The Forum for Partners in Iran's Marketplace

March 2005 / No. 34

Cover Story: The World Economic Forum

The Wealth of Nations

Hernando de Soto, sounder, Institute for Liberty and Democracy – Peru

The author of The Mystery of Capital, Hernando de Soto is one of the world’s most influential economists

According to one of the world’s most influential economists, globalization will lead to ever greater urban migration and new economies of scale.

Peru’s Hernando De Soto also believes that in the Third World, globalization has gotten to us before nationalization has even finished.

De Soto teaches at the Institute for Liberty and Democracy in Peru and is the author of `The Mystery of Capital’.

Elaborating on the essay he wrote just after 9/11 under the title of "It is not enough to appeal to the stomachs of the poor. One has to appeal to their aspirations," he says the first thing to keep in mind, even cynically, is that poverty is the enemy of us all.

“Poverty itself doesn’t breed subversion, it doesn’t breed rebellion. The tendency of the poor, on the contrary, is to be pretty hum­ble. What breeds social cleavage and conflict is exclu­sion. When people feel excluded from something they imagine to be important for them, then they get angry, they start marching and institutions fall apart. What’s happened to a lot of the poor in the last 40 years - all over the world, from Haiti to Egypt, and from South Africa to the Philippines - is that they’ve begun a large migration process in quantities that have never been seen before. All of a sudden, cities and towns where people cluster together in Haiti have been multiplied by 17 in just the last 35 years. In Algeria, it’s about 15 times; in Ecuador, it’s 11 times.

“What they’re doing has been basically marching from rural, underdeveloped areas - which we were familiar with through National Geographic magazine, the Discovery Channel, anthropological reviews - towards a concentration of large, Westernized cities. For reasons that we have yet to fully figure out, sometime after the Second World War, people decided to do what both Adam Smith and Karl Marx had foreseen that they would do eventually, which is cluster in ever greater numbers to produce enormous economies of scale and to cooperate in expanded markets. They are aspiring to live like the wealthiest people that they know about. We don’t know if what happened is that more of them are reading or more of them are hearing the radio or more uncles and cousins are traveling and coming back with the news that you can achieve prosperity the closer you get to the big city or the more you travel abroad. The fact is that they’ve got aspirations, and there’s no stopping them. They’re not going to come back.”

One of the things De Soto has noticed in many develop­ing or former communist nations is a feeling that some­how or other they will go back to the hinterland. But, he says, they are here to stay, and they’ve got aspirations. “We had better listen to them.”

Asked if those aspirations were simply material or was it more complicated, he replies by saying that they have aspirations for just about everything. “It’s a quality of life, a standard of living. Some of them, because they saw others die, know that if they had been in the city and they had money they would have lived longer. Some of them know that if they had a good den­tist, they wouldn’t lose all their teeth before the age of 32. Some of them know that you can live a different life.”

Many of them are no longer content to be farmers or hunters and gatherers. They would like to work with their heads and not their hands. That’s very common, for example, where I come from. People really want to do something besides working with their hands. Working with your hands is a sign that you’re lower on the social scale. So it’s aspirations for a better life. A better life is represented by all sorts of things: from reading to under­standing what’s going on around you, to making sure that your sons and daughters have a better quality of life.

In reply to another question as to whether this would wipe out the distinction between global and local, and lift up everyone in the process, he recalls Adam Smith talking about a pin factory where he saw a husband and wife producing 14 pins a day.

“He visits another factory many years later and sees 11 people pro­ducing pins, but they’re producing 48,000 pins a day. Why? Because they’re dividing labor among themselves in a much more efficient manner. When you get people able to concentrate outside family structures in larger divisions of labor, in large-scale markets, you begin pro­ducing surplus value, which, according to Smith, was going to be the wealth of nations.

According to Marx, who saw the other side of the picture, it was going to mean that some had more than others and that eventually this was going to bring such a concentration of wealth into a few people’s hands that it was going to bring about revolution. But they were both in agreement that the bringing together of people was going to increase one’s chances of being wealthy.

"Before people learn how to collaborate through e­mail and specialization, they’ve got to become pretty sophisticated," comments De Soto. “I don’t doubt that that’s going to happen sometime. Before that, though - and especially for very simple people, those that work with their hands - that division of labor is going to take place physically. One revolution, the industrial revolution, is still traveling much faster than the information revolution.”

