going to look at CIPE’s early beginnings with our very first program, which was based in Latin America. Lessons learned from it would help shape how CIPE carried out its mission worldwide in the years to come.
Coming up on CIPE at 40, Hernando de Soto shares the secret sauce behind sustainable development in Latin America.
So, my guest today is our very first partner, noted economist and author Hernando DeSoto. He’s the founder and president of the Institute for Liberty and Democracy, or ILD and Lima, Peru. And both he and his organization are internationally known for their groundbreaking work to advance key areas of economic development and emerging economies. Hernando, thank you so much for joining us today and sharing your insights.
Hernando De Soto (01:17):
Andrew, it’s great to see you again. I’m delighted to be with CIPE, of course. You made all the difference in the way we started off. Good to be with you.
Andrew Wilson (01:27):
Well, let’s start with that. Let’s start at the beginning. Please help me set the scene and walk us through how ILD and CIPE came together. It was the early 1980s. It was a challenging time in your region in many ways. What issues were you trying to address and why were you focusing on those in particular? What was driving your thought process as you looked at events in Peru?
Hernando De Soto (01:52):
Well, what was driving the thought process was that I, myself, was discovering my country, because my parents had been in exile since I was very young. I had afterwards good job offers, even though I kept in touch with Peru on holidays, I had just returned to Peru after leaving in my mother’s arms at the age of three. So, I had a different look at Peru than most Peruvians did.
Two things were foremost at that time. First of all, I was amazed by the informal economy. Everybody talked about it being something marginal, and everything I saw was just pure, informal. And as it turned out in those days, the statistics are mainly of the International Labor organization, which measured the informal economy as being those who were out of a job. The failure of the capitalist system as it was described by the International Labor Organization, and I counted it in a different way.
I found out who had a job, but that wasn’t recorded. And we got to nearly 70% of the economy. That changed the whole concept about development around, in other words, private enterprise was there, the spirit of enterprise was there, and the problem was the law. And it was not unemployed laborers. We had plenty of entrepreneurs. What we lacked were good markets for where they could develop with all the mechanisms required for markets develop. And the second thing that was of impact is that a huge, a very efficient, very cruel terrorist system had begun in Peru anti enterprise. It was a Maoist system and classified by your own Congress and your State Department as only equivalent to the Khmer Rouge in Cambodia under Pol Pot. We went out to try to defeat it, of course, because their thesis was that these were not private entrepreneurs, that capitalism doesn’t work in the country.
And you were crucial to all that because by the time that Abiel Guzman, who headed the movement, trained in China at the time, those were other days, it wasn’t the modern China of today. He credits us in his last book, he said we were defeated and the cause is Hernando DeSoto, his organization. And that includes you, Andrew. So, we have our certificates from the best place we could in the world, which were the terrorists themselves.
Andrew Wilson (04:33):
Well, Hernando, maybe you can expound a little bit on this. In a lot of the development community, there was not this concern with the informal sector if people were making a living and there was bread on the table, why did it matter that there was an informal sector? It was getting a job done, it was serving a need. Why was this a particular issue that was vexing you? What were you thinking in terms of, okay, why is this an issue that needs to be addressed of informality?
Hernando De Soto (05:01):
Well, because one thing is enterprise, and there are such things as poor entrepreneurs. I mean, if you even go back to drawings and paintings of early Americans in the 17th, 18th, 19th century, Billy the Kid, Davy Crockett, you had a lot of poor entrepreneurs. As a matter of fact, we were wealthier than you are. So, there are such things as poor entrepreneurs. You go to India today and there are people making a dollar a day, and what they don’t have is economies of scale. They don’t have credit, they don’t have capital. They cannot make combinations. Their markets are extremely restricted, and the rates of suicides among them are extremely high. Well, they were doing surviving, but surviving is not good enough. People get angry, not when they’re poor. You can have masses of people in India, hundreds of millions, and they’re poor. But it’s when you put them and you contrast them to richer people that you start having social problems.
The informal sector is important. The other thing that’s important about the informal sector, and it’s something we still haven’t managed to address adequately, is that it’s very hard to describe it. Informal is another way for saying illegal or extralegal. It doesn’t mean that they’re laid back or that they’re casual, but they lack law. So, imagine for example, just one example, Andrew. If you are an entrepreneur in Peru and you lack just one thing, everything else, one thing, it’s called limited liability, you practically have limited liability included in any entrepreneurial formation in the United States. What does that mean? And the whole informal sector, one of its characteristics, one of the ways that we describe it is it doesn’t have limited liability. Means every time I make a deal with you, I can’t just say, look, I’m going to take a risk, but I’m only going to go to a thousand dollars.
