Political pressure kept Hernando de Soto's family out of his native
Peru when he was a child, but his father insisted that Hernando
and his brothers return to their native country each summer to stay
connected with their homeland. As the economist and president of
the Institute for Liberty and Democracy (ILD) in Lima explains in
the following interview, it was this experience that caused him
to wonder why his European friends were wealthier than his Peruvian
This question, in part, motivated his economic studies,
but economic textbooks did not provide adequate answers, and
so the question stayed with him throughout his career until,
about a dozen years ago, he began his own quest to answer
it. His first book, The
Other Path, investigated the informal nature of
much of the Peruvian economy and argued that a viable market
systemcapable of generating wealthwas operating
under the nose of the government. His latest book, The
Mystery of Capital, based on five years of field research
by the ILD in developing countries, argues that five-sixths
of the world's population holds the answer to its poverty
in its own handsits propertyif only this property
were recognized by government and legal authorities.
Solving the mysteries of capital, as this interview attests,
involves reflections on U.S. history and of great economic
thinkers, as well as references to barking dogs, bell jars
and assorted Hollywood legends. All leading back to de Soto's
fundamental query: "The question of why these different countries
are more prosperous than the others has always been in the
back of my mind. I find it one of the most intriguing questions
De Soto's international experience has allowed him to consider
this question from many perspectives. Born in Arequipa, Peru,
in 1941, de Soto did his post-graduate work at the Institut
Universitaire de Hautes Etudes Internationales in Geneva.
He has served as an economist for the General Agreement on
Tariffs and Trade, as president of the Executive Committee
of the Copper Exporting Countries Organization (CIPEC), as
managing director of Universal Engineering Corp., as a principal
of the Swiss Bank Corp. Consultant Group and as a governor
of Peru's Central Reserve Bank. He was also President Alberto
Fujimori's personal representative and principal adviser.
The ILD, the organization that de Soto currently leads,
is a private, nonprofit group whose efforts have been recognized
What my definition of capital is, for the purposes of this book, are all those values that are hidden in assets and that come forth when property is well defined.
It's much more interesting to talk to dead Americans than to live Americans, because dead Americans two centuries ago were facing the same problems we are now.
Region: You say in your new book, The Mystery of Capital,
that the essential meaning of capital has been lost to history. So, let's
begin by defining our terms, and one term in particularcapital.
de Soto: What I take from the word capital is a notion
of value, very much discussed by classical economists throughout
the 18th and 19th centuries, going all the way from Adam Smith to
Karl Marx, who said it was the most important part of the economy.
And what is interesting, and that's why I got back to the 18th and
19th centuries, is that they insist very much that capital is not
money. They define it as not money. They say it can be represented
by money and captured by money in certain given circumstances; which
is, of course, very familiar to us Latin Americans, who have many
times throughout history produced tremendous inflations thinking
that wealth was money. What my definition of capital is, for the
purposes of this book, are all those values that are hidden in assets
and that come forth when property is well defined.
There are certain values in goods that are in the physical assets
themselves, or that are in the value ideas themselves, but that
gather surplus value when they are correctly defined within a property
system. So, what I say is that a lot of the capital valuethat
additional surplus value that you Americans or Europeans obtain
in your market economyis not available in developing countries
because it isn't captured in descriptive form.
It's actually somewhat more complex than that, but the general
idea is that there are two types of knowledge: knowledge by acquaintance
and knowledge by description. When you're acquainted with a physical
object, you get a sense of part of its value. But, when an object
is defined in such a way that things about it are captured on paper,
and knowledge about it is organized in such a way that it is user
friendly for agents in the market, it develops additional value.
Typical examples are the Latin American state corporations that,
before being privatized, had a value on the stock marketlike
the Peruvian telephone company, for example, which had a value of
about $100 million. But when, after a year, we had created titles
for these companies and they were organized within a body of law
that made sensebecause that body of law allowed them to define
the asset better; it defined economic attributes of the assets that
were not visible; it defined what markets they could have; it defined
clear procedures for settling disputesthe value of the Peruvian
telephone company was increased enormously. It was sold at $2 billion20
times the original price.
So, what we're saying is that when things enter the world, their
description within a property system brings out surplus value. And
the capacity of something to bring out surplus value, and therefore
be used as a productive agent in new enterprise, is our definition
of capital. Capital is the surplus value that can be obtained from
an asset or from labor for productive purposes by defining it within
a property system.
Region: So, we may be getting ahead of ourselves,
but if capital is misunderstood, it's also likely misunderstood
in the West, where it works. So, is one of the mysteries of capital
that it can work despite the ignorance of those who benefit from
de Soto: In other words, how can that be?
