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Interviews | Hernando de Soto interviewed by Shekhar Gupta on NDTV’s Walk the Talk

Hernando de Soto interviewed by Shekhar Gupta on NDTV’s Walk the Talk

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published Published on Jul 12, 2010   modified Modified on Jul 12, 2010


Peruvian economist Hernando de Soto turned classical capitalism on its head with his trickle-up theory: that if you create wealth at the bottom of the pyramid, it will find its way up. de Soto, president of the Institute for Liberty and Democracy, speaks to The Indian Express Editor-in-Chief Shekhar Gupta on NDTV’s Walk the Talk on the need for the poor to be able to participate in the global economy

Shekhar Gupta: Hello and welcome to Walk the Talk. I am Shekhar Gupta and my guest this week is the capitalist of the poor, the guru of trickle-up, Hernando de Soto. Welcome to Walk the Talk.

Hernando de Soto: It’s a great pleasure to see you.

Shekhar Gupta: Tell us something about trickle-up, because everybody who is halfway non-socialist, talks of trickle-down, not trickle-up.

Hernando de Soto: Most of the wealth of developed countries is trickling up. In other words, countries like the United States were basically made of poor pioneers who migrated from Europe, because they were poor. So they all trickled up. Good growth generally comes from bottom up, for the simple reason that it has to do with the division of labour, and it has to do with poor people creating a solid, independent economy.

Shekhar Gupta: All of us heard the trickle-down mantra from Ronald Reagan: you create growth and wealth will get down. You are saying, create wealth at the bottom of the pyramid, and it will trickle up?

Hernando de Soto: The explanation (of the West) for their tax policies, why they are giving capital gains breaks or why they are helping the big banks is that it will all trickle down. But the way they got to where they are is, first of all, they emancipated their people, gave them rights, gave them the right to form entrepreneurship. And as a matter of fact, all their stories of wealth are not really trickle down. Like Bill Gates, who trickled up. He wasn’t the big guy before he got to where he is. Steve Jobs was also working from a garage. In our countries, or at least in countries like mine, you start working in a garage, you stay in a garage. But these guys keep on moving up.

Shekhar Gupta: Because the system doesn’t give you the opportunity or a level playing-field.

Hernando de Soto: Well yes, the proof of it are the migrants. All those Africans who migrate to Europe, or the Latin Americans...

Shekhar Gupta: Or the Indians, who do so well abroad.

Hernando de Soto: They do so well abroad and sometimes not so well at home. And so that has to do obviously with the fact that there are legal opportunities to get organised in the north that we don't have in the south.

Shekhar Gupta: So the classical capitalists have got their discourse wrong.

Hernando de Soto: Well yes, they know how to make money, but not necessarily the genesis of their national wealth, and that’s not strange. Albert Einstein used to say, after all what does the fish know about the water in which it swims? In other words, maybe it’s much easier to see it from the outside and you can describe it much better. I don’t think most of our western friends realise how their wealth coincided with the industrial revolution, and the industrial revolution came about because there was a breakdown of the feudal system, and because essentially every guy got the property and the business right and a uniform rule of law was applicable to everybody.

Shekhar Gupta: And democracy.

Hernando de Soto: And democracy, oh yes, of course.

Shekhar Gupta: That’s how you have named your NGO in Peru.

Hernando de Soto: Yes, we are called the Institute for Liberty and Democracy. So we believe both--that economic alternatives are important, and that democracy is crucial for making the right decisions.

Shekhar Gupta: Tell us a little bit about your own evolution. You are a capitalist in the true sense--you ran a large corporation.

Hernando de Soto: Unfortunately, I wasn't the owner. So I wasn't the capitalist. Yes, I ran it. I was the CEO of a large consulting engineering firm in Switzerland. Actually all that while, I was waiting to go back home to Peru, because my parents had been exiled when I was a child, so I only visited Peru on holidays.

Shekhar Gupta: And you went back to Peru, at the age of 17?