I am not going to go further. I want to put my kids through school or whatever it is. Every time you make a deal in the informal sector and you don’t strike it rich, you’re wiped out. You’re not wiped out five times in your life. You can be wiped out every day. So, what I’m saying about informal economy, it is a way of saying the law that allows enterprise to work is extremely complex. It’s not laid out in such a way that you can just absorb it in a generation. So, you don’t have to simply be labor to be poor. As a matter of fact, most of the poor of Peru are not labor. They’re entrepreneurs.
Andrew Wilson (08:04):
So, you’re looking at this system that functions under this high risk area, that it limits people’s ability to make decisions and invest and do other things, do business with strangers, and we try to understand
why people choose that path, if you will, stealing the title from your first book, the Other Path. Can you tell us a little bit about how you gained the insights into why people behave the way they do in selecting the informal sector as where they would be business if indeed it was a choice? What kind of led you to the approach and maybe share with some of our listeners this approach we took Because at the time it was groundbreaking. It really, I think was taking people in a very different direction from what the orthodoxy of economic development was.
Hernando De Soto (08:50):
Well, the fact is the informal sector is a name that we’ve given simply because the ILO made it famous, the International Labor Organization, to attack capitalism. And so we came back to say, we have another definition, and instead of talking about capitalism or choosing another framework, that’s the framework we were under. But in fact, the informal sector is the way enterprise begins. It’s been informality all the way, like some Americans say, it’s turtles all the way down. It’s always been informal. It’s entrepreneurship without standards. It’s entrepreneurship without scale, it’s entrepreneurship without the ability to combine things. Andrew, everything around your room in the United States, everything around this room in Peru, there isn’t one thing made by one person. Everything is a combination of various other things. So in countries that don’t have information, standards, ways to enforce and draw up contracts and have justice and build trust, that’s what we’ve had all away. It’s always been informality.
Andrew Wilson (10:15):
One of the things that I recall from my early days at CIPE and listening to you speak and reading your works and even talking to my old boss, John Sullivan, was the concept of entry barriers and other things that, so some groups were able to access the protections of limited liability, others couldn’t. What did you learn in those early days that have sort of shaped your approach over time?
Hernando De Soto (10:40):
Sure. What we learned was the cost of the law. In other words, there were costs of entry. In other words, in the case of Peru, it happens in different ways in different countries. But the Spaniards, my ancestors, Europeans migrated to Peru. And so we came with the early findings of the Borges, the Mercantile class, the privilege of Europe. All of that was fine, but our indigenous people didn’t get into it, and we didn’t realize that when you start building the rules for enterprise, the tendency of people who get inside the system and start working together is to begin excluding. And you set up boundaries for you to operate in a larger economy, but you create boundaries that so the others cannot come in. That happens everywhere. That’s why you have in your laws anti-trust, anti-collusion, and where you have now enormous reactions against capitalism worldwide. Because after a while, as Mark said, and as Jefferson said, there’s a tendency to accumulate wealth and you always have to learn to reopen it. And that’s why you have the Office of Management and Budget and all these other things. In other words, it’s not like you can repair it once. It’s like a water closet. It’s got to operate all the time.
Andrew Wilson (12:21):
So, what was it that you learned in particular about the Peruvian system that sort of informed your recommendations?
Hernando De Soto (12:30):
What we did, which I believe was also considered original because the World Bank bought it from the Peruvian government for whom we had installed. It was the doing business program. So, the doing business program is how do you get the information of where the blockages are? Where does your shoe hurt? We want you to tell.
So, we set up systems for consultation worldwide. And even today, I mean now they’ve had some problems, but even today people heard the president of Columbia said, we’re doing, according to the IMF, we’ve got stable currency according to the WHO, we fought covid. We’re position number 37 worldwide and doing business. This is where we go, and we set that up with you.
