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2009 Summer Seminar Series
Back to 2009 Seminar Series
July 1
What Capitalists and Slumdogs Now Have in Common
Presenter: Hernando de Soto, President, Institute for Liberty and Democracy, Peru
Opening Remarks: Michael Yates, Senior Deputy Assistant Administrator, Bureau of Economic Growth, Agriculture and Trade, USAID
Moderator: Mary Ott, Acting Deputy Assistant Administrator, Bureau of Economic Growth, Agriculture and Trade, USAID
Seminar Summary | Question and Answer
Seminar Summary
The work of the Institute for Liberty and Democracy, which works in different parts of the world from Africa to Central Asia to Middle East to the Americas, involves trying to ensure that people—poor entrepreneurs—are able to know as much as rich entrepreneurs. How much are entrepreneurs—how much is anybody who makes decisions to put things together—in command of so many facts. It isn’t a question about information, it is about fact. The question is how do you get these facts? How do you put them in the question? Why? Because the elements that make up knowledge, the elements that would make up a fact, have one characteristic about them, which is that they are dispersed.
The Industrial Revolution was the time when the world realized cooperation among different suppliers and providers was the way to go. You look around you, and there isn’t one thing in this room that is made by one person. Everything requires cooperation. Part of how you get cooperation is that you need to know about other people who you will probably never meet in person. You’ve got to know who they are, you’ve got to be able to identify them, you’ve got to know their track records, you’ve got to know about the quality of their product. The question becomes how are you going to put all these things together? For example, it can take as many as 22 countries to make a pencil and, for a locomotive to be put together, it requires 5,000 different parts.
So, information has to be brought together to be useful. It is like building a house; you can’t build a house with your bare hands. You need tools. The question is where are those tools? If you don’t have a standardized language, how can you understand each other? So standards are very important. Up until the 1880s, noon in the United States meant when the sun was right up in the center of the sky. And so if you said, I’ll meet you at noon, you had to make sure you that you were in the same area because noon would vary five miles down, twenty miles down. So the trains didn’t necessarily arrive on time. So you standardized time.
Then, by 1888, the Americans and Brits decided that zero time was Greenwich Mean Time. If you went to the left, or to the West, you’d advance in time, one hour, two hours, three hours, and that allows you also to put lines of longitude, and you can start navigating better. With electricity you found a new way to fuel your machines, so there was a cry in the 1890s for one voltage, one plug. Standards were obviously a very important part of the whole thing that allowed your shipping to take place, and planes and trains to come on time.
And at the same time, there is identity. You take out your passport, and you have a standard document. You’ve got the facts. So identity isn’t something you carry in your body; it is something that is carried in a document. If you think about where your facts are in the United States, the facts are on papers. They are basically published memories. Everything that exists in the United States, everything is reported, and it is reported in a standardized form so that you are able to make deals with people faraway to make pencils and locomotives and put it all together.
Like all successful people, you tend to forget what you’ve done so successfully because you have just burst into something that you call derivatives, which are a form of financial paper, insurance paper on the one hand and having to do with credit on the other hand. You produce six hundred trillion dollars of this paper, and it’s not reported, and you don’t know where it is. It’s important to remember that to get things standardized on paper is crucial. We are very scared about this because we know what a shadow economy is all about. It is very hard to make a diagnosis, and it is very hard to make a correction if facts are missing.
One of the things we find, for example, is that there are conflicts over money in Africa, like everywhere else. And what happens is that it is their village authority who solves issues of conflict and then adjudicates. And we haven’t found a place in Tanzania where that adjudication doesn’t take the place of a document that reports on who really owns what, and that’s exactly where you want to be. Once, of course, it was adjudicated, it created a property right. Property rights are the result of conflicts being solved. So, we go to where conflicts are being solved. And we’ve found wherever we’ve gone that there is an atomic fact, a little piece of paper. Once you’ve got that, you can build from that. We’ve found that wherever there is a piece of land the neighbors have gotten together and actually produced a map.
