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


The Philosopher of Progress and Prosperity

The two Peruvian presidents since then have more or less kept Mr. de Soto at arm’s length, and while the land titling has continued under a World Bank–funded agency called the Committee for the Formalization of Private Property, or COFOPRI, many other reforms have atrophied. The notarios, whose fees had been sharply reduced in the early 1990s, have returned to their former position, and Peru’s economy is stagnating again.

Still, Mr. de Soto’s programs have undeniably helped strengthen the economy. For example, according to data gathered by the government of Peru, 28 percent more Peruvian children are going to school in communities where a formalization process has occurred. There is also a noticeable increase in the number of small businesses established outside the home, and a 17 percent increase in the number of hours worked per household.

To Harvard University economics researcher Erica Field, who conducted a study in 2002 of Peru’s formalization while a Ph.D. student at Princeton, these changes signify some critical effects. According to her research, from 1995 to 2001 more than 1.2 million households — 6.3 million people — received titles for the homes they were living in. As squatters, they devoted significant time to protecting their property and less time to work. With titles to their homes, they could seek jobs in the formal sector, hence the increase in the official record of hours worked. Women in particular have benefited; of the new property titles that have been registered in Peru since 1990, 60 percent are held by women, a statistic that is especially significant for single mothers or wives of bigamous husbands. Energy and utility companies have reported less waste and fewer spikes in Peru, because they have a much clearer idea of the people who are using their services. For instance, they now know where people are running sewing machines, and can adjust their transformers accordingly.

Then there’s what Miguel Delgado, an administrator of COFOPRI, calls the “paradox of the Peruvian economy.” Since 2000, Peru has been gripped by a severe recession, and the number of Peruvians in poverty has increased to 54 percent of the population from 47 percent. Credit and banking are stagnant; jobs are hard to find. Despite all of that, the level of investment in house construction has risen markedly, and microcredit — the granting of small loans to the working or entrepreneurial poor — is growing at more than 20 percent per year.

The Peruvian experience also demonstrated the many ways in which asset values can rise when prospective owners no longer face potential seizure or arbitrary penalties. In 1993, the Peruvian telephone company, the Compañia Peruana de Teléfonos, was owned by the national government and valued at $53 million. A government privatization team, trying to take it public, could not convince any global phone company to buy it. Peru spent $18 million retitling it — reconstituting the charter so that it spelled out the law for settling conflicts over ownership. Then the team conducted an auction and sold it to Telef"nica of Spain for $2 billion.

“They didn’t paint headquarters,” says Mr. de Soto. “They didn’t repair any broken windows. They simply made it easier for people to identify the company, assess its value, settle disputes over its ownership, and issue shares and bonds against its worth.”

All they did, in short, was make the inherent capital in the telephone company visible. Do that everywhere, and it could change the world. Or, as Hernando de Soto puts, it, “We are all brothers and sisters in this world, but there are too many of us to be able to recognize each other by face. We need a better system of passports. We need the rule of law.”

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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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