Andrew Wilson (13:22):
I was going to say, let’s talk a little bit about our cooperation as institutions. You were our first partner. I can say from our perspective, the approaches that you took, which was really to understand why people behave certain ways, why did they make certain decisions, what drove their behavior in terms of their commercial activity was a key lesson that we learned. But we also learned how to do programs a lot from our first work with you for CIPE, at least, you were a bit of a shaper in terms of the secrets of engaging partnerships. And I want to take us out of the issues for a second and think about what made our partnership successful in terms of how we work together.
If we were doing a case study on CIPE and ILD and what made the secret sauce of our work together so beneficial, what would you point out as sort of the ingredients of that secret sauce?
Hernando De Soto (14:20):
The secret sauce, Andrew, was how do you deliberately create capitalism, call it social market economy, whatever you want to call it, deliberately. Because what you usually get from US academia with the best of intentions is: son, you’ve got to do what we Anglo-Americans have been doing for 200 years and us Spanish Americans haven’t been doing, which is you got to set up good institutions. You’ve got to set up a good senate, a good Congress, an executive branch that follows these principles. You need freedom, you need that, et cetera. And then you say, and then what? Well, then make it work. Friedrich von Hayek, who said, spontaneous generation man! The people will figure a way out.
So, I said, well, you started doing that pretty much beginning the 19th century in the United States. Yes. And then what happened? Well, you went through a huge crisis in 2008. It nearly broke your country in two, your democracy. You went through Indian wars; you went through a civil war. Then you fought off the enemies of the system who thought that your system discriminated both in the states and abroad. I mean, to the point that even Abraham Lincoln had an epistolary relationship with Karl Marx about social injustice. You went through a first world war without 40 million deaths through a second world war against people who didn’t like the market, whether they were fascists or communists. Kate killed 85 million people in 1945. And so the question for you and us was how do we get to this much quicker than that while still preserving democratic values? What was, if you want to say is the secret sauce was: looking for the shortcut.
Now, let me give you a particular shortcut which you helped finance. We said, who’s done it before? Everything indicated as we started looking at the different things that China was not an example. China’s GNP per capita in 1990 was equivalent to 1948 when Mao had trounced Chiang Kai-shek. All right? But what happened was, and we found a clue here by some of the advice you gave us or the people you put us in touch with. That hold it: there’s one country that’s made it terrific whose reforms the United States started off, which is Japan.
Now let’s start, where do we look? Where do we look to? So CIPE said something like, oh, look at our declassified documents on the occupation of Japan. Well, we didn’t find much. They’re terrible. They’re with smudges and they’re black, et cetera. But then we found a very important document, and that document was the Honolulu team that Douglas MacArthur set up in Japan in 1942. He said, we’re going to win that war, but the trick is how to win the peace.
The reason Japan became aggressive is because it had a futile government that futile government had decided because of 56 large peasant uprisings throughout the beginning of the 20th century and during their Meiji restoration that the problem was that Japan didn’t have enough land. It’s just a little strip island. So, they invaded Manchuria, they invaded Korea, they went all the way down to Indonesia. So said MacArthur, what we have to do is dismantle the feudal state and create a market economy. And he was a Jeffersonian. So, he took that plan and once he got into power, he said, this is the first thing you’re going to do. And he gave a one page edict. So, we went to Japan and said, we haven’t found anything stateside, so let’s find out what you’ve got. And they didn’t have much either. Why? And I’m getting to the point now: because when you’re flattened out by two atomic bombs, you’re not in the mood for writing anything.
Not writing things about America. So, what we found out is that what MacArthur had done is that part of his plan was to delegate it to the Japanese. With your money, we spent half a year searching around Japan with a foundation called the International House of Japan for any survivors who organized and created the property rights and the private property rights system in Japan. And we ended up with seven plans that we worked with for about a year and a half. And once we had everything, their posters and their stuff, we translated it to the tightly system that exists today all throughout the third world. Also, thanks to you, because we not only implemented them in 30 countries, including ours, the World Bank also did that. The Inter-American Development Bank did that and the world throughout. And the result is that now all those enormous migrations in developing countries as a result of wars, squatting, nations splitting up, decolonization, are now titled countries where there are boundaries at the level, not only of the sovereign state, but of private entrepreneurs.
