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 / Summer 2004 / Issue 35(originally published by Booz & Company)


The Philosopher of Progress and Prosperity

For example, the 19th-century American West was “wild,” says Mr. de Soto, precisely because its property records were ambiguous. “The same acre,” he argues in The Mystery of Capital, “might belong to one man who had received it as a … land grant from the British Crown, to another who claimed to have bought it from an Indian tribe … to a third who had accepted it in place of salary from a state legislature … and to squatters who believed that if they occupied the land and improved it with houses and farms, it was theirs…. That past is the Third World’s present.”

Only by the beginning of the 20th century was property ownership in the American West codified into law, often because of the increasing political influence of frontier squatters. In the process, the concept of property was transformed. No longer “a means of preserving an old economic order,” Mr. de Soto writes, it became “a powerful tool for creating a new one.” Similar changes, he says, can be found throughout European history; the suburbs of London were originally illegal settlements that gradually gained legitimacy. Japan, for its part, did not enter the modern economy until U.S. General Douglas MacArthur brought property rights there after World War II.

Irons of Hope
In a sense, Mr. de Soto has pursued his inquiry into poverty since 1948, when he was 7 years old. His father, who had been the first secretary in the Peruvian embassy to Canada, left the government after a military coup and moved the family to Geneva. Growing up attending a school for expatriate students, Mr. de Soto developed a cosmopolitan view of the world, rejecting out of hand the idea that people in developing nations were less capable or sophisticated.

“You never knew at our school who was going to be the smartest in class: a Mexican, an African, an Arab, or a European. So for me, all the explanations about Latin Americans not having the cultural capability for development didn’t make sense. I’d seen otherwise.”

Mr. de Soto remained in Europe after graduation, studying international law and economics, then working at the General Agreement on Tariffs and Trade (GATT) offices, and finally joining a Swiss consulting firm. Then, at age 39, eager to return to Peru, he cofounded a gold mining company in Lima. What he saw in the city surprised him. At that time, in 1979, Lima had undergone two decades of intensive and continuing rural-to-urban population migration. Millions of people were moving from the Andean mountains to the nation’s cities, more than half of them squatting on government land or occupying homes without formal title. They squeezed into shantytowns on the edge of the city, building houses out of discarded lumber and corrugated tin if they couldn’t afford stucco and concrete, and taking whatever jobs they could get.

Today, Lima’s paradoxically rigid but haphazard cityscape reflects the transition it went through. Most homes, whether in relatively rich or poor parts of town, are small, modular, boxlike structures, packed into a dense street grid. Since credit was hard to come by, each family tended to expand its home vertically, one story at a time, saving up for the building materials. From many roofs, small steel rods known colloquially as the “irons of hope” still jut skyward — visible symbols of the aspiration to anchor another floor onto the existing house.

Another prominent feature of the Lima skyline helps explain why credit was so difficult to access. On many commercial streets, the largest and flashiest retail signs say “Notario.” These signify the offices of legal officials who verify the identity of people turning in applications for government licenses or approvals. In the early 1980s, with only about 40 notarios in the entire country, it took an applicant nine months of full-time work to get formal approval for a new business, two years for a minibus route, and 728 bureaucratic steps for a legal title to a home in Lima. Most Peruvians took their chances instead with the underground economy.

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  1. C.K. Prahalad and Stuart L. Hart, “The Fortune at the Bottom of the Pyramid,” s+b, First Quarter 2002; Click here.
  2. Hernando de Soto, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else (Basic Books, 2000)
  3. Hernando de Soto, The Other Path: The Economic Answer to Terrorism (Second ed., Basic Books, 1989)
  4. Francis Fukuyama, Trust: The Social Virtues and the Creation of Prosperity (Free Press, 1995).
  5. C.K. Prahalad, The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits (Wharton School Publishing, 2004)
  6. The World Bank, Doing Business in 2004: Understanding Regulation (Oxford University Press/World Bank, 2003), Click here.
  7. Erica Field, “Entitled to Work: Urban Property Rights and Labor Supply in Peru” (July 2003); Click here.
  8. Erica Field, “Property Rights, Community Public Goods and Household Time Allocation in Urban Squatter Communities” (September 2003); Click here.
  9. Erica Field with Maximo Torero, “Do Property Titles Increase Credit Access Among the Urban Poor? Evidence from a Nationwide Titling Program” (January 2004); Click here. 
  10. Center for International Private Enterprise: Click here. 
  11. Center for Sustainable Enterprise, University of North Carolina: Click here. 
  12. Institute for Liberty and Democracy: Click here.
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