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As Capital Moves From Lima to Cairo

Winter 2013 Tête À Tête

As Capital Moves From Lima to Cairo

As Capital Moves From Lima to CairoGB discusses wealth creation, the state of the Americas, and lessons for the states of the post-Arab Spring with Peru’s Hernando de Soto

GB: Why does Peru today have the second fastest-growing economy in the Americas (after Panama)?

HDS: What is good about Peru today is that a macroeconomic model that was designed in the early 1990s has endured and been protected, quite systematically, across different governments – all of different political stripes. The result has been, ultimately, Chinese-type growth rates. Of course, Peru does not profit from the type of canal that has made Panama so vital; otherwise, we would have the top growth rate in Latin America.

Most of the economic and legal reforms have favoured Peru’s urban centres, in which some three-quarters of the national population lives. The rural sector – in the Amazon, in the Andes – has been less favoured. Our indigenous people do not have the same rights as those enjoyed by urban Peruvians, and inequality between rural and urban Peru – particularly in the context of high commodity prices – is really a major social problem.

GB: Can you elaborate on Peru’s economic model?

HDS: The model is a hybrid. Macroeconomically, it is essentially the Washington Consensus. It was first instituted by President Fujimori, but it has gone all the way to President Humala, who was originally opposed to it, but who has stuck to it since his election in 2011. Fujimori introduced the model alongside many social programmes, the purpose of which was to integrate people institutionally. These programmes emphasized property rights and also political participation. And we made it easier for people at the lowest levels of society to do business. That is about it.

I would be negligent not to note that this economic model was ushered in just as we ended an internal war with the Shining Path. This was a short, messy war, but one that was relatively successful for the Peruvian state, and that allowed us to get a lot of our problems behind us.

GB: Which are the countries to watch in the Americas over the next 10 to 15 years?

HDS: From your point of view, probably the big countries. Peru is a small country compared to either Mexico or Brazil, so it is obvious that these countries will dominate. These big countries may not be growing as fast as Peru and Chile, but they will certainly have greater influence on the continent’s future simply because of their size.

Peru, Chile, Colombia and Brazil, however, are closest among themselves in their economic philosophies: they all operate today along the basic lines of the Washington Consensus – governed by what Americans and Canadians would call fiscal conservatives, or what Europeans would call economic liberals. All of these four countries have broadly similar economic frameworks, policies and preferences.

Of course, these countries came to adopt the Washington Consensus at times of peculiar authoritarianism in their respective histories. Take Pinochet in Chile: Chile was the first Latin American country to essentially move from developing to developed status – even if under dictatorship. So the model is not exportable without the strongman leaders who drove it through their systems.

GB: What is your assessment of the current state of the Chavez-inspired Venezuelan or Bolivian model?

HDS: These countries have undertreated, if not altogether neglected, the entrepreneurialism that is needed for a society to prosper. Everyone wants equality. And there clearly is a lot of inequality in that part of the world. But you cannot get off the ground – economically – simply through rhetoric. You have to move beyond electioneering in order to mobilize economic forces. The only way in which you can beat poverty is through greater wealth and better distribution of wealth. There does not seem to be much of either today in Venezuela and Bolivia. Capital is not freed up in these countries, and the governments do not allow individuals to accumulate capital. Private property is not fungible – that is, it cannot be used as collateral, to generate credit, to form capital, or to guarantee a supply of basic services. In other words, assets in the country are not put toward what Marx called surplus value. If that does not happen, I do not see how wealth can be generated. And so I believe that these countries are headed in the wrong direction – even if I may sympathize with the social grievances that have motivated their methods and doctrines.

GB: What, if anything, is to be emulated among countries in Central America?

HDS: Panama, as mentioned, looks like it is on the right track; Costa Rica also. That said, I do not think that Latin America has anything special to teach the world in terms of macroeconomics. For the last 20 years or so, we have effectively been perfecting the basic framework under which Western countries have been operating for some time now – playing with wealth redistribution and democratic imperatives. We have nothing to teach anybody, except that we have found ways – at least in the case of Peru – for dealing with political violence in a more or less civilized manner. We have found ways of empowering people – through microfinance, strengthening property rights and, among other things, facilitation of business. But in macroeconomics, we are definitely followers.

GB: Is Latin America looking to Asia for any lessons?