Hernando de Soto: I went constantly on holidays to Peru so I was always in touch with the country. And afterwards as a businessman, about five times a year. But I went back at the age of 39. And then, as I started learning to live in Peru as a Peruvian--I was in the gold business at that time--it became very clear every time I had to make a deal, whether it was to put up walls in the house or to make a deal regarding the mining business, I was always in the shadow economy.

Shekhar Gupta: So you had to pay a bribe?

Hernando de Soto: Pay bribe or to do things not contractually, because that’s the way you had to do it. I said to myself: "Has anybody measured how many people actually live and work outside the law?" And after I got curious about it, I found out that slums had been measured, poverty had been measured, but nobody had measured what it means being within or without the law. And that is how I got into this business.

Shekhar Gupta: Explain that a bit more. What does it mean to live outside the law?

Hernando de Soto: Living outside the law means, first of all, that your home is not represented in a document in such a clear way that you can buy and sell it easily, that you can appreciate it, that you can use it as a guarantee to get credit. It means that if you have a business, it might be recognised by the local authority, but it doesn’t have limited liability, so basically, you operate with unlimited liability. You cannot issue shares, therefore you cannot get investment, and you cannot use the things that you have as collateral, because you are not properly within the legal system.

Shekhar Gupta: So you can make a living from it, but you cannot monetise it in any way.

Hernando de Soto: You cannot, because in the end, business and prosperity are the results of cooperating on a large scale with everybody.

Shekhar Gupta: And that led to the thought process that you then finally employed on the ground.

Hernando de Soto: That led, effectively, to the idea that certainly, legal institutions were important...

Shekhar Gupta: To demystify capital.

Hernando de Soto: That’s right. Since you have talked about demystifying capital, capital, like the word energy, sums up something of value, something of power, but that is obviously not tangible. So the question is, how does it become tangible? If I ask anybody, "Where is your wealth", they will eventually bring out a piece of paper and say, "It’s in my home", "It’s in my car", "It’s in the bank", “It’s in stocks"…but its always on a piece of property.

Shekhar Gupta: And the poor man in most developing countries, particularly in India, has no such thing.

Hernando de Soto: The poor man does not have his value represented on paper, nor his identity. In other words, as developed countries have made a transition from poverty to wealth, they have not understood to what degree wealth is essentially the result of adequate documentation…even identity. For example, just by chance now, since I am in a country that is not my own, I am travelling with my passport. And if you ask me, "Are you the real Hernando de Soto", the way I am going to prove it is through my passport. In other words, capitalism works in the measure in which you are able to identify what you have and who you are in terms that are easy and identifiable.

Shekhar Gupta: And the poor don’t have it.

Hernando de Soto: And most of the poor are informal or extra-legal and they don’t have it and therefore, they cannot participate in the global economy. They participate in local neighbourhood economies and that’s why they are relatively poor.

Shekhar Gupta: So tell us about how you employed some of this wisdom in Peru.

Hernando de Soto: Well, the first thing we did in Peru is do what we call the diagnostic. Which is, how many people have got all of these different symptoms that we call legality? How many people actually have fortunes, or have savings or have any form of accumulation or any form of possession, or anything that identifies them and allows you to be a contracting partner in a way that is identifiable, nationally or internationally. And that’s when you come to the conclusion that 10-12 per cent of enterprises, whether you are talking about Peru or Egypt, have that identity the rest don’t have. That rest which doesn’t have it is what’s the extra-legal economy. And so what we started doing in Peru is finding out how come they were not documented. We found out that there are very concrete and very simply reasons for it. Like for example, in Peru, if you have a home that is built on a sand dune, that is a result of a settlement, like Dharavi, or something like that, if you want to go legal, in Peru it would have taken you 21 years working 8 hours a day. If you did it in Egypt, it would have taken you 17 years. If you do it in Manila in the Philippines, it takes you 25 years. So as you begin documenting, you start finding out that the law is not that friendly to poor people.

Shekhar Gupta: Tell us briefly the story of your success in Peru, what did you do and how much success did you get?

