Passport out of poverty

According to Peruvian economist Hernando de Soto, the solution to world poverty comes down to passports and apples.

As de Soto – head of the Lima-based Institute for Liberty and Democracy – delivered the 2004 Albert H. Gordon Lecture on Political Economy, he recounted his most recent visit to Miami airport. When the immigration officer asked who he was, de Soto says he blithely regaled the official with the history of his family, which came to Peru from Spain more than 350 years ago.

As the crowd chuckled, de Soto said that the officer interrupted him and spat out “Will you just shut up and show me your passport!”

Legal documentation, de Soto said, not personal relationships, allows movement of people and goods across borders.

Then the Peruvian produced a bright red apple and sat it on the podium in front of him. He assured the audience that he’d purchased the fruit. He even had witnesses. But, he admitted, there was nothing on the apple that confirmed it belonged to him. In fact, “a stolen apple looks just like a legal apple.”

“In the same way that there’s nothing on the apple that says who the owner is,” he went on, “there’s nothing on the apple that says I can buy it, that I can rent it, that I can transfer it, that I can loan it, that I can pledge it, that I can use it as collateral, that I can mortgage it, that I can split it, that I can use it as the basis for buying a company.”

Laying his passport beside the apple, de Soto said, “everything that relates to ownership and trust, which is what makes the market go … has to do with the legal environment we create for physical objects.”

De Soto claimed that the problem in poor nations is that there are too many “apples” and not enough “passports.” In Egypt, for instance, he estimated that 92 percent of the country’s land and homes are without proper title and 88 percent of the

enterprises are extra-legal. Furthermore, de Soto said that the assets held by the poor of Egypt amounted to a staggering $248 billion. Even when you include the Suez Canal and the Aswan Dam, de Soto said, the value of the property held by the poor amounted to roughly 55 times the size of all foreign direct investment over the past 200 years.

Moreover, de Soto claimed that the numbers in Egypt were not much different from those in other developing nations throughout the world. In Mexico he estimated that the poor hold more than $315 billion in assets. But he said that the people of these nations can’t take advantage of these resources without the documents and underlying laws that allow them to leverage loans, organize companies, and conduct commerce.

“It is never really apples that travel,” he said. “It is documents about apples. What you exchange are property rights.”

De Soto asserted that nearly 80 percent of the world’s people do not have access to the legal structures necessary to create the organization that has defined Western capitalism: the firm. Without firms where individuals combine resources, work in large groups, and have a division of labor, de Soto said the word’s neediest citizens will never be able to participate in economies of scale or engage in trade.

“If you go out and start exporting apples in the United States, the first thing you will have to do is … fill in a bill of lading,” he said. “The first thing that the bill of lading asks you is ‘Put your name.’ The second thing it asks you is ‘Put your address.’ And 80 percent of us don’t have an address. I mean, we have a place to sleep at night, but we don’t have addresses … a book that you look at that tells you who actually owns what on the land.”

In order for modern markets to take hold, de Soto said that countries in his part of the world had to emulate Spain rather than Argentina. In 1978, he said, the per capita gross national products of the two nations were the same. Today, Spain’s GNP is four times that of Argentina. The difference, according to de Soto, was the European Union. In order for Spain to join, it had to make its legal structure conversant with those that were more supportive of property rights.

In closing, de Soto said that countries such as the United States had a responsibility to support the development of the sorts of laws and institutions necessary to support market economies. Latin Americans understood, however, that these institutions couldn’t be given or transplanted. They had to be homegrown.

“You can’t just transfer law from one (country) to another,” he said. “You have to root them in reality. And that’s an art you Americans excelled at in the 19th century.”