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


The Philosopher of Progress and Prosperity

“ILD was the most talented group of people I’d ever seen in Peru together,” says then-ILD lawyer Victor Endo, who recently rejoined the institute after several years with the World Bank. “It was also a kind of school for the country. Most of the important ministers, lawyers, journalists, and economists in Peru are ILD alumni.”

The Other Path
At the same time, however, the Shining Path guerrilla group (Sendero Luminoso) — whose war of terror during the 1980s and early 1990s took 25,000 lives — had singled out Mr. de Soto and ILD as targets for terrorism. Mr. de Soto had deliberately provoked them: Recognizing that “the Shining Path could never be eliminated without first being defeated in the world of ideas,” he reoriented the book he was writing, publishing it in 1987 under the title El Otro Sendero (“The Other Path: The Economic Answer to Terrorism”). It was a runaway best-seller, with an unambiguous message: Open property rights make terrorism irrelevant.

The aftermath was as clear an illustration as ever existed that ideas matter deeply in real life. Shining Path leader Abimael Guzman, a former philosophy professor, launched several attacks on ILD — and also instituted his own underground property-titling system, following the example of Mao Tse-Tung in China. Mr. de Soto installed bulletproof glass in his car, which saved his life during at least one drive-by shooting; there were two car bomb explosions at ILD headquarters; the second, in 1992, killed three people. Meanwhile, the citizens of Peru, many of whom were small-business owners with private property, facing the runaway inflation of the late 1980s (which reached 1,700 percent at its height), recognized the alternative that Mr. de Soto offered them. In 1988, when a 300,000-member bus drivers’ union that had supported the Shining Path endorsed the Other Path instead, it became clear that Mr. Guzman’s popular support had been eclipsed.

Formalization expanded even further in 1990, when Alberto Fujimori, then Peru’s new president, allied himself closely with Mr. de Soto. The alliance was credited with paving the way for the capture of Abimael Guzman in 1992. Meanwhile, ILD staffers helped draft much of Peru’s new constitution and created a plan with the International Monetary Fund to reduce Peru’s yearly inflation rate. That involved renegotiating Peru’s international debts and a series of legal and economic reforms, including a property-rights system that titled 1.6 million of the country’s 2.3 million extralegal buildings and licensed 280,000 small businesses that had been operating illegally. Suddenly, Peru had a 6 percent annual growth economy, with Mr. de Soto getting much of the credit. (Newspaper political cartoons of the time regularly portrayed Mr. Fujimori as his puppet.)

Then, in a much-heralded triumph of the early 1990s, Mr. de Soto forestalled an American antinarcotics attack on Peruvian farmers through a property-rights campaign that successfully sought out the informal farmers’ networks, and signed them up in an agreement to collaborate with the government and switch to noncocaine-based income sources, such as growing coffee. According to Mr. de Soto, U.S. President George H.W. Bush agreed to the deal after asking at a White House meeting, “Let me get this straight, Mr. de Soto. You mean to say that these little guys are on our side?”

“Absolutely,” the Peruvian economist replied. “A coca grower is a father, like you and I are. So who is his daughter going to marry? If we attack them, chances are it will be someone from the Shining Path, a corrupt cop, or a member of the Colombian drug cartels. They don’t want that. They want to be respectable.”

This moment of triumph, however, also led to Mr. de Soto’s separation from the Peruvian government. In 1992, one of the leaders of the farm reform initiative was assassinated by a man riding a Peruvian military motorcycle. When President Fujimori failed to appoint a prosecutor or bring the murderer to justice, Mr. de Soto resigned, naming government involvement with drug traffickers as the reason. This was an early link in the chain of military corruption scandals that forced Mr. Fujimori to resign in 2000.

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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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