Hernando de Soto: Well, the first thing we did is, in areas that were the so-called slums and shanty towns, we started trying to find out why it was that they did not have a title and what were the consequences. So the first part, like I just told you, is that it took 21 years to get a title. The second thing we found out is that if you just title people, it’s not enough. Because for many people, it’s not only where they live, but where they work. So if you offer them a certificate of possession or a title, that titles their home but doesn’t title their work; they still won’t come in. So in the end, you have to focus on the whole spectrum. What is it that does not allow them to bring in a form of being identified within the law in the same way that my passport identifies me from India all the way to South Africa? And we started then finding out that once you did this identity, then things started changing radically. In as simple terms as this: we are now here in this hotel in Delhi, and let’s pretend you own the hotel. And I happen to represent Carlos Slim, one of the world's richest men, and I say, "Look I want to buy this hotel." And we agree it’s worth a 100 million dollars. It’s a perfect deal, we start signing, and I then say, "Mr Gupta, could you do me a favour? Could you pass me the title?" And you tell me, "I have no title, but all my neighbours know it's mine." Is it still worth a 100 million dollars? In other words, precision and certainty are worth many, many millions of dollars. The moment we started titling in Peru, the value of the wealth or the possessions of the poor went up.

Shekhar Gupta: You know something about the coca business in Peru. Tell me about the fight you led.

Hernando de Soto: One of the myths in the world is that if you get into the drug business, even if you are a poor Peruvian farmer or a poor Bolivian farmer or a poor Chinese farmer, or a poor Afghan farmer...you are going to be much better off. But the fact is, life isn't that good. In the beginning, because your crop happens to be somewhat rarer, you fetch a higher price. But you will beget a lot of gangsters in the business and your family will be destroyed. So what we saw in Peru is that any farmer, if they are given secure titles to their homes and their businesses, preferred getting out of coca in spite of the fact that the economics were against it. The fact is, that his family and his real life are also part of the economy and you have to factor that in. That worked. Peru was responsible for the production of 70 per cent of the raw material for coca, and we went down to 28 per cent.

Shekhar Gupta: How would this apply to, say tribal India, where we see the rise of Maoism now?

Hernando de Soto: I think the way to think about it is, who owns any land on which there are natural resources? The people who live on it or the people who have the paper to it? In Peru, we have tribal people who live next to the gold mines. So they should have one way or the other of participating. But they can't. And it’s a very simple scheme. If a foreign company or a national company comes in to get the gold out, or to get petroleum out or gas out, you need to raise funds. No company has 3 billion or 6 billion hanging around. They take the piece of property paper--legal--that the government gave them and say, "I have a concession." Then they inscribe that concession in a bilateral investment treaty with the United States or with Europe. So it's not only now a local title; it's an international title. Then they go to an organisation within, say the United States or Europe, that gives them a guarantee on the title. So now they have got a super-duper title. Then they can go to the World Bank and get a guarantee from the multi-lateral investment guarantee association. It’s against that title that they raise the money. So, having a property title doesn’t only mean that you own something, it means that it’s that with which you raise capital. So the question you must ask yourself, which I would do if I were Indian, is: How many of the people that are in these areas where you have natural resources actually have a piece of paper that you can take to Wall Street? And if they don’t, they are in a situation of inferiority.

Shekhar Gupta: Under the Indian Constitutional system, mineral wealth belongs to the state. But what we are saying is that they are neighbours. So if you have a big MNC, for example, starting to mine iron ore in a large area, then the local tribal communities should have a shareholding in that concession.

Hernando de Soto: But for that, you would need formalisation.

Shekhar Gupta: So how will you give titles to these 10 of millions of tribals?

Hernando de Soto: Well, you have got to do various things. You have to, first of all, accept that the tribes exist. You can also tell them, here are the tools to get organised, business-wise. Secondly, you've got to be able to divide land, you've got to be able to divide shares of abstract value. How are you going to be able to participate with a mining company if you don't have shares and you don’t have a corporation? How are going to be able to take a risk in the market if don’t have limited liability? All of these are the legal creations that the informal economy or the extra-legal economy lacks.

Shekhar Gupta: And if we could do some of this, then some of the appeal of the Maoists would go down as much as the appeal of Shining Path has gone down in Peru.