And the location of the place, who owns it, who else has rights on it, are there any easements on it, are there any encumbrances, it is all there. We didn’t find in Tanzania, in the 33,000 villages, one village without a reporting office. It’s not a very reliable place. They do not have color coding, they do not have alphabetical coding, they don’t have the standardization, but at least we can see that it doesn’t matter how undeveloped and poor people’s societies are, there is a need for records. That’s another important thing for people to understand. So, it’s all in place, it’s just not brought together. It’s just not standardized.
So what we do is we go back. We start putting together with the authorities of that country what we call the extralegal law. That means to say that in every village there is some kind of a standard. But it’s got a common denominator with the standards of the other villages. And when you put all that together, you are able then to put on paper the extralegal—or if you want to—customary law of the Tanzanians, and then on the right column you get the official law.
Our job consists of making one connect to the other until we get a common denominator for standard rules that everybody agrees on and is willing to respect. Now, we haven’t really invented the formula. The formula is invented by you. The trouble with it is it was invented by your great, great, great granddad. But, then, there is a tendency to forget about that. But when you did it, you actually produced enormous changes in the world. One of the biggest changes, of course, was produced in Japan in 1945.
Before 1944-1945, Japan was a feudal empire; we know that because we had a president of Japanese origin. We have a lot of people of Japanese origin in Peru and Brazil, two countries that actually welcomed a lot of Asian migration in the course of the ‘30s. And the point, of course, is why did Fujimori and Yoshiyama come to Peru and Brazil in the ‘30s and ‘40s? Why didn’t Garcia or Lula go to Japan? Because we were richer than they were then. These guys came as gardeners and painters and cheap labor for laying down railroad tracks in places like Peru and Brazil. What happened? You go to Tokyo now, and they are 11 times wealthier than us. The way this was done was because you have, as far as I am concerned, a very few unsung heroes in the United States. One of them is called General MacArthur. General MacArthur was a big believer in property. He thought if you got the inventory, all other things stem from that. It wasn’t that he believed in boundaries to be feared. He believed that identities of things and people should be clear.
It doesn’t matter what you believe, the only thing in the world that doesn’t move is land, so you’ve got to tie it to the land, then all other information flows from that. The important thing is lock it up. Lock it up because then your identity and your facts start coming into play and then you can deal with masses of people without ever necessarily having to shake their hands. So, in the case of MacArthur, already in 1942, believing that he was going to have a victory in Japan, he set up in Hawaii—Honolulu—a team under an American, who used to work at a certain time at the State Department. This man said there are forces there. In other words, let them do it, not us. Do not come in and, you know, make it look like Manhattan, let them do it their way.
Every time you go out and say that the law and standardized rights are important, somebody says, well, how about Japan? Most of you could pick up a book on the Industrial Revolution in Britain and France and Germany, and tell them this is the way they did it, but somebody says, hey, look at Japan, they didn’t do it. So we went into the International House of Japan in a joint venture and said, in the late 80s beginning of the early 90s, we would like to know, of the Japanese, who actually did implement these reforms in Japan, starting in 1945-51? Finally after a year we were able to cluster in Tokyo at the International House of Japan the seven surviving octogenarians of the reform, and we started taking down what they did.
It’s very complex. The interesting part for us was that they had put everything into posters. When we finally had the posters, they tell the whole story. They found out that basically at the business level people were organized in informal organizations of people who were not feudal lords. All these people at a local level had a right assigned to them by the feudal lord for hundreds of years which the feudal lords respected. All the feudal lords had wanted was to collect taxes and to collect revenue. So as long as that was respected, he let them keep the records of who and what and how they inherited it. So the first thing that the agrarian reform in Japan indicates is, tell us what you own. You hear people saying, I own this; I own that. And by about 1948 the ministries of the central government of Japan had all this information, and all these assets were given to people, to corporations, and they passed from the 18th-19th century to the 20th century in one huge traumatic movement.
