By Hernando de Soto
Harper & Row
Photographs, 271 pages
These days, nearly any discussion on developing countries will eventually
turn to the ideas of Hernando de Soto contained in his book, The
Other Path. Universities teaching international economics or
development will most likely list de Soto's book as required reading;
directors of international development agencies have begun to universalize
the book's concepts; and heads of state quote de Soto in their speeches.
President Bush, in his remarks to the World Bank/IMF annual meeting
this year, was no exception. He summarized the essence of the book well
The Peruvian economist, Hernando de Soto, has helped us understand
a worldwide economic phenomenon. By walking the streets of Lima not
analyzing official statistics, he found the poor of Latin Americawho
have never read Jefferson or Adam Smithran their affairs democratically,
outside the formal economy, organizing their private, parallel economy
in a free and unregulated manner.
De Soto's great contribution has been to point out what, in retrospect,
may seem obvious: People everywhere want the same things. And when
left alone by government, people everywhere organize their lives in
remarkably similar ways.
De Soto's prescription offers a clear and promising alternative
to economic stagnation in Latin America and other parts of the world.
Governments must bring "informal" workers into the regular economyand
then get out of the way and let individual enterprise flourish.
The book and its ideas have gained currency in a remarkably short time.
It was only in 1986 that de Soto published his book El Otro Sendero in Spanish, and the first English translation appeared in early 1989.
It quickly went on the best seller lists wherever sold and now is translated
in languages ranging from Swedish to Swahili.
Why so popular? The story begins with de Soto, a mid-40s Peruvian
entrepreneur who earlier worked as an economist for GATT, as a managing
director of an engineering corporation in Europe and as director
of Peru's Central Reserve Bank. De Soto decided to find an answer
to the simple and direct question that had continuously plagued
him: What's wrong with Peru's economy? He began to seriously explore
the question and to open his mind to explanations that went beyond
the normal conjecture of "class-blaming-class" or "industrialized-exploiting-underdeveloped."
De Soto didn't have a predetermined answer in mind; he wasn't looking
for an informal economy.
But that's what he found. Side by side with the highly socialized
formal economy was an exceptionally healthy and reasonably efficient
market economy. It was the country's black market, but he chose
to call it the informal economy, a label with less negative connotations.
Since the end of World War II the major cities of Peru experienced
an in-migration of poor, mostly illiterate peasants. They came to
the cities with few or no skills and found practically no government
safety nets. Systematically, they were excluded from participation
in the formal economy by what de Soto calls the redistributive tradition.
That is, the established order held little interest in creating
new wealth and was content to reflexively serve pieces of the existing
economic pie to each other. An impenetrable bureaucracy bounded
the formal economy.
To better help his readers understand what these peasants encountered,
de Soto compares the governments and politics of Peru to that of
the mercantilists of 15th-19th century Europe. Historically, the
mercantilists sought economic welfare through state control of monopoly
rights. In the context of his book, de Soto means more specifically
a "bureaucratized and law-ridden state that regards the redistribution
of national wealth as more important than the production of wealth."
So, those who arrived late to the cities couldn't gain favored
status in the economynor any status. Worse yet, they found
no jobs, transportation, housing or even food and water.
The informals responded by spontaneously creating a market to
support themselves. It's this point that so many find fascinating.
Left alone with a pressing need for efficiency and precious few
resources, how did these people organize themselves? What was their
"natural" inclination? Without question they picked Adam Smith over
Karl Marx. They chose the market economy.
And the market economy has served them well (which also fascinates
the development professionals). Through invasion and illegal purchase
the informals acquired land, opened businesses and initiated bus
routes. By organizing themselves and voluntarily obeying their own
extralegal norms, they provided virtually adequate public services,
policed their communities and administered a system of justice designed
for the emerging subculture.
The Instituto Libertad y Democracia, the think tank de Soto heads,
offers remarkable statistics quantifying the informal sector's economic
progress and showing its contribution to the national wealth:
- In Lima alone, the informal sector employs 439,000 people.
- 48 percent of Peru's economically active population and 61.2
percent of its work hours are devoted to informal activities contributing
38.9 percent of the country's gross domestic product.
- 95 percent of Lima's public transportation is informal.
- 50 percent of the population in Lima lives in housing built
by the informals, which expands at nearly 50 times the rate of
- 83 percent of the markets in the capital were built by informal
These numbers, along with others that de Soto tracks clearly show
that the poor of Peru are finding an independent way to bootstrap
themselves. By conscious choice they pick private initiative and
enterprise to conquer their own underdevelopment and poverty.
De Soto would argue that Peru is not unlike most of Latin America
and a large portion of Third World countries; they all have informal
economies. But they are stuck with variations of long-ago inherited
mercantilist systems. Development possibilities are slim until market
economies are legitimized rather than seen as problems themselves.
This notion stands traditional development thinking on its head.
De Soto calls The Other Path a political book. I'd
say political economy, written not as an abstract economist-to-economist
treatise that only recommends further study, but rather as an insightful
investigation that may well, as one reader put it, serve as a "virtual
manifesto for laissez faire capitalism in the Third World."
Of importance is that de Soto is himself an activist. That sets
his work apart from the standard fare of development studies. He
takes a personal stand in the government and politics of Peru and
has been called upon to advise other countries of the region. He's
not content to slap another set of ideas on the table and see if
anyone's interestedand then move on. No, he's working for
constructive change as he sees it. It's much more than a book-length
speculation; it's serious business for de Soto.
In the last chapter of his book, de Soto lays out his conclusions
and an outline for a course of action. They're somewhat predictable,
but left unsaid for those who plan to read the book. How are the
lingering remnants of mercantilism handled? Who supports or opposes
a populist-based market economythe left, the right, neither
or both? What are the chances of a violent outcome if formal and
informal can't synthesize?
At an historic time when Communist countries worldwide are rethinking
their political philosophy and economic orientations, de Soto's
book seems to be on the top of the stack for consideration.
The Other Path's many lessons deal mostly with developing
countries, but it is only natural to relate them to one's own local
economy. Tracking the Ninth Federal Reserve District's regional
economy as we do, it's obvious to see that informal economies exist
here also. Our Midwestern versions are substantially different,
of course, because of the size, the welfare system altering incentives
and the national capitalist (not socialist) orientation. But nonetheless
we have economically disenfranchised groups who struggle to improve
themselves. Where ethnically identifiable, they are, among others,
recent Southeast Asian immigrants and Native Americans.
For these local informals, the book's ideas could be important
if only to highlight the economic potential of finding market-based
solutions; and expanding the circle, it's a safe bet that its pages
could inform (in some small way) those who work on the larger problems
of America's inner cities.