Hernando de Soto: What you have to try and find out is if, in effect, it is easy or difficult for a tribal organisation to have access to the wealth that neighbours them. Do they have the tools? Have you thought about it before? We have found out that sometimes, for example, in Egypt, just forming a bakery can take you 549 days. 549 days, 8 hours a day of a poor person's life, is impossible.

Shekhar Gupta: It’s impossible. He'd rather work as a labourer in a bakery.

Hernando de Soto: So the question then is: how can you modify your law, to make it so accessible to poor people, so that you can have these wonderful success stories that you get from the United States or Europe of somebody who is real poor? I mean, think of the big families that you have today in the United States or Western Europe. A generation ago, they weren't there. So obviously, the tools that they have, to gather capital, to gather savings, get credit because they have collateral, are only legal tools.

Shekhar Gupta: Hernando, you have seen Slumdog Millionaire. You have been to Dharavi on your earlier visit. Now we know that the Ministry of Urban Affairs and Urban Poverty Alleviation, is talking to you. They lay great store by your thinking. I know Selja, a young minister for Urban Poverty Alleviation, she has been reading up on your books and talks very fondly of you. Do you have any prescriptions for Indian slums?

Hernando de Soto: The first thing is, I am delighted that we have been so welcome in India. I am delighted to have met the minister, your Prime Minister as well. I love the idea, because among other things, when I was in Dharavi, it looked pretty similar to what we've got and where we have been in the rest of the world. The first prescription is this--get the facts.

Shekhar Gupta: Right.

Hernando de Soto: The facts mean, find out the about the slum in terms of its legal connections. Do they actually have the tools with which they can convert a piece of land into capital? Is there any way that they can use to get credit? Is there any way that they can use it to be able to be identified, anywhere in the world and therefore fit in the division of labour? And according to that, you will find your own formulae yourselves.

Shekhar Gupta: One solution that has been found in India is what is called the SRA--Slum Rehabilitation Authority--where you resettle slum-dwellers in-situ, where they are. You take the land, find a builder, he takes part of the land for commercial development, makes his money from that, and builds apartments for slum-dwellers on the same land--on the same larger piece of land--and gives them titles. Is that a workable solution?

Hernando de Soto: Yes, but you are talking to me about housing, and I am talking to you about the law and property. A house is a house, made out of bricks--you can improve that.

Shekhar Gupta: But they have titles to that.

Hernando de Soto: But the question is, do they have a title that allows them to convert the bricks into money. Whether they can sell it, whether they can use it as a guarantee.

Shekhar Gupta: So you would prefer them to be completely hassle-free titles. They can do what they want--like any property that somebody might own in the city.

Hernando de Soto: Well not necessarily, because the way you start off, first of all, so that people will accept exchanging their extra-legal...

Shekhar Gupta: NGOs object to it, by saying once the poor have the title -- saleable title -- they sell it and go to another slum and they waste the money.

Hernando de Soto: Well you know, the first thing rich people do when they make businesses is sell it and then make their businesses. So the question you have to answer is, how much by not allowing them to selling are they really sacrificing? And there is one way of settling that outside a university hall, which is, to go in and make the diagnostic of what they are doing today. Find out how real Indian people are being organised in Dharavi. And if you tell me they never sell, they never borrow, they never get credit, they never get capital, then obviously dont give it to them, because they don’t like it. But if they are doing that, but they are doing at tremendously low prices, they will then..

Shekhar Gupta: At a huge arbitrage.

Hernando de Soto: Then you will find out what it is you have to do for Indian people. In other words, we should stop, among so-called intellectuals, finding out what the people want. Go in there, find out how they are constituted. Because you see, there is no way in Dharavi, there is no law. That's not true. In Dharavi, there are probably dozens of legal systems.

Shekhar Gupta: Also, in Dharavi there is the law of Dharavi.

Hernando de Soto: That’s what we are talking about. So if the law of Dharavi shows that they are giving themselves credit, that they are buying and selling among themselves, and how they do it, then you have to create a formal system that goes according to their customs. I would personally very very surprised if the Indians were very unsimilar to the rest of the world.