You know that today, for example, there is a food shortage, and you know that about only 1/3 of the land in the world that could be used to cultivate is being cultivated. Most of the rest is in Africa and Latin America, but most of it is untitled. And land doesn’t just produce; you’ve got to get roads, you’ve got to get water in, and that requires investment, and nobody is going to invest, even at a small level, if it isn’t clear who owns what. Unless you have standard acceptance of the inventory, it’s worth very little. And that’s what property value is; it creates capital.
We are concerned there is no possibility of creating capital without an asset, coming again to the derivatives. As we started looking at the derivatives the first thing they say is, well, this derivative is based on an underlying asset. We started saying, why did they say “an underlying asset”? Why didn’t they just say based on “an asset”? Well, it’s because it isn’t fettered to the asset. It’s an underlying asset. So you lost the connection, as far as we’re concerned, between the asset and the capital. That’s why when all the banks started finding out that because of the subprime bubble imploding some of that paper wasn’t worth what it was. Where is it? You haven’t been able to find it. And your government is out for $3 trillion dollars, but you still don’t know where it’s at. They’re not recorded. I mean the Tanzanians are more recorded than you. If you can’t find them, you can’t trace them, you can’t buy them. Somewhere, somehow, someone has got to identify them. So here again: no assets, no titles, no property, no capital.
We tend to modernize essentially because of your rule of law; we think that your rule of law is a fantastic system that increases facts, and the more we realize that, the easier it’ll be for the recession on your side and probably the easier to achieve development on our side.
Question and Answer
Question: Is it at all possible to create something to track derivatives or over the counter derivatives and create a derivative exchange plan that could create rights so that all debts are on the table, in terms of providing some sort of cohesion to a policy that may lead away from financial meltdown? Is it possible to create something similar to land titles?
Answer: Of course it is. The question is if there will be resistance from all those people who’ve now got derivatives, probably couldn’t sell them on the market. People don’t want to put them on paper now because they may be insolvent, so they are going to resist that. And that always happens. But it is something that I understand your government is trying to do, to be able to take account of derivatives. It’s saying let’s look at an exchange; and I think it’s something you’ve got to do simply to start getting a diagnosis of what’s going on. So, absolutely it can be done. But for that, what you need to do is find out where they are. You’ve got to be able to pass the kind of laws that tell everybody who owns derivatives that you have to report them. I mean Franklin Delano Roosevelt did that back in the ‘30s when he thought it was important to know how much liquidity there was in the market. So it was reported that most of it was not. He gave the American people a bank holiday—I think it was 20 days—to report it.
And he said to report them or otherwise 10 years in jail. And, of course, that guy reported them really fast. So if you want to do it, you can do it. The problem is, of course, what happens if you discover that nine of your principle banks are broke? That’s why some people think of nationalizing, even if it’s only for a month. Why? Because then there can be a sorting out of the good guys from the bad guys, and there’s no run on banks, and we’re going to protect the savings anyhow. So the whole question is how you can do it without producing a run on the banks and without producing a panic.
Question: We’re one of a relatively few developed countries—and even in developing countries—that do not have a national identity card, in fact we have a peculiar aversion to that, and is your contention that our social security numbers and our drivers licenses sort of function as a proxy personal identity card for the purposes of these transactions and that that is kind of working okay?.
Answer: First of all, I see that western countries, which are obviously the North Atlantic countries, are the more economically successful countries in the world. You’ve grown more in the last 60 years than you’ve grown in the previous 2,000 years. And, of course, culture does exist, and people tend to respect it. And privacy is a big issue in the United States, on the one hand; and the idea that government shouldn’t get too close is also a very American issue. You keep government away. That makes you very different than the Swedes, for example. But you do have an identity system. How else can you govern a country? How else can you identify yourself if you don’t? You use all sorts of alternative forms of documentation to supposedly avoid having a big data bank that allows government to know many details about you, but the general idea is you’ve got to pin people down. And you seem to have done it through the social security system and the driver’s license system. Yet, I understand that you also issue a United States drivers license for people who don’t drive.
