Commentary

Economist for the Poor Wins Friedman Prize for Advancing Liberty

By Peter F. Schaefer
May 6, 2004

The world is discovering an unlikely new leader for the poor and developing nations: Peruvian economist and property rights advocate Hernando de Soto. In recent weeks, it has been announced that De Soto will receive the Sir John Templeton Prize, the Milton Friedman Prize for Advancing Liberty and a royal order from the King of Thailand. Time magazine has named De Soto one of the 100 “most influential people in the world today.”

These honors should come as no surprise for a man who has done so much to better the lives of so many poor people (and poor nations) around the globe.

De Soto, 63, travels the world advising governments on how to strengthen their economies by providing their poor citizens with the means to prosperity. De Soto begins by explaining the “hidden architecture” of property rights, which is the basis of all modern economies.

These rights are so well established in developed countries that they become invisible. The systems run smoothly in the West but in poor countries, legal property rights simply do not exist for the overwhelming majority of people.

This translates to more than 4 billion people around the world who live in states without that necessary architecture that defines things and then sets the rules for those things to work. As a result, many live as squatters without rights over their own homes and businesses, mired in poverty with no chance to escape except perhaps through migration to the West. Establishing that architecture is what de Soto does. Yet it is nothing radical or new. It is, in fact, an old idea, an old model — that works.

The initial document of the First Continental Congress was sent to King George III in 1774. It listed grievances and rights, the first of which were the right to life, liberty, and property. These rights, taken from the natural law and firmly established in England and Europe’s history, were declared in the U.S. Declaration of Independence and detailed in the Constitution and Bill of Rights. The architecture was in place.

De Soto decoded America’s legal revolution that allowed squatters who improved land to gain a property right to that land, thus preempting the owner. And if the owner moved them off the land, they had to be compensated for those improvements, which made reclamation unlikely. The first preemption code was passed in Virginian in 1642, but the principle was in operation from the first settlers.

As America expanded westward across the continent, Congress enacted over 30 laws that preempted prior land claims on enormous tracts of land thus allowing land disputes to be settled in an orderly manner. California’s history is particularly illuminating because it is a story of vast preemption as the state accommodated the land registries of millions of people living in more than 800 squatters’ associations.

In explaining property rights as vital to prosperity, de Soto makes plain that it is the system of property law, not just physical possession, which confers most of the value to property in the marketplace. This is true because ownership is much more than possession. It is a process of buying, selling, renting, and collateralizing that goes on constantly, and effective rules can only come from a legal process common to everyone in the marketplace. Local customary rules are not sufficient to create either a wide or efficient market.

De Soto has techniques that allow modern systems of property law to be transplanted to very different cultures. The U.S., for example, did so after World War II, in Japan and her colonies, Korea and Formosa. America’s strategy was to see that Japan adapted our values.

We employed totally different strategies in Europe and Japan and as a result we won the peace in each region, though in very different ways. Our problem was that the leaders who came after the “greatest generation” looked at the wrong model of our postwar success and so carried the incorrect lesson to developing countries. In Vietnam, for instance, we followed Marshall’s model — cash, aid projects and trade — and failed to build a nation. Only MacArthur’s Japan offers us a successful model of modern nation building by design.

Democracy and capitalism evolve from a structure of laws and cannot be purchased through foreign aid or great natural wealth, which de Soto explains with considerable clarity. His interest in this history is not as an historian of transformation but as someone who wants to transform poor societies. The real question that he asked, and the main reason that he won the Friedman award, is how these transformations can be mapped and accelerated.

In the West, these laws were created over centuries through a convergence of customs, philosophies, and the give and take of an open political process. There was no formula, no “little blue book” of democratic capitalism. Its rise throughout Europe and the U.S. was a process of trial and error, guided by preference and conditioned by efficiency, not by any political or economic cookbook.

But after more than 20 years of research by de Soto, we now know how these national transformations succeeded. MacArthur in Japan and, later, de Soto in Peru have shown us how to compress a process of decades, even centuries, into a few years. In both Japan and Peru, personal freedom increased, billions in assets were capitalized and homeowners and entrepreneurs were empowered to an extent that would be impossible through even the most generous and sustained aid program over generations.

A decade ago, the most vicious, entrenched insurgency in the Western hemisphere was the Shining Path in Peru. It had 80,000 armed soldiers. De Soto and his team spent two years planning property reform for the impoverished Peruvian coca farmers, whose sons populated the Shining Path. Just six months after the de Soto program was launched, the Shining Path leaders were in jail and their army had melted away, choosing to work in their newly legal farmsteads. De Soto convinced the peasants and slum dwellers that the state would guarantee their property better than the guerillas, and so the poor people of Peru turned against the Shining Path almost overnight.

The foundation of laws beneath every modern nation is aimed at insuring the same basic trio of goals articulated by Locke and Jefferson: life (personal security), liberty (personal autonomy), and property (civil protection for houses and goods). If life, liberty, and property are secured by the state, then democracy and capitalism are the natural outcomes. De Soto gave the Peruvians (and many others) Jefferson.

Two decades ago, Ronald Reagan went to the North-South Summit in Cancun and advised the leaders of the Third World to ask us for our system of political economy, not for our money. Last year, de Soto went to another such summit in Monterrey, Mexico, and explained to the world leaders how to do just that. He has broken the code by deconstructing what every successful state has done. Now, it is time to use de Soto’s insights and help the developing nations attain the heights that we have.

Peter F. Schaefer, senior fellow at the Institute for Liberal Democracy since 2002, has advised Hernando de Soto informally since 1984. De Soto will be awarded the Milton Friedman Prize for Advancing Liberty in San Francisco today.