So, coming back, what we did with you is if you went to two things. One: you try and find somebody who did it, who are the real guys who did it, you become a Sherlock Holmes all the way to the end. You don’t want to talk to somebody who heard that somebody else did it. You start getting less into history. John Sullivan’s stuff because historians spend a long time giving each other a bloody nose about what really happened. You talk to the guys who’s in it today, and most importantly than anything, how do we get their liberation not only set up the institutions, Douglas North, Adam Smith, et cetera. What did you do in the last 300 years that you could have stopped, you could have not have to do and get to the point right away. We can do that. We can interpret that. That’s what we did.
Andrew Wilson (21:12):
I think between the work you did on entry into markets as well as the idea of property titling and property rights and transferring property rights, a lot of different lines of thought coming together, I think that are complimentary and really get at the core of people’s problems when they want to start a business. If we fast forward to today, what are you seeing as the challenges and the barriers that those at the bottom of the pyramid, if you will, or outside the pyramid, are facing in terms of accessing the opportunities within the market?
Hernando De Soto (21:48):
Excellent question, but I’m going to turn it around a little bit. I’m going to tell you not why it’s important to us, but why it’s important to you. You are now being sidelined in Latin America. You are no longer the first investment power in Latin America. It’s China. You’re the head of the Southern Command, which is your military who are in charge of looking south. You’ve got the Northern Westerns, et cetera. You’ve got seven commands declared on the 29th of March this year that China’s investments in Latin America were no longer simply economic rivalry. They were a security issue and a threat to the United States.
And just a few days ago, you said the same thing in the Middle East. What’s happened during all this time? And because we followed them, I’m by the way, aside from being member of various universities in the United States and halls of fame, I’m also on the Chinese side and I’ve seen how they’ve been developing what the Chinese have done. Let me, first of all, give you a number that’s striking.
The Chinese have spent on buying mines and energy sources in the global south, mainly Peru, Chile, Brazil, three times more than all the financial military aid that you’ve given last year to Ukraine. They’re churning more capital out than you are. Their thesis is that always has been like it was Jefferson’s that you have to make a distinction between what’s investment and what’s money. These are two different things. And the failure of capitalism is that it always falls into what they call fictitious capital.
That’s what Jefferson called it. Money that disappears like it did in 2008 and like it’s disappearing in front of our eyes today. Capital is something that says that six, it’s solid. It’s like you’re out. It has other ways of being measured and valued. Now here’s what’s happening. The Chinese have specialized in actually doing something which you haven’t quite caught on because you have such a successful system, which is they also separated not only capital from money, they have separated sovereignty rights from property rights.
So cut the United States or the Americas in two, but not horizontally, geopolitically, right? Arizona, Santa Fe, blah, blah, blah, Peru, Bolivia, Brazil, not horizontally, vertically. And the way it works is this, in Latin America from the Rio Grande down, like in all of the world, except probably you to a certain degree, everything that’s subsurface, that it’s just a strategic material energy. Everything you need to win the war in Ukraine and to make sure you’re not overrun by China comes from below the surface and it’s sovereign. In other words, it’s not the individual who owns it, it’s the state that owns it in the name of the people. And it’s been that way 2,400 years since the Roman Empire. They’ve studied that extremely well since 1990 until today. They call it the modernization of Marxism. It’s Xi Jinping’s personal work, and they found a way of cornering those rights throughout the third world. It’s crucial because unless, I don’t know if you’ve ever read HG Wells and the Time Machine, the Morlocks below, there’s no Morlocks. Everything on top to get to the bottom of the earth, you need to pierce the surface. We’ve titled them with your money and today they’re revolting against the Chinese because they think they’re not getting a good deal because their property rights give them a right to buy and sell locally. But that’s peanuts compared to putting them on the stock market because locally it’s potato land.
So today, as you try and fight back Russia, who has a choke hold on Europe because it supplies half the energy and that energy comes from fossil fuels, oil, coal, gas, 90%. It’s choking you guys all. And they’ve created the BRICs as allies to help guide your only way out. Your only way out is if you want fight. That battle is clean energy, which Biden is very much in favor of, alright, but clean energy, hydro nuclear wind energy doesn’t travel by tubes, it travels by wires. Just Chile and Peru, the people we have titled with your money, they haven’t realized that yet. The title we started with your money, we export 38% of the world’s copper. We’ve got most of the world’s lithium and we have all the electric metals, tin, gold and silver. Alright? And you’ve been ignoring us, but we’ve got it all.