Region: Yeshow can this be?
de Soto: Well, for example, people were navigating using
compasses 500 years before anybody discovered the theory of magnetism.
And most people who were involved in animal husbandry knew about
genetics before the theory was put into place some 700 years later.
As a matter of fact, theory is our capacity to understand many of
the things we do and put it into an intellectual context.
A perfect definition of capital would, of course, go beyond what
I'm talking about. But a lot of the surplus value that you are able
to obtain from the assets you have created, or the transactions
that you make, is due to the fact that they can be put together
in property documents. To start off with, for example, your markets
as opposed to most of our markets, work by paper. When you go to
the Chicago Commodities Exchange, what's being traded is paper that
is about assets. You go to the New York Stock Exchange, it's the
same thing. When you go to a Palestinian market, Egyptian market
or Peruvian market, it's one cow at a time and it's one pig at a
time, without the papers involved. By putting things on paper through
representational devices, you get an enormous amount of additional
surplus valuewhat Marx was always looking for. Where does
this surplus value come? Marx was always asking: Where's the hen
that lays the golden eggs? And then he said, well, that hen that
lays the golden egg is the surplus value that is extracted from
labor by capitalists. Terrible thing, huh? Adam Smith said it's
a wagon way through the air that is structured by bankers as they
And what I'm saying is that what they were both referring to is
property paper, basically, because when you get this you are capable
of adding an enormous amount of additional value. In the West you
can trade enormous amounts of goods, physical goods. I mean we can
trade a cow at a time in Peru and in Egypt, while in the Chicago
Commodities Exchange, you can trade 10,000 head of cattle with just
one document. So, it has economies of scale built into it; because
of the precise descriptions it cuts transaction costs; because of
definitions, it lessens the risk.
So, I don't doubt that capital is many things. I mean, somebody
will probably even say the Pyramids of Egypt are capital because
they're tourist capital. Sure, there's that broad definition. But,
what I'm saying is that what characterizes your kind of capital
is the fact that you can document it and you can insert it into
a broad legal system. Capital is that value, that additional value,
that comes from things that are duly titled.
Region: One more term, and you touched on it in your response,
and that is property, which you describe in your book as pure concept.
Please describe this understanding of property.
de Soto: Sure, let me try. [At this point, de Soto fishes
an apple out of his briefcase and places it on the table.] This
is my apple, obviously, because I brought it out and there are three
witnesses, including yourself. Now, it's my apple, but nothing on
it says Hernando or de Soto or from Peru. Therefore, property is
not the physical object itself; it's something about the physical
object. Basically, it's a contract between you and me and our witnesses.
It's a social contract.
Now, you have a lot of assets in developing countrieswe
probably have more oil, we probably have more copper, we probably
have more uranium than the United States and Western Europe put
togetherbut when I say we don't have property, what I mean
is that we don't have social contracts defined well enough so that
the title, back to our apple now, that picks up the property concept
about the apple does not allow us to increase the value of the apple.
Okay, remember what I said about the telephone company, that it
had a value as a physical asset? I mean, we brought in experts who
said how many bricks, how much cement was in the Peruvian telephone
company before it was privatized. How many towers, how much wire?
We never got more than about $100 million. But when we got a title
and finally sold out for bids, it was worth $2 billion, because
many aspects about the physical objectswhich are not apparent
by looking at themgot organized in a property system, and
allowed them to increase enormously in value. Property, then, is
For exampleenergy. You've never touched energy and you've
never seen energy, nor has any North American nor has any Peruvian.
But it's a concept, and because you have that concept, it allows
an engineer who looks at a body of water to understand that, aside
from its physical nature, the weight of the body of water, if it
can be allowed to drop, to tumble out, can be converted into kinetic
energy. And when it makes the paddles of the turbine turn, it converts
it into mechanical energy. And as this one goes through transformers
and a generator and heats up the wire, it converts it into electrical
energy. But nobody's touched energy; nobody's ever seen energy,
but it's a very useful concept. It allowed Einstein to look at a
brick of plutonium and understand that, aside from the plutonium
inside, there were a lot of other potential things that could be
This notion of capital, very similar to the one of energy, was
one that was used by the classicsfrom my reading of themto
indicate that there is a potential value in all things, and that
this value can be revealed or used provided we organize things adequately
in our minds. Notice how capital is like energynot realizable
physically, but realizable as a concept. And what I try to say in
the book is that what allows you to obtain much more capital value
or extract more additional value from all the assets you have, and
allows you to cooperate in this division of laborwhich is
the market economyis because you are able to organize concepts
about assets in property documents.