Shekhar Gupta: When you talk to Indian officials, you can see now that there is interest in addressing the problem of urban poverty, which is mainly located in slums of India, but most of he parts of India, do you find that they ask you the right questions, or you think they are looking for a quick fix?

Hernando de Soto: Well, I think they are asking the right questions because I don't have any quick fixes. I wouldn't be here if they were just looking for quick fixes. It obviously takes time because the tendency, even in the United States, even in Western Europe, is not giving the law that importance.

Shekhar Gupta: Right.

Hernando de Soto: The proof of it is the recession you now have in the western world, which you don’t have in India and we don’t have it in Peru, among other things, because the majority of the paper value that they have in their financial markets is a shadow economy that they are not able to trace today. So they are going to have to get back to understanding how important the law was regarding their creation of wealth, and why it trickled up rather than trickled down. So what we simply... I think... our proposal, if you want it, to the Indian government is to get an inventory of what is the real legal status of these people understood not as the official status, but how do they actually deal among themselves, what rules do they follow. And according to that, you can start getting an idea, and on top of that using democracy, to find out what kind of a legal structure you have to give them, so that they can move ahead. The general idea is not to follow an ideology. The general idea is to find out what they are actually doing. And then create a rule of law. What it means is not that you should have many laws. The rule of law means that you should have one law. I mean, here we are, at this time, looking at international football. And we are all in it, and we are all getting excited by it. Imagine...

Shekhar Gupta: Where's Peru (laughs)?

Hernando de Soto: It isn’t there, but I promise you one thing, it is...the way we play football in Peru and the way you play football in India is the same rules. If we didn’t have the same rules, we wouldn't be playing the match. It’s the same thing...

Shekhar Gupta: But a lot of neighbours are there, doing very well.

Hernando de Soto: The neighbours... the neighbours are doing fine, but the important thing here is, there is no such thing as getting into the capital's game. Or getting into the market economy game.

Shekhar Gupta: And having different rules for different people, different classes.

Hernando de Soto: You have to have one rule and the rule of law. And the question is, where are the Indian people who are in the slums today? And what is necessary for them to come into a legal system that honours their identity, honours their customs, but nevertheless allows them to play football internationally?

Shekhar Gupta: That is a very good way of putting it. I am glad, in fact, it’s a very good beginning that the government of India has at least begun to talk to you, which also shows that they are getting focussed on the problem.

Hernando de Soto: Well, I am delighted that we should do this, is because at the end you see, it is always so interesting to find out what are the differences between your countries, what’s the food like. I mean the reason you travel to India is because it’s different. But because we focus so much on the difference, like travel agents and anthropologists, we have not focussed so much on how many things we have in common. And that's also an important part of the agenda, that humanity has a lot in common--football and the capacity to do business and innovate.

Shekhar Gupta: I can only tell you that there is one area in which India's ranking is even lower than its ranking on human development index, and that’s football.

Hernando de Soto: Really?

Shekhar Gupta: So maybe you can help with India's football as well.

Hernando de Soto: Well look, you know, forget about occasional successes. Look at what happened to the French just recently. These things go up and down. The importantly thing, is that the game goes on.

Shekhar Gupta: Well if you focus on the slums, that's a good enough place to begin, Hernando. So welcome to India, keep coming back and stay engaged, because India has a big challenge, but also big opportunity.

Hernando de Soto: I think so too, and I am delighted to be here. And if anything that we know is of use, I'd be delighted to share as much, and learn of course, so much, that I am from India.

Shekhar Gupta: SG: Thank you Hernando. Thank you for your time.

Transcribed by Shatarupa Chakraborty

The Indian Express/ NDTV, July, 2010, http://www.indianexpress.com/news/the-poor-man-does-not-ha
ve-his-value-represented-on-paper-nor-his-identity/642545/

The Indian Express/ NDTV, July, 2010, http://www.indianexpress.com/news/the-poor-man-does-not-have-his-value-represented-on-paper-nor-his-identity/642545/


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