Question: How do you deal with the property ownership issue, where in the case of Peru you have the indigenous people who have extralegal claims, they’re on land, an asset, that those with power want. There’s not a common interest of “let’s just legalize, standardize the landholdings.” People in power, the institutions, the legal system want those assets; they’re lacking common ground there. How do you approach that?
Answer: The first thing to understand is that, at least in the Americas, there’s a tendency to confuse a property right with sovereignty. These are two different things. There are two way to assign rights, if you want control over the earth’s surface. One of the ways is sovereignty. Sovereignty means this is the United States of America; as long as you are here, you’ll respect our laws. And that gives you political rights. Property rights are very different. Property rights mean you can be within the United States, but you own this part of the land; it’s not sovereign. You can’t decide to bring a whole new law on marriage on property. But, within that, there are a whole lot of things we can do. We can turn it into capital; we can convert it into the Ronald Reagan Building, you can make a restaurant out of it, you can make a home. And those distinctions are very important because what we have traditionally done in Peru, and it is also the case in North America, we’ve given the indigenous people, not property rights but sovereign rights, which is we’ve given them the right to run it as if it were to a certain degree like a different nation. Now there are a lot of consequences to that.
The first one that we studied at the ILD as we’ve gone through history is that we found out that sovereign right is very insecure and shaky, as compared to a property right. There’s no way you’re going to be able to defend yourself throughout history against somebody who’s your neighbor who’s got a property right and who’s got courts on their side.
Secondly, institutions that have been set up to protect the indigenous people are weak. As far as we’re concerned, you’ve got to get for the Peruvian indigenous people property rights and property rights on the subsoil. But wherever you go it is always that same issue. It’s always two sovereign people. If I have to defend my property in Peru, it’s not an emotional issue when my neighbor cuts down a tree or whatever it is, it is something practical. I’m going to take him to court. If it’s something practical, you have to deal with it like that. But the moment it’s about sovereignty, you go to war. It’s an emotional issue. We’ve got to bring in property law.
Question: Some of the initial examples you gave were based on electricity and other government-oriented forms. To what extent do you think government should standardize? And do you think governments are necessary to standardize title and property rights?
Answer: There are different mixtures. When you are talking about Latin America, you still need standard terms, and we would like to see that happen in developing countries. You have a government that is relatively weak, that sometimes can’t fund itself, and so it is a good idea to have private industry come in. Obviously, a lot of standards have come out of spontaneous generation, and sometimes it’s a lot better when it comes out of spontaneous generation.
The first thing that comes to mind is dictionaries. The first thing that comes to mind is that when my book comes out in English it is this size, and when it comes out in Spanish it is this size. And the reason for that is because you have more words in English so I can say what the words are that I mean in English. While in Spanish, I’ve got to do what they call spiraling, giving it color, giving it shape, giving it flavor, and then, of course, we’re not as precise. In our case, we’ve got to go to the Royal Academy of Spanish to get words officially approved. Somebody’s got to consolidate at some level, and obviously dictionaries are proof that government doesn’t have to come in all the time.
Question: Could you talk a little bit about what are the incremental measures for impacts that can be picked up throughout the lifetime of a particular project in one country?
Answer: To answer that question I have to answer a whole bunch of other questions. I’ll make it really brief. So far all our contracts are with heads of state. It’s because if that head of state isn’t interested, it’s a very difficult to change the laws. So, one to two years to get the diagnosis, to show government and public opinion that this is an important improvement; that most people are lacking the tools to move ahead; three years to design the reform program, and then the rest is as long as history allows it to take.
Previous USAID Summer Seminars
Notes, Q&A transcripts, handouts, and slides from previous USAID Summer Seminar are available for the following years: 2008, 2006, 2005, 2004 and 2003.
How to Contact Us
Any questions concerning the Summer Seminars should be directed to the 2009 Summer Seminar Planning Team at ksc@usaid.gov
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