HDS: Fujimori was probably a very big admirer of Singapore. The Chileans were too. But the models that they implemented were strongmen models. This was also true of Singapore and Lee Kuan Yew. Politically, the times have changed in Latin America, and so the strongman methods that lubricated the introduction of those economic paradigms would probably be unacceptable today.

GB: What is the state of the indigenous people in today’s Peru?

HDS: First things first: most Peruvians are indigenous people. Moreover, you would not find one Peruvian today, in the urban centres, insisting on some description of tribal sovereignty. All of the indigenous people in Peru’s urban centres are actively integrated into the private economy. And unlike, say, Canadian Aboriginals, Peru’s indigenous people form the country’s majority. President Humala is himself at least half indigenous. Toledo was an indigenous president.

In Peru, the market economy is no longer associated only with white people, but rather with people of all races. There is no artificial reserve system that separates indigenous people from the political economy of the rest of the country. And when indigenous people from Peru travel to the US and other Western countries – whether they are Aztecs, Mayans or Incas – they want to be assimilated into some form of modern, Western organization.

GB: Are you impressed with anything that is happening – at least on the economic front – in the post-Arab Spring Middle East?

HDS: We have to start with a key question: what was the Arab Spring all about? Our organization actually worked to determine who the people were who self-immolated and got everybody to rise up in the streets. So far, we have been able to determine that, in the first two months of what has been called the Arab Spring – that is, from December 17th, 2010 (when Mohamed Bouazizi self-immolated in Tunisia) through to February of 2011, by which time four strongmen had been toppled – some 64 people self-immolated across the Middle East. All of these people were business people, or what we might otherwise call budding entrepreneurs. They were street vendors, small restaurant owners, and so on. And all of them committed suicide or attempted to commit suicide in the aftermath of expropriation of their property by the state.

In the end, an average of two or three people self-immolated per Middle Eastern and North African country. Some 40 percent of those who self-immolated did not die – that is, they were saved by people around then. But in all cases, these people were protesting against some species of expropriation. Their property was being taken away from them, as was their right to do business. In the case of Bouazizi, for instance, one might have expected that there would have been a political declaration from his family – after the fact – or perhaps a religious declaration. Instead, in their interview with us, the family said: “The poor also have the right to buy and sell.” This is about as commercial as one can get; one might have expected something far more romantic.

Another word that came up in at least 70 percent of the cases was ‘hogra,’ which, loosely translated from the Arabic, means ‘contempt’ – that is, contempt for the small businessman or woman, contempt for the bazaar, for the souk, and for the peddler.

GB: What do you conclude from your study?

HDS: For all practical intents and purposes, the people who self-immolated – in other words, the people who were called the martyrs, and who triggered the Arab Spring – had essentially economic views.

Beyond that, we have been keen to determine how many people in the Middle East and North Africa today work within the bounds of the legal economy. In other words, how many people do not have clear property rights or access to credit, and are fundamentally unable to compete in the global economy? After studying the region over the last 12 years at the request of governments and international organizations, we have determined that anywhere between 70 and 80 percent of all enterprises in the countries of this region operate outside of the law. Those who self-immolated were in most cases the managers or owners of these extra-legal businesses. As such, the Arab world is only about to discover the reasons for which its people rose. The very spark that lit the fire has not yet been properly diagnosed.

GB: If the Arab Spring is primarily an economic story, what is to be done in policy terms to react to it?

HDS: The first dimension must be intellectual. There is no path dependence here. The region must not resign itself to historical determinism – a way of thinking that applies in the Middle East just as it does in some parts of Latin America. I think that what happened in the West, starting in the late 18th century, through the 19th century, and even through to the last century, had little to do with historical determinism: it is simply called the Industrial Revolution. That was when people discovered that the only way to get to prosperity was by collaborating with other people according to a set of rules developed over time by Europeans and North Americans. In other words, once you discover that capital exists – that entrepreneurship exists – this cuts right through any historical trend that may seem predominant. The Arab experience should absolutely not be exceptional in this regard.

GB: Practically, if you were to advise Mohamed Morsi and his team in Cairo today, what would you propose?

HDS: We have been in conversations with all of them. We have told them the same things that I am saying here. In Egypt, the red tape is crippling. The amount of time that it takes to have some kind of control over land so that you can build is 17 years of red tape. Add to this the time spent fending off more powerful people who want to dispossess you of whatever you may own – formally or informally. If you look at many of the people today in Egyptian jails, they are, frankly, people who have not been able to pay their debts, and have essentially been exploited financially.