Whether you realize it or not, by creating a property system,
you end up creating a system that goes beyond defining ownership,
and it becomes a system in which you transfer value. And that's
why when you see images of a capitalist market it's not about people
working with their handslike these big Soviet paintings of
people laboring and moving monkey wrenches aroundit's about
people moving paper, moving descriptions of assets around, but very
secure ones within a body of law that allows you to extract hidden
But many of the things in the world, like Hayek says, are developed
for one purpose and they end up having additional functions attributed
to them. And these additional functions create wealth. That's one
way of describing capital, getting back to our original term.
Region: Any more on property?
de Soto: Yes, an American philosopher named Daniel Dennett
uses a helpful concept. He says human beings are continually creating
prosthetic instruments of the mind, like music. I mean, we wouldn't
have all of these problems with Napster if somebody hadn't invented
musical notes that you can capture. And writing captures other things.
Symbols allow you to capture other things that you can float through
the Internet, but if you hadn't put in the symbols in the first
place, you couldn't pass an apple through the Internet.
The whole capitalist system creates value because, by describing
physical things or assets, you end up not only just getting juridical
precision, you also end up getting additional aspects of value,
which is why you're able to produce much more than we are. That's
Region: So, people who equate capital with money are clearly
de Soto: Well, how did the first bank get started? It started
not because there was somebody like Scrooge McDuckyou know,
Donald Duck's uncle who had a swimming pool full of money that he
could use one way or another. It started with people who had certain
assets and had certain contracts that were about assets, and they
were able to paperize them adequately with proper backing. And they
went to other people and asked: Can you fund me? And these private
bankers started creating their own bank notes.
Property led to the creation of credit money, not the other way
around. There's a general feeling that first of all you need the
money, that we're poor countries so we need your money. But, in
fact, we could create our own value of money if we had property,
because on the basis of property you create all the discount mechanisms
with which you can generate solid money. And we think that's a part
of the economy that has not been well studied. That's why I like
going back to Marx and to Adam Smith, because at those times the
system was just being born, and all of these things were much clearer.
Today, they make very little sense to a Westerner who's already
within a system that's humming, and you don't know whether money
or property is the chicken or the egg. But, from our point of view,
it's very important to have a clear understanding of this, because
it will tell us how to structure economies in our political system.
You know, my continual problem in life is that for the problems
I face in Peru, where I work, and in other parts of the Third World,
it's much more interesting to talk to dead Americans than to live
Americans, because dead Americans two centuries ago were facing
the same problems we are now. I look at many of your jurists, for
example, and if I mention the name Reynaldo Noyes, does it make
any sense to you? But, you know, this man wrote 150 years ago and
what he says is just so relevant to what we're doing.
Region: This is a good point to talk about U.S. history
and the comparisons you make between pre-colonial and colonial U.S.
experience and present-day Latin America. This strikes me as an
eye-opening way for Westerners to think about the problems today.
de Soto: There is something about early American history
that's very similar to us, which makes me say in the book that you
were once, of course, a Third World country. And, therefore, it's
very important for us to find out how you got out of that mess.
And the idea behind it is that the very notion of nonfeudal property
is born as a result of large migrations, and people decidingand
it's part of the Industrial Revolutionthat they're going to
appropriate certain assets whether the law agrees with them or not.
Whether it's common law or it's statutory law. And they break the
law in massive numbers because those who have rights, which are
patrimonial rights or feudal rights, are a small minority who are
obviously abusing whomever doesn't agree with them. That's why a
great part of the story of the United States from the 19th century
is basically disorder. In different parts there are different squatting
orders, there are different property orders, and what's interesting,
of course, is the study of your preemption acts. These are the different
acts of Congress during dozens of years before the Homestead Act,
acceptingat the endthat the spontaneous creation of
property rights by squatters is the source of law from here into
And one of the areas, of course, that's important in this discussion
is California. When the Gold Rush miners came around and made their
claims, they ignored Mexican law. And you Americans didn't even
have very good mining law. So, basically, they took their miners'
claims contracts and built them into the kind of property and mining
law which today rules the United States. You didn't import it from
Switzerland, you didn't import it from France, you grew it from
the bottom up. In other words, peoplelike this apple, where
we just created a social contract that says it's minein the
United States, once they saw and became acquainted with new assets,
started creating social contracts around their relationships and
the relationships of these assets on which you could build a system
which everybody today believes. Because it came from the bottom
So, we are exactly in that stage now, from Russia to South Africa,
where written law says one thing, but what people are doing on the
ground is completely different. And when that happens, like it happened
to youyou had a common law imported from the United Kingdom
and it wasn't working. There was Clint Eastwood shooting everybody
up and Hopalong Cassidy shooting everybody else up and it wasn't
working. You had to structure and build a new law, which is what
you did throughout the 19th century. And, what we're saying now
is that everything we import from Europe is also outdated. It doesn't
work. Because when we bring out the figures, we start finding out
that 80 percent of the assets in Egypt are not within the legal
system, which is pretty much the same number that you've got in
Peru and Venezuela and Mexico.