That’s why they’re going to us because the day that they finally are able to break the choke hold from Russia, you’re going to need us. Alright? Now here’s the part that’s important. I said that you had to cut there’s no way of pumping out or drilling out unless you go through the surface, unless you’re a Morlock and there’s still no Morlocks in the world.
That’s what we can do. But if we could connect, say through blockchain, the titles that you have helped us build and the United States right market said, all right, what do I have to do to add so that I can negotiate this title not only in Peru, but negotiate it in the capital market where you’ve got people that are trained to size up potential, what’s the potential of something is where you compete with the communists. The communists say you have to own the resources. The Americans say you got to have to good money, but you need to do that. Now I have just as we are talking, so I’m glad you talked, got this. We have thanks to all your tightening, organized, all the surface mining communities of Peru. They’re all informal or were informal, but at a lesser degree. And I’ve put them together and I’ve gone seen my friend Chris Dodd, who is now the right-hand man of President Biden.
They’re old buddies from the Senate who’s in charge of rescuing Latin America from the Chinese hand. I’ve sent you two documents. I’ve put them into eight organizations that are sitting on top of $2.5 trillion and they want to touch the United States because they think they’re getting a dirty deal from the Chinese. And why? Because the lawyers that worked with me in ILD, that’s where they are. Once the ILD started sizing down, they were hired by the informal to protect them. And with all of these, and after talking to Ted Cruz, the Congress, Henry Kissinger, Clinton, all the people I met through you at a certain moment, I went to the US Embassy and asked for 12 visa so we could start the dialogue and I didn’t get them. What happens is this what you and us did when we decided to see what MacArthur had done but never really recorded, we took the Japanese revolution that worked also in Korea and in Taiwan and all over.
The place was spread out only at the eighties. Titling has been the last 30 years. The whole world is titled, but it’s not in touch with capital markets. Remember we said that it’s not enough just to have the document. So what’s interesting now is that they have no notion. I mean I’ve talked to the likes of Juan Gonzalez. He has no notion of what we did with CIPE. He doesn’t know that you’ve already got set up as usual because you’re a busy nation. You forget some of the good things you did. And as you said, there’s a cycle and you started that cycle at this end of the second World War because when Marshall did his plan, general Marshall for Europe and MacArthur for the East, the whole idea was how do we reduce sovereign powers which strengthened the likes of those Hitlers and Mussolini and the futile oligarchies of Asian countries and bring in property art.
That’s basically what you did, and you’ve done it so successfully that you’ve forgotten about it. But now these are your best allies. And what’s important is to now do the tasks that we are doing through this podcast to remind the United States that it’s got all the right allies. And with this I finish, but you keep on talking to the wrong people, your president, your president has just invited Latin American presidents, including Marxist. Lenin is, those aren’t the people he have to talk to. It’s the landowners, not the guys who dish out the subsurface rights, but the guys who control the surface rights because
Andrew Wilson (32:13):
Well, I think what you’re saying resonates a lot with me in particular, but I think with my colleagues here at CIPE in another aspect too, because we have been looking at, we call a phenomenon of corrosive capital versus constructive capital and looking at capital flows from authoritarian states that essentially arrive without rules attached and by their arrival in a country they seek, whether through corruption or other means, expedient ways of entering into the market to dig those mines, drill that oil, extract, that wealth, lend money in ways that lacks transparency and ultimately assaults the rule of law within a country because they work around the systems, not through them in order to get what they want versus constructive capital, which is what we would attribute to more sort of traditional capital flows that bring with them best practice, et cetera, et cetera. I think the big difference here as well is that with Chinese investments often comes Chinese loans and Chinese projects that are financed differently.
And ultimately it’s those folks that sit on top of the land who have collateralized assets sitting underneath them, but ultimately are being asked to pay the costs of this corruption or these deals that shouldn’t have been made in the first place. We’ve worked with local partners to study some of these issues. Half of Argentina’s debt to China isn’t considered state debt sovereign debt because the Argentinians classify it as a loan from a state owned bank in China to a state owned corporation in Argentina. Therefore, it’s not sovereign. It falls under sort of a commercial definition. So people can’t even know the extent to which their own countries are doing business with these forces. And I think we need to draw a lot more attention both to the scale of the issue that you pointed out early in your comments, but also the fact that a lot of these solutions actually lie not only with the citizens, but with the governments and the countries receiving these investments that they need to follow their own rules if we want to ensure both the rule of law and I think in the longer term democracy in markets,
Hernando De Soto (34:17):
I agree and I disagree. Let me tell you why. This is Peru.