In most of the region, the majority of the people are still living in what I call the mercantilist system – that is, capitalism for only a few. What we tell Arab governments is that it is only 10 to 20 percent of the population that have the rights and the tools to go global, economically. The majority of the population simply cannot compete – no matter how many free trade agreements may be in place. In fact, most of these governments really have no idea about why it is that they are poor. Now they are slowly realizing that much of it has to do with the fact that their citizens are not economically protected, and not equal before the law.

Politically, my advice for Morsi would be to listen to his own people. That sounds too broad and simple, of course. Every time that I have tried to figure out what is meant in Western systems by listening to one’s own people, I get a different answer, depending on the country or even province or state in question. Switzerland has its referenda. In the US, Congress cannot pass a law without pre-publishing draft legislation and passing through comment and notice periods. Congressmen and women are elected by district. The same goes for Canadian and British and Australian parliamentarians. By contrast, in the Middle East, not one person is elected by district. And so there is no local accountability.

One more example: in Japan, everything looks quite centralized. The Diet seems to have all of the powers. But you soon realize that it cannot approve a law of any import unless it holds a popular assembly that is actually supervised by the press. Once the laws are approved, they have to be looked at by the press. There are at least 40 newspapers per press room. And then, of course, there is electoral accountability for Diet members in their local districts.

All of this tells me that the key lesson of democracy for the new Middle East is not just that electoral pressures matter, but that the manner in which decisions are made – indeed, what goes into decision-making – is by far the most important aspect of good governance.

GB: Elections are obviously not enough, correct?

HDS: One of the characteristics of all developing countries is that they have elections – and only elections. For all practical intents and purposes, this means that they often elect dictators. In Peru, for instance, we elect presidents for five years. Over the course of a presidential term – that is, over the course of five years – Peru manifestly enacts many thousands of decisions, from supreme decrees all the way to bona fide laws.

Just because we have the press, and just because a Canadian or British NGO occasionally visits Lima and shakes up the place, does not mean that we have anything close to what Canada or Britain has in terms of real democracy. Returning, then, to the Middle East theatre, the first thing that the leaders in these countries ought to be doing is to find out from their own people what they need and what they think. Unfortunately, for now, these countries simply do not have the means to do this. There is no feedback inside the systems of these states. The reason that we discovered that it takes, say, 560 days simply to open a bakery in Egypt is that we put 120 people into the field to investigate. But evidently, we should not have to do that.

Let me add that, in respect of the complete absence of these democratic feedback (and accountability) mechanisms, the West often lets us – that is, developing countries – get away with murder. The West continues to assume that, just because we have elections – just because Jimmy Carter comes in and says that we are fine – means that we have democracy. Clearly, it cannot be that simple.

In this sense, the West has an especial duty toward the rest of humanity to ensure that it gets its advice right. This is due to the fact that, from China to Singapore, we are all, one way or another, really imitating the West – for the West has the most socio-politically successful model that ever was. I am talking about the high buildings, the way you educate – all of it, really. Sure, there may be a Chinese or Japanese spin on this, but we are all effectively Westernizing. So the West has a conspicuous duty to convey its lessons properly, but also to be sufficiently humble not to export domestic quarrels or ideological wars.

GB: Is there a country in the post-Arab Spring Middle East that is getting things right – politically, economically or on other fronts?

HDS: I am generally more optimistic than the press and most Western commentators about the future of the Middle East – largely because I have had the privilege of being able to talk to some of the new leaders in the region. In many cases, I have found these new leaders to be extremely interested in making big changes. Of course, the question is: if many of these leaders seem to know and want so much, why are they not getting things right? Probably because, at this stage, the question is still: who is going to run the place? Who is going to write the national constitution? How is parliament going to be elected? And, to be sure, how much power is the military going to wield? So we should avoid being too impatient with these leaders and their countries. Clearly, there are some people in the new Middle East who are really willing to talk about modernity in very interesting ways – even if there does not seem to be much light in the sky for the moment. We will all have to wait a little while to see results.


Hernando de Soto is President of the Institute for Liberty and Democracy in Lima, Peru. He is the author of The Other Path and The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else.

(Photograph: Paul Richards)