So, the time has come to make the law jibe with reality so that
it helps us organize reality and obtain capital value from things.
And what I'm saying is that there are strong parallels not only
between when you were a Third World country in the United States,
but when Europe was also made up of Third World countries. And what
we try to do is find out how you jumped and stumbled from one false
solution to one good solution over time, and find out how you did
it over 200 years so we could shorten that period to two or five
years. We know what worked and we know what didn't work. We know
that when you started organizing territory on lines of sovereignty
and giving away to your Indians, it doesn't work. People eat other
people's sovereignty. Property rights, those are more respected.
Region: How tight is the parallel? That is to say, the
United States was newin the sense that the Europeans were
relatively recently settledand so you didn't have generations
of squatters or generations of other problems or issues to resolve.
May it have been easier for the United States, given its relative
newness, to pull that off?
de Soto: We're just as new. I'll tell you why. The property
rights problems come to us because of large migrations. In other
words, the majority of the citizens of Third World countries were
disbursed throughout the hinterland 50 years ago. Since then, 30
years ago even, Port-au-Prince has grown 16 timesthat's pretty
new. Guayaquil has grown 11 times, that's 10 times more new. Iquitos,
in my country, has grown something like 16 times in 30 years. That's
something new. So, it's the same old people, but in a new situation.
And that's also what happened in Europe. It was also when Oliver
Twist came to town that forced the British to define property rights.
They didn't have to do it before because before it was very simpleit
was royalty and blue blood that owned everything. But when Oliver
Twist and Fagan came to town, they wanted their share of it. They
weren't content with the poorhouse so they had to redefine the system.
These social pressures and migrations have created that newness
that was available to you in the United States. It's a different
social consensus in people that have passed from one social order
The important things probably are the notions of the Industrial Revolution.
When asked to define the Industrial Revolution, the best historians
I've seen have defined it not as industry, but rather as a result
of migration toward a new ordera new order in which people
are now learning to work in a context of a great division of labor.
In other words, in the old days, like in the United Statesand
the films are there that show John Wayne in his place, and there's
a lady milking the cow, the kids are taking care of the crops and
his brother-in-law is building log cabinsno specialization,
no division of labor. Every family basically builds its own home,
takes care of its own house, makes it own cheese, takes care of
its own crop, cuts its own wood. The Industrial Revolution is the
movement from independence for things on a small scale, to things
on a large scale. That's what creates the newness. Not the emptiness.
Region: So, back again to the idea of things bubbling up
from the people, if you will, of social contracts begetting law;
this suggests, at least to me, that democracy is the key. But we've
had democracy, or attempts at it, in Latin America for a long time.
Why hasn't that worked? People always wanted this to work, I'm sure,
de Soto: Absolutely. It's because our capitalism is a fake
capitalism, and our democracies are fake democracies. Let me start
by giving you a couple of examples. Your congressmen are elected
in district elections, right? There's district number 32 in New
Jersey, there's district number, I don't know, 18 in California,
some come from John Wayne County; in other words, the way you do
your elections, your congresspersons have to be popular back home.
In district number 32, they've got to be representative. So, if
the district has many Hispanics, they better cater to Hispanics,
and if it's mainly Jewish, they'd better cater to them. Whatever
it is, they better cater to what the needs of that sector are. If
they want to get elected, nobody's going to save themneither
Clinton nor Bush. They've got to go back home and mend their fences.
In Latin America, in our democracies, congressmen don't get elected
by district. They get elected by party list. So, Fujimori or Hugo
Chavez are candidates who represent their party list, and you vote
for it as a whole. Now, it might just look like an expedient way.
You know, we've got literacy problems, and so on, but in fact, what
it means is that the allegiance of the congressmen is not to the
people who voted for thembecause it's the nation in general
that voted for themtheir allegiance is to whoever picked them
for the party list. And the result, of course, is that the congressmen
end up doing what the president wants and that's it. Otherwise,
they have no more political life left and there is no traditional
campaign to help.
So, if you start looking at our different institutions, in theory
we've got the same thing you doan executive branch, a legislative
branch, the judiciarybut when you start finding out who's
accountable to whom and who's accountable to what, it's still the
old feudal system. It's still kingship. The president is king. He
can do and undo.
Region: The answers are political then, in part?
de Soto: Oh, absolutely. I would say the source is political
because at the end, it's the political powers that create the rules
of the game. We know that a market economy is about the rules of
the game. It's like a football game, you take away the rules and
there's no game anymore. It's not enough just to have a couple of
posts. As long as you don't have rules, you don't know if each team's
going to have 11 or 13 or 14 players. Can you make the goal with
your hand? Can you do it with your foot? Can you do it with your
head? The rules are the gamethat's the market.