Andrew Wilson (34:21):
You’re holding a bottle of water.
Hernando De Soto (34:21):
I am holding a bottle of water. This part [the bottle] is a subsurface sovereign owned the way it’s always been for 2000 hundred years. If you want our oil, you want whatever you find in the global south, and we’ve got most of it. You ask for a concession on this. Governments give concessions now always on top. Somebody sitting there already, that’s a surface.
Andrew Wilson (34:50):
We’re on audio here, Hernando. So I’ve got to just explain to folks, you’ve been doing a wonderful metaphor with a bottle where the sovereign rights are the bottle and the volume of liquid in the bottle, but the cap of the bottle, which is the individual property rights.
Hernando De Soto (35:02):
That’s right, now always on top. Somebody sitting there already, that’s a surface. Okay? When we met in Cyprus 30 odd years ago or more, this part was always part of this. You bought it lock, stock, and barrel.
But thanks to my participation as a principal in meetings, international meetings together with Stig and George Meany, head of the AFL-CIO, we gradually separated this from this and we said, this gets an international price, high corruption, high money, whoever gives it, and this gets bought out at the price of potatoes. What’s logical is if this is the key to getting in there, it receives an international price. So, we did two treaties of which I’m a principal. One is called 1 6 9 of the ILO, and the other one is called Fair Globalization with Indigenous Rights. And I participated with all even indigenous people in the United States, but it went much further on the basis of the free trade agreements negotiated with Latin America. This thing that property rights should be negotiated separately or can be negotiated separately from sovereign rights is now in the law in every country. And the reason that they’re rebelling against the first Chinese investment is because as opposed to 30 years ago, this is what our indigenous people are doing.
So, the delegation I was getting to from Peru, the objective of which is to go to your capital markets and say, give me the token that allows me to enter your market and sell this for the right price. And why is that convenient for you Americans? Because the Chinese have no experience whatsoever in dealing with a property right! They know how to deal with this and that’s why they have their problem. If their own farmers don’t own their land, while you can go to the Latin America and you can go anywhere in the third world and say, are you enjoying your property rights? Well, yeah, we’re doing a lot better. I gave them to you United States, and I know I have a whole title, insurance people, underwriters, all these guys don’t know what CIPE did. They don’t know what USAID did. So, what I’m saying is that the best way to do that was to create, and that’s why I’m talking about the big names.
Put the big names in one big conference place, we get the Wall Street Journal, which I’ve already got. We get my friend Steve Forbes, et cetera, to start saying: you have a comparative advantage. The Chinese are way ahead on this of you, way ahead with the sovereign. Yeah, you go to Arkansas, some guy comes in and says, I think Mr. Wilson, that you’ve got an interesting vein underneath. Do you mind if I poke around? We’ll sign this quick contract. Sure you do. Nothing happens. You’ve got a few holes in the ground. But if you find oil and you find copper, you find gold for having that cap in the United States. In Arkansas, it’s 8%. In Peru, it’s a fraction of a 1% and a lump sum. The result is the Chinese are all over the place because they’re catching this. Your comparative advantage is here.
And all we’re saying is this is complex stuff. I mean to me it’s easy. To me it’s as simple as a bottle, but for you it’s different because in the United States, your property goes from A to Z. That’s not the way it’s in the rest of the world. So, nothing like hearing it the way we did it with CIPE, which is right from the horse’s mouth. What if we bring to you the representatives not only of Peru, but every country that come in and say, you’re having trouble with the Chinese. We know how to deal with that. And then you would do what MacArthur did. MacArthur didn’t ask the emperor of Japan how he could distribute land. He went to the bottom. That’s the secret of America, the bottom up. And you keep on talking to the rich people on top instead of talking to the guys that are your beneficiaries and will understand what you’re talking about.
Andrew Wilson (40:05):
Hernando, I’m going to take us off in a slightly different direction here just as we wrap up our chat. You’re already headed there, so I don’t think it’s much of a stretch. Within the name of ILD is the word democracy, and I think you’re already alluding to how you empower people through their property rights and their ability to exercise them. Speaking from a Latin America perspective, what’s your gut feeling on the future of democracy in Peru and elsewhere in Latin America? Do you think that people see democracy as a way to exercise their power? Or if not, what is it we need to be doing to help rebuild that confidence in democracy?