On Karl Marx’s view about globalization if he were around today, the Peruvian economist says Marx would have agreed, first of all, that capitalism was going to survive. But he would have recognized that the rule of law was crucial to mak­ing it survive, which is something he hadn’t figured out because he hadn’t given much importance to law.

“He considered it a superstructure, that is to say, something in the structure of everyday life that wasn’t so important. He would have realized that Westerners had found ways of avoiding having the concentration of wealth get in the way of progress and distributing it better and creating social contracts that actually functioned.

“The social contract explains why, in the United States, you can have a guy who makes as much money as Bill Gates and nobody is going around to bring him down. Because everybody believes that he played according to certain rules accepted by the social contract and they, too, could become part of that. A Bill Gates in Latin America would have already been kidnapped, assassinated, would have been the basis for a big social revolution simply because people don’t yet see how they could become as prosperous as he could without cheat­ing. That’s the challenge.”

According to De Soto, the best way of production that we have found is a market economy and the accumulation of capital. The challenge remains: How do you keep that going while ensuring everybody has got the same opportunity or that everybody’s aspirations get a fair break? It doesn’t mean that you have to be successful; it means that you get a fair break. Obviously, the guys that found that out, or were closer to finding that out, were very successful Westerners during the 19th century and the beginning of the 20th century. Now that the West has achieved that formula, it doesn’t really seem like anybody is fully cog­nizant of it, it’s so complex and it’s so intricate and it’s so old that they can’t teach it to us in the Third World. That’s why we Third Worlders are going to have to find out for ourselves by looking closely at our history and working it out in the context of our reality.”

In response to another question on the impact of economic globalization - free-trade agree­ments, GATT, NAFTA, the WTO – on this process, De Soto says we’re seeing now in Latin America, as we’re putting the final touches on our free-trade agreements with the United States, that this is a big item of debate.

“I would say that it’s nearly unstoppable unless, of course, the conditions of having a free-trade agreement with the United States are totally inequitable, which doesn’t seem to be the case. The message that I’m driving across and getting a lot of echoes from in the region is let’s find out about how many guys will immediately become a mem­ber of that global club. In other words, how many people are going to be able in Latin America to participate in this new global market? The reply is that not more than 20 or 30 percent will be able to participate in it.”

De Soto believes goods, just like people, can’t travel without passports. “Goods have another form of passport called the bill of lading, some kind of documentation that accompanies the good or the amount of money being transferred abroad. The first thing you need in a bill of lading is to identify yourself - and most people in the Third World can’t identify themselves.”

The second thing you’ve got to do, he continues, is to put down an address - most people don’t have property rights and therefore are not recorded in any system that allows you to give an official address, a phone book.

The third thing you need to do is to say what company you belong to, so that whoever is importing or whoever is transporting knows who has got final accountability, responsibility for the goods, who is guaranteeing it, who is on the board of directors, who is the CEO, all sorts of things.

According to De Soto probably 70 percent of Third Worlders don’t work in companies but in families because “we don’t have the rule of law that allows us to cluster.” That, he says, would require business organizations, and business orga­nizations are still not accessible to two-thirds of the world.

“If we appropriately take conscience of globaliza­tion, it should force us to say, ‘Hey, now we’re starting to integrate internationally, how about starting to inte­grate nationally so that the international part will work?’

In the United States and Europe, nations were formed and then were nationally integrated and then went off to become more globalized through GATT and bilateral trade agreements.

“In the Third World, globalization has gotten to us before nationalization has even finished.”

In conclusion, De Soto is asked if the end of family structures and a brave new world where everyone works in a highly efficient pin factory is what we want. He has the following to say: ‘I don’t know if that’s what we want, but that’s where we’re going. As we have moved to working in different African countries now, we have started finding out that most families are already enterprises of sorts but very insufficient ones. They’re still on 14 pins a day, but they could easily be at 48,000. A family doesn’t allow you to diversify very much. You can only count on your sons, and what if they don’t want to make pins? What if the guy who wants to make pins is your neighbor but you can’t hire him because you don’t have the legal structure to guarantee his participation, his salary or his inter­ests? Today, no one can live on what he earns from making 14 pins a day.’


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