And what I'm trying to say is that capital is also law. And since
law is basically rated by the political system, yes, at the end
it's a very political matter. What you've [in the United States]
got is good politics, and it should be of no surprise that all the
countries that actually have good politics, and democratic politics,
are all the countries that are wealthy.
Region: On that note: Much work has been done lately on
the question of why some nations are rich and others poor. How does
your work fit within the context of this broader debate?
de Soto: I understand that what we're doing is a contribution,
of some sort, to that debate. And why do I understand this? Not
because I have read everything else that's been publishedI
basically work in the fieldbut simply because of what some
friends tell me. Like when Ronald Coase got his Nobel Prize and
he was in Tunisia, and they asked him who he thought was doing the
most sophisticated work now in institutional economics, and he said
these guys from Lima, Peru. So, we know we're doing things that
are useful, but not because I read all the books about this other
work, but because other people who look at us say so.
So, I don't think that anybody's got the magic bullet to development.
I've been criticized for writing the book in the magic bullet sort
of sense. I don't believe that, I don't pretend to; it's just my
way of putting an argument together and making it more exciting.
I don't pretend to have all the answers, but I think I've isolated
a very important phenomenon, which is the important role that property
law can playa crucial role that it plays. Does that mean everything?
No. It's like when people start saying, aren't there other things
like culture? And I'm sure that's going to be one of your questions;
if you want I can save this for later.
Region: It's certainly one of the questions that's often
asked about your work, and we might as well address it now.
de Soto: Well look, I brought something along and you can
describe it. [De Soto retrieves a stack of laminated paper, about
six inches high and attached end to end, so that when pulled apart
forms one long chain.] One of the things we worked on for President
Mubarak was to illustrate, for him, the power of law, in its simplest
form. There are a lot of bakeries in Egypt because they've got free
flour subsidized by the government. So, we said, we've been working
in your country for a year, and we've infiltrated a few bakeries,
because it takes time to gain their confidence. How long does it
take to incorporateto get your license to operate a bakery?
So, we managed to make a legal history.
It takes lots of months to get the confidence and then incorporate.
This is 40 yards long, and it indicates that with a lawyer, it takes
you 549 days, working eight hours a day, to get a license to operate
a bakery, aside from building the bakery, putting in the ovens,
training the people and so on. Without a lawyer, it's about 650
days. And to get a title on a house in a sand dune in Egypt, it's
17 years, and in Peru it's 21 years. And in the Philippines, it's
54 years. So, maybe these guys with all the cultural arguments have
got a point.
But let's take this stuff out of the way, and then let's have
the discussion to find out whether people are more culturally ready
to do certain things in certain parts of the world for ethnic reasons
or inheritance reasons or whatever it is, or whether it's just that
you were lucky enough to have ancestors that built a good legal
system and put the seeds inside for a good legal system. I mean,
there was a time in America when you and I would have preferred
to be living in Mexico City or Lima, than in Williamsburg, I assure
you. So in different parts of different worlds, different cultures
have stumbled upon easy solutions.
My feeling is that culture is something that you can't get your
hands around. It makes for good writing; you're going to get a lot
of readership; it allows a lot of cultured people with lots of anecdotes
to put them in. If you're white and Anglo-Saxon, it makes you feel
real proud, but I can't get my hands around it. What I do find is
very objectivenonsubjectivereasons why people have a
hard time having flourishing businesses and trading wealth. Let's
get that out of the way, and then we'll just find out which culture
is superior to the other one. Now, of course, you can come back
to me and say: Ah, but law is part of the culture. Okay, but when
you find a useful way to grapple with culture, I'll be very grateful.
Region: If culture were an issue, wouldn't it be the case
that those coming to a Western country from one of these other cultures
would be unable to deal with their new economy?
de Soto: That's it.
Region: But that's certainly not the case, is it?
de Soto: That's not the case. You found it out with the
South Vietnamese, who were an impoverished bunch of Chinese Latinos,
sort of, when you were fighting the war in Vietnam, and they are
extremely productive today. And all these whiz kids from Asia, and
all these Peruvians who wouldn't stop at a red light in Lima, who
stop at red lights in Miami. Absolutely. I mean, ask the Europeansall
these Turks coming into Germany, and all these Portuguese and Yugoslavs
and Montenegrins coming into Switzerland.
I'm not saying that culture doesn't exist. I mean, I go to Paris
because I like to change cultures once in a while, and I like going
to a Mexican island because it's a different culture altogether,
and that's why I like traveling. But to come down and say that this
culture is more prepared for one thing than another, I think, is
a tall order. It's a tall order and it's unfair, and it predisposes
people to do the wrong things.
