During grad school a couple of years ago for a class focused on microfinance we read The Other Path by Hernando de Soto, the famous Peruvian economist. I really enjoyed the book. But for some inexplicable reason, I didn’t get around to reading his most famous work, The Mystery of Capital until just now.
In The Other Path – written in 1989 as a provocative alternative to Sendero Luminoso (or “The Shining Path”), the Maoist guerrilla movement which claimed to defend the poor while using terrorist tactics – he writes about the huge portion of the population of Peru that is “extralegal,” operating businesses outside the law simply because the law, mired in bureaucracy, has made it so difficult for businesses to operate legally. He contends – rightly, I think – that to understand the plight of the poor in Peru and possible solutions to their poverty, one needs to pay attention to the hidden joys and sorrows of the booming extralegal sector. Only then, he says, will poverty alleviation be possible. And only then will capitalism be its tool.
The Mystery of Capital was written in 2000 and it expands upon his earlier ideas, applying them more generally to developing contexts in general. De Soto is a capitalist, but you might be forgiven for calling him a reluctant one. In an excellent New York Times Magazine feature in 2001, Matthew Miller wrote, “de Soto reached the conclusion that the left was great on social justice but didn’t know a thing about economics.” While clearly no fan of Communism, de Soto explains the dilemma for capitalists concerned with addressing poverty:
[T]he Marxist tool kit is better geared to explain class conflict than capitalist thinking, which has no comparable analysis or even a serious strategy for reaching the poor in the extralegal sector. Capitalists generally have no systemic explanation of how the people in the underclass got where they are and how the system could be changed to raise them up.
He admits that capitalism has often been used to “exploit and conquer” the vulnerable, but warns:
No amount of ranting and raving against writing, electronic money, cyber symbols, and property paper will make them disappear. Instead we must make representational systems [like capitalism] simpler and more transparent and work hard to help people understand them. Otherwise, legal apartheid will persist, and the tools to create wealth will remain in the hands of those who live inside the bell jar.
In conclusion, de Soto writes with wisdom, pragmatism and hope:
I am not a die-hard capitalist. I do not view capitalism as a credo. Much more important to me are freedom, compassion for the poor, respect for the social contract, and equal opportunity. But for the moment, to achieve those goals, capitalism is the only game in town. It is the only system we know that provides us with the tools required to create massive surplus value.
Great post, Tim. One of the recent initiatives our founder has been exerting a great deal of energy on is the challenge of legitimate land rights in Haiti, specifically. We are now working with a few of the largest titling companies in the world to explore whether HOPE could serve in a certification/validation role of the “paper” (land title). This would partner well with some of our housing products and building designs we have begun offering to our long-time clients.
Would love to chat with you about that sometime.
Chris
Thanks, Chris! Sounds like a daunting and mind-bogglingly complicated, yet exciting and worthwhile, initiative in Haiti. I would love to hear more about that.
I’ve wrestled with de Soto’s discussion of Peru’s “extralegal” sector for a while, mostly I’m curious if its in any way unique to Peru. My inclination is that its not, that its a key factor in poverty struggles in nearly all developing nations, and that anywhere we work we must “pay attention to the hidden joys and sorrows of the booming extralegal sector.” Thoughts?
And after reading “The Other Path” and “Mystery…” (p.s. I’m also surprised you got out of Eastern without reading it.) I’ve had to come to the same conclusions as de Soto regarding capitalism. “[F]or the moment… it’s the only game in town.”
Thanks for the post.
Thanks, Michael. Yeah, my hunch is that this isn’t unique to Peru but happens in slums and poorer neighborhoods almost everywhere. Over on FB a friend working in rural Guatemala got me to thinking about whether de Soto’s conclusions apply equally to rural areas, and THAT I’m still not as sure about.
And yes, pretty crazy to have gotten through Eastern without reading Mystery… I think the MBAs read it, but I was an MA.
Dude, “The Other Path” was paradigm-changing for me in so many ways. Part of one of the best courses I’ve taken in college, hands-down.
It’s definitely a good one, Hiram. What was the class?
I’d be interested in the urban/rural discussion. I need to reread de Soto before and I can put some solid thoughts to it relating to Peru. But my initial reaction is that in many ways the rural population struggles with the same issue. One study I did in school was on access to formal (read: legal) markets in the extreme rural areas of Peru (mostly in the altiplano). Much of their income generation has to come off the books, mostly because its simply a burden to try and get the proper licensing and access to markets. So they are subsistence farmers or participate in the coca trade.
Actually, Michael, you may know the guy who raised that issue — Nate Howard with MCC in Guate, and a fellow Eastern alum. It seems that the research you mention points to de Soto’s premise being equally applicable in urban and rural areas, but I guess there’s no way to say definitively that “urban poverty is like this” or “rural poverty is like that” — sweeping generalities only go so far in being helpful. Nonetheless, I’d imagine the key factors in the lives of small farmers in the Altiplano find parallels elsewhere.