The economist versus the terrorist

TO BE the target of a terrorist campaign is not the usual fate of an economist. But Hernando de Soto is no ordinary practitioner of the dismal science. It was his pro-capitalist intellectual crusade against Shining Path terrorists in his native Peru that made him one of their top targets; he survived at least three attempts on his life. Those ideas, set out in his 1987 bestseller, “The Other Path”, may even have helped to turn the poor against the Shining Path, ensuring its defeat. What worked in Peru, he says, can work wherever terrorism now thrives.

After the September 11th terrorist attacks, this message gained a new urgency. Mr de Soto was already increasingly influential with international policymakers, thanks to a second book, in 2000, entitled “The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else”. Now, he is everywhere. So far, over 20 government leaders—from Afghanistan to Mexico to Russia—have sought his counsel. This week alone he was championed by Bill Clinton at the World Economic Forum in Davos; and then he discussed development with Bono, a rock star, and Gordon Brown, Britain's chancellor of the exchequer.

Mr de Soto is charismatic and sells his ideas energetically. But he is no mere talker. Besides Peru and El Salvador, which made reforms some years ago based on his ideas, Mr de Soto and his think-tank, Institute for Liberty and Democracy, have recently been working with the governments of Mexico, Egypt, the Philippines, Honduras and Haiti—which is expected to be the first of these countries to introduce new legislation in April.

Marx and Engels, Mr de Soto's pet dogs, were so named because “they are German, hairy and have no respect for property”. It is a carefully chosen joke, for respect for property is at the heart of Mr de Soto's economic creed—and may explain why his earliest foreign supporters, in the 1980s, were right-wingers such as Margaret Thatcher, Richard Nixon and Dan Quayle.

Yet Mr de Soto is not one of those economists who thinks that the key to capitalism's success is to protect existing, legally established property rights, come what may. On the contrary, he argues that capitalism will thrive, and overcome threats such as terrorism, only if legal systems change so that most of the people feel that the law is on their side. Creating this sense of inclusion requires many things, including marketing the idea aggressively to the poor. But one of the best symbols of change is a mass programme of giving full legal protection to the de facto property rights that are observed informally by the (typically poor) people now living beyond the formal law.

According to Mr de Soto's research, based on interaction with extra-legal communities in several countries, such informal property rights cover assets—notably, land and housing—worth many billions of dollars. Informal systems of property rights usually make such assets “dead capital”, meaning that it is hard to use them as collateral for a loan, which might be used to start a business, for example. Bringing these rights into the formal legal system will unleash this capital and spur growth, says Mr de Soto: an efficient, inclusive legal system preceded rapid development in every rich country.

Too good to be true?

Critics of Mr de Soto contend that he is selling a simplistic universal solution to many different, often culturally specific, obstacles to capitalism or sources of terrorism. What, for instance, do the disaffected rich Arabs of al-Qaeda, motivated by heavenly virgins, have in common with the brutal Marxists of the Shining Path? Can there be a common cure? Mr de Soto concedes that it was lucky the Shining Path were so cruel to their potential supporters among the poor; Che Guevara would have been harder to beat, as “he was a nice guy”. Yet he believes that most poor people, given the chance to participate fairly in the capitalist system, would do so rather than stay outside. And although not all terrorists are from poor backgrounds, or motivated by materialistic goals, most tend to survive—as did the Shining Path—by hiding among the world's excluded.

As for cultural specificity, understanding in minute detail the practical rules governing each extra-legal society is the essence of Mr de Soto's approach. Without this, it is impossible to design formal laws acceptable enough to make the excluded feel included. Indeed, the lengths to which Mr de Soto went in Peru to help make coca-growing farmers of the Amazon feel included enough to reject the Shining Path were extremely culturally specific. His then boss, the then-president, Alberto Fujimori, and the army agreed to recognise the farmers' informal militias, grant them land titles and decriminalise the growing of coca; Mr de Soto even got the elder George Bush to support this strategy, in exchange only for a signed pledge from farmers that they would begin a programme of crop conversion away from coca.

This certainly undermined support for the Shining Path. But although, on a recent visit, The Economist found that the farmers still felt (and valued being) included—a big achievement—crop conversion had not gone well. Coca output is still high. Rising coca, and falling coffee and cocoa, prices have not helped. But Mr de Soto says the job was not finished properly. Mr Fujimori envied Mr de Soto's popularity and stopped him implementing all his plans. New land rights were granted that did not properly match old informal rights. Mr de Soto could not bring in multinationals to oversee crop conversion.

Mr de Soto draws several lessons from this. Reform is no quick fix, but a long-term project demanding specific cultural knowledge. And it must be driven by a head of government (who presumably needs to get enough of the credit not to become jealous of Mr de Soto). His challenge now is to persuade other government leaders to turn expressions of interest into action. Wish him luck, for capitalism may not have a better path.