Among other things, heads of state can't get their hands around it
and they say look, it's cultural, it's wishy-washy; so the president
of the Latin American Republic says: The poor? Let my wife take
care of them.
I can see two years of debating North Americans on this issue
of culture, but it's not going to get us anywhere. What's going
to get us somewhere is getting good law and a good order that reflects
the culture. That, I agree with. I can capture culture through laws,
but when you talk to me outside this context, it's good debate.
We'll give each other bloody noses in different American universities
but it doesn't help you. It doesn't help you develop.
Region: It hinders development?
de Soto: It hinders development. It's unavoidable that
this will be the subject in the United States, because the United
States is very gung-ho on culture, very gung-ho, and I can understand
it. If you're born on 42nd Street to 45th Street in New York, it's
a different culture than down here, and so on. I understand all
that. But when you try to raise the issue in Latin America, or when
I speak in Egypt, people don't take culture seriously. It's a university
subject. They don't take it seriously.
Let me tell you, everybody was saying, oh, it's going to be very
difficult for you Peruvians to work on these issues in Egypt because
the Muslim mind this and the Muslim that. But when we came over
and we said look, the fact is that the poor Egyptians own $241 billion
in real estate outside the legal system, and you've got 17 years
of red tape blocking them from good property law that gives them
credit, no oneI haven't found one Egyptian who came to work
for mewho said, you are touching my culture, man, get off
it. Nobody. But in the United States, I can see myself going to
universities and 101 gringos with freckles on their face saying,
ah, culture is the thing. I have a feeling that culture is your
culture. That you've given, in your culture, much too much importance
to what you can actually do through culture.
Region: Tell us the barking dog story, the metaphor.
de Soto: That's about culture too.
Region: Yes, and it gets to the nub of the point.
de Soto: It's a good metaphor. I'll tell you how that came
about. My other book, The Other Path, was written for
Peruvians, but I was amazed when it spread beyond Peru to all of
Latin America and became a Latin American best seller. And then
it started going to other developing countries, and one of the other
countries it went to was Indonesia. And I was also thrilled because
my publishers in Indonesia were the extreme left-wing press, which
I thought was interesting.
So, I went with my wife to the other side of the world. And one
of the reasons I went there was not only to see what Indonesia looked
like, but specifically to go to an island called Bali. Because every
time I talked on the plane with somebodythese people are very
well traveled, and travel with a continual sun tanI would
ask them where they liked to visit the most. Everybody always says
Bali. So, I went to Bali after having presented my book.
And when I was in Bali, your ambassador to Bali called me and
said that Suharto and his Cabinet would like to see me if I'm available,
because they know we're doing all this work on property rights in
Peru. So, I went to see them. And they said, don't talk to us about
the virtues of property; we know the virtues of propertymost
of them were, as a matter of fact, Ph.D.s from Berkeley and UCLAwe
want to know how it gets done, because we figure that 92 percent
of our people don't actually have property, they just have possessions.
But start off with something concrete. How do you know who owns
what? That was the concrete question. In other words, you've got
all these masses of people; how do you warrant a property type in
a systematic way to 160 million people? You need systems.
And so, if I had to give them a long-winded reply, which means
putting out my flow charts, it would have been impossible and I
would have lost their attention. With politicians, you lose their
attention very quickly. So a metaphor came into my head. And I said
look, I've just been in Bali, that beautiful island, and all I've
done during these 16 days is walk up and down Balibecause
that's all you can do in Bali. It's got these rice fields and these
palm trees and these pagodas, and I just kept on walking with my
wife. We always knew when we changed properties because a different
dog would bark. Therefore, all the information you need is in the
hands of Indonesian dogs. So, get the Indonesian dogs organized.
And everybody understood it. And then, of course, one of them said,
"Jukum Adat," the people's law.
Basically, wherever we go, we find the symbol of the dogs barking;
people have agreed on some form of law on how they're going to relate
to each other regarding their assets. And what we do is we try to
build up a legal system of property that is based on the realities
already on the ground. In other words, if at this moment there was
a huge earthquake in Washington, D.C., and we find out afterwards
we were the only four living survivors and we had to share all of
Washington, D.C., among ourselves, we'd make a property rights agreement
pretty quick. Either we'd agree to govern the whole thing jointly,
or we'd split it up into four.
And that's what happens with people, they make agreements among
themselves. And they understand these agreements. They have invested
in them over a long period of time. And we saw that this is basically
what you did in the 19th century all throughout the western United
States, and this is pretty much what occurred also in central Europe,
but it occurred many years ago. So, we try to reproduce that process
very quickly with computers in the 21st century. So, that's what's
behind the barking dogs.