Hernando De Soto (40:44):
Well, the first thing, Andrew, is we need to have a good democracy. We do not have good democracies. Let me explain many of the ingredients that we learned as a matter of fact with CIPE, because you knew how, I mean, I learned a lot, much more from CIPE and people working the system and your experience than reading books on democracy because of course you teach democracy for Americans, for developed people. I need to go to where it started right from the beginning. The known pieces are known. It’s the unknown ones that are important. So, let’s look at it this way:. you have democracy every day. Every time somebody wants to pass a law, they have to do a cost benefit analysis. It’s controlled by the of office of management and budget. For every rule that’s going to come out, you have got to do a, what do you call a consultation process.
You have to pre-published the law in case it’s kind of shady. You call it a sunset law, which means that it can be cut back at any time possible. You’ve got a series of mechanisms. We don’t have that, what we call democracy in Latin America is electing the president. Once he’s in power or she’s in power, she’s a dictator because none of the things that allow the control of the electorate are in place. You can, what do you call them? Revoke. There are no Schwarzenegger and you don’t like the way somebody’s governing California. You hold an election. Again, you’ve got all the mechanisms to hold people accountable. None of those things which you also helped installed in other countries exist in our countries today. The result is that democracy is not considered, I would say by the majority of people, the main problem, the tendency in Latin America is to go the quick route or the messianic route, somebody that’s going to get this straight.
We once even did a study to humiliate the Peruvian status quo that if you were part of a Chinese, Soviet, your day-to-day, possibility of getting with your complaint to the top was much greater than we had in our democracies. We elect our dictator if you want to, but afterwards we can’t control them. So, all of those different mechanisms, and what’s difficult about it, of course, Andrew, is that it’s not the same in every country. The Swiss have another way of controlling power, I should say creating democracy. They have seven presidents, not one, right? They have other ways of holding referendums. Latest one, I’ve been throughout Switzerland. Sometimes it’s absurd, like when the farmers managed to put tooth referendum, do cows and bulls in the country shave their corn or not? Because they have to, because supposedly they would not be so aggressive, but it’s affecting our milk.
If you get the popular opinion in everything you do, you get into the nitty gritty detail. We do not. Democracy isn’t only about elections. Elections are not even the beginning of democracy. For me, the idea of property rights and an economy working is the starting point. I never thought I would come to that conclusion, but I’m coming to it as you talk because for people to really be interested in the nitty gritty of what’s behind a good law, what’s behind, or the importance of a government that listens to me, it’s got to matter to me. It’s got to matter. And while you have an informal economy that is not plugged in to Wall Street, I don’t care what happens in Wall Street because it doesn’t concern me, it doesn’t touch me. It should, but it doesn’t. So, I think that really a great source to democracy CIPE, John Locke and Benjamin Franklin and Hamilton and all that was the fact that you needed a democracy. I mean, otherwise, the country would be run over by the Billy the Kids of the world and all your unsavory types that came with before and after the Civil War. You’ve got to need democracy. It’s not just something you hold in your heart.
Andrew Wilson (45:32):
That’s interesting because of the idea that you need democracy. I remember speaking to colleagues in India once, trying to understand why India, with all these different ethnic groups and religious groups. How did it manage to sustain democracy? And the point was made to me because without it, we can’t function that There’s just too many groups, too many interests. It’s the only thing that can possibly mediate in a vast country like India. Hernando, I’m going to thank you now for sort of taking us full circle democracies in both our names. We’re both institutions that are passionate about markets and property rights and the role of the individual in society. Thank you for taking us back in time, but also offering us some real practical solutions to some of the biggest challenges both United States is facing. I think many emerging markets or countries of the South are finding themselves in the middle of. And that’s sort of this global competition over economic and value systems that we find ourselves in. And I do nothing but wish you the best in your latest efforts and hope that we can find ways to complement each other moving forward.
Hernando De Soto (46:40):
Thank you very much, Andrew. First of all, great to see you again. Great to be in touch with CIPE. It’s a little bit like coming out of the orphanage and finding your mother.
Andrew Wilson (46:50):
Thank you very much. And thank you for joining us today for this episode of CIPE at 40. If you found this podcast interesting, please visit cpe.org for more information about our programs and share this podcast with others.
Published Date: January 11, 2024