In other words, you don't go out and copy other people's legislation.
You can't take other people's rules and bring them in. You can get
inspired by the principles, but you basically have to build them
from the ground up. And that's why your democracy works so well,
because it's built from the ground up. It's adjusted from the ground
up. It always takes into account public opinion.
Region: So, to give property value, to create capital or
live capital, as you describe it, where it doesn't exist now, you
don't write the laws from the top and hand them down; rather, you
go out and see what social contracts, if you will, already exist,
and write the laws from reality?
de Soto: On the basis of reality, yes. That's what you
do. As a matter of fact, I forget who it was, but there were common
law judges who described four centuries ago what the law was. And
they said law isn't something you build; law is something you discover.
You can take a state cooperative, for example, which is what we
did in many parts of Peru, where the left-wing military government
had actually organized a great part of the countryside in state
cooperatives. They had taken indigenous communities and created
state cooperatives managed by government bureaucrats. And when we
went there to title them, we knew that they had no sense of property
in the traditional senseit was like a salad bar. You had kibbutzim
in there, you had indigenous communities, you had private parties,
you had hippie associations; every way of organizing property was
there. And if you wanted, you could combine or recombine the notions.
We said here's the menu, you choose. The important thing is you
come within the law. That's all. In other words, you're going to
create property rights and once you're in those laws, you can change.
But it's a legal processit doesn't have to be a revolution
anymore. We want you inside the lawin systems. And we'd come
back six months later and they had then created their own barking
dogs, even if they didn't have a tradition.
In other words, you don't have to have customs over many years.
If somebody has been given six months to decide how the four of
us are going to hold 600 hectares, well, under no pressure we would
do it. If we've been given three months, in three months we'll make
the decision. And because we'll sweat it out, it'll be a strong
one. The important thing is that we agree on it, and that's what
gives it legitimacy, and that's what allows it to grow. And everybody
knows where the starting point is.
Region: I want to make sure I have a chance to ask you
about yourself, so please tell us how it is that you came to decide
that you were going to spend your life thinking about these sorts
of questions and worrying about these sorts of problems.
de Soto: Well, the opportunity to do this only came about
15 years ago. I spent most of my life in private business. I ran
continental Europe's largest engineering company, and I financed
projects in hydroelectric plants and nuclear plants worldwide. That's
what I did before, and I continued to do some work in the mining
For political reasons, I was raised outside Peru, but I visited
Peru every year. My father called it the Peruvinization of the boys.
You have to go back to Peru so as not to lose your Latin American
culturesupposedly, according to my father, who was very stuck
on Latin America. He was very proud of being a Latin American.
So, I would go to school with my American friends, my European
friendsI picked up some of your accent thereand I'd
go back to Peru. And when I was in Peru, I think it was about the
age of 17, it all of a sudden dawned on meafter living in
both places, nine months in Europe, three months in Peru from the
age of say 5 to the age of 17that I came from a poor country.
We rode a lot of horses and mules in Peru, and in Switzerland
we rode bicyclesthere were these types of differencesbut
with the people there was something you could distinguish, one from
the other. So I said, well, why do my cousins come from a poor country
and my friends in Europe from a wealthy country?
And so, that's what made me curious, and that's why I kept on
reading most of these books. I probably studied economics just to
find out what the ingredient was. And then I started seeing how
the formulas included stable money, fiscal equilibrium, privatization
and so forth, and yet the changes remain. So, I thought that most
of the differences must, therefore, not be things that are visible.
But to analyze things that are not visible requires a lot of time,
and it requires a lot of time not locked up in an ivory tower, but
actually doing things on the ground and seeing where you fail and
seeing where you succeed.
So, when the Shining Path became prevalent in Peru, and there
was space and financing to be able to take time off to see how reality
did work, and to try to pass legislation in Congress, I found a
golden opportunity. And afterwards, it got so exciting, of course,
that I even stopped watching Schwartzenegger and suspense films.
Life itself was more exciting, and now I'm stuck in it and I can't
let it go until the mystery's solved.
It's just very exciting, of course, and it's always been in my
head. I have friends in America and Peru and EuropeI mean,
I've got Italian friends and they're very different from my Swedish
friendsbut there's nothing in that difference that indicates
why some are more prosperous than others. So, the question of why
these different countries are more prosperous than the others has
always been in the back of my mind. I find it one of the most intriguing
questions to consider. And The Mystery of Capital is
taking a stab at it.
Region: Let's talk about another metaphor that you use
in your book: the bell jar, wherein the wealthier people of lesser-developed
countries livethe "legal" residentswith everyone else
outsidethe "extra-legal." What is the incentive, if any, for
those in the bell jar to support change for those on the outside
and, in effect, let them in?
de Soto: What happens is this: If you document it well,
in the worst of cases you win over their neutrality. In other words,
if you document that 30 percent of the country's been taken over
extra-legally, and you tell those within the bell jar that those
extra-legals are never going to give it backyou can call for
compensation, but it's never going to go backand if you don't
settle this property rights issue, they'll take over 60 percent,
then 90 percent. So, let's deal with it now.
If you're able to articulate a clear image of what's happening,
and you tell them how this happened in the United States, and this
happened in Japan when they destroyed the feudal system, they will
understand. And the smart guys are those who settle fast and quick.
Because the sooner you get a property rights system, the sooner
those poor people will actually be on your side to protect property
rights, because otherwise they're going to be squatted upon as well.
It isn't a question of claiming for justice. It's just the same
situation the Europeans had 200 years ago and the Americans had
150 years ago. So, that's the political reality. Settle it, then
those within the bell jar will do it. They won't do it with enthusiasm,
but they won't resist it. But that means that you've got to bring
across a strategy. You've got to talk not only to the barking dogs,
but also to the elites as well, and settle their issues.
Region: Given your prescription, what is one country that
looks promising for the near future?
de Soto: In the Third World?
Region: Third World.
de Soto: Probably Chile. Because, you see, they've got
a consensus. They've managed, in spite of everything, to work up
some kind of consensus. They've got a social contract going on.
I mean, the left and the right have agreed that they want the Washington
consensus; they've seen the fruits of entrepreneurship. You know,
the three countries of the southern cone of Latin AmericaChile,
Argentina and Uruguayare very different from the rest of us.
We're more like Mexicofrom Mexico down to Bolivia, Brazil,
we're Third World. Many people never understood why Argentina didn't
look more like Australia. These are basically Western European countries.
And among them, the people who have seemed to have gotten their
act together much better have been the Chileans.
Then secondly, probably Mexico, and that has a lot to do with
the influence of NAFTA [the North American Free Trade Agreement].
You see, I think there's a hidden strategy in Mexico, that tying
all their lawsall the modifications they've made to their
old patrimonial systemto agreements with the United States
and Canada has allowed them to lock in certain institutions securely.
And so I think they're probably going to head in the right direction.
And with that, they've also beat this cultural thing about Mexico
vs. the United States.
Region: That should apply to others then, right? Can you
apply that Mexican modelthat way of thinkingto other
de Soto: Yes, well, that's how Spain started coming into
the West. The Pyrenees were considered really the tip of northern
Africa until about the 1950s because Spain was out of the loop.
And by then, with old Franco and all the Spanish elites emphasizing
their Europeanness rather than their Latinness, they were able to
hook up to a model the people could believe in.
So, it's no coincidence that developed countries all come together.
All poor countries are lumped together and all rich countries are
lumped together; there's this imitation effect. So, if Chile really
starts making enormous progress, and maybe Argentina jumps into
the loop, then the rest of us will have a tendency to go there.
Or, if that happens to Mexico, then all those barriers of resistance
to change will break down just the same way they did in Europe.
Some countries took off faster than othersGermany took off
very fast, but when Germany did, then Austria, Switzerland and all
the other eastern European countries had to follow. When one country's
very successful, it catches on in the rest of the neighborhood.
Region: Some might read the subhead of your bookWhy
capitalism triumphs in the West and fails everywhere elseand
see cause for hope instead of concern; that is, they might hold
capitalism in very low regard, and just as soon see it fail and
fail again. Is capitalism the only game in town?
de Soto: Yes, I don't know of any other game in town. I
think it's a very sophisticated game. We have to analyze it better
and better. It's a very, very sophisticated game, and it's the only
success story. There may only be 25 countries that have succeeded
out of a total of 190 or so, but it's the only game in town for
Now, where your question is very pertinent, of course, is: Will
it continue to be the only game in town? Yes, that is a good question
because, you know, the fact that you don't have a communist system
with a Comintern controlling you from the Kremlin doesn't mean that
people don't invent systems. I mean, fascism can grow up out of
nothing, and other social systems can grow up out of nothing. So,
it is the only game in town for the moment. But if it continues
to be so, it's going to depend very much on its creativeness and
its capacity to reach out to the poor and not consider them simply
as a sob story, or a charity story.
Generally speaking, most people who write about capitalism don't
have a view on that because they're thinking about the First World;
or they apply IMF [International Monetary Fund] and World Bank recipes
alone. But then again I don't think it is an IMF or World Bank responsibility.
I think it's a local responsibility. If we have that amount of poor
imaginationthat we're incapable of doing anything else than
just simply repeating the recipes given to us from Washingtonthen
we don't deserve to be called good economists or good politicians.
Region: Thank you, Mr. de Soto, and good luck.