The appointment of former deputy secretary of State Robert B. Zoellick — to replace Paul Wolfowitz as president of the World Bank marks a predictable return to normalcy. The script for the Zoellick regime should follow a well-rehearsed Washington morality play: Reassure World Bank bureaucrats and European allies alike that the “neocon” boat-rocking will end, conduct business as usual, and for goodness sake, promise to drop all that upsetting talk about the endemic corruption of the developing world.
Zoellick would do better, however, for the world’s poor and for the credibility of the World Bank’s mission if he did the unexpected. He should reorient World Bank policies around the insights of a Peruvian economist, a man with the name of a conquistador and the heart of a Bartolome de las Casas, the world’s first human-rights activist. Zoellick should labor to enact the policies of Hernando de Soto, and perhaps install de Soto in the prestigious post of World Bank chief economist.
Who is de Soto? After a successful business career in Europe, de Soto returned to his native Peru in 1979 at age 38 — not to conquer, like his namesake, but to liberate. He observed conditions in his own country with the objectivity of an outsider and the passion of patriot — and came to some iconoclastic conclusions.
The first thing he observed was that there was no lack of entrepreneurial energy among the poor. They ceaselessly invest their toil and meager savings. And yet they remain perennially poor, while the working class of North America and Europe prosper. Why is this so?
In a famous experiment, de Soto scrupulously observed regulatory mandates required to legally open a small garment factory in Lima. He and his team spent many hours each day filling out forms and standing in lines. Some 289 days later, they had succeeded. They had legally registered a Singer sewing machine.
Of course, no one but an intellectual with a point to prove can afford such an exercise — not in Lima, not in Cairo, not in any large, developing world city where masses of red-tape stand between small entrepreneurs and their dreams. The result is that millions who operate small businesses in the developing world exist in a legal grey zone. They have no clear, legal title to assets against which they can borrow to expand and grow. And they are always in danger that a visiting policeman or petty official will stop by to extract a bribe for looking the other way.
This is not a trivial matter. De Soto estimates that the amount of “dead capital” in untitled assets held by the world’s poor is at least $9.3 trillion — far in excess of anything the developing world can lend, offer, or even invest. In Egypt, de Soto estimates the poor own 55 times the amount of all foreign direct investment in that country since the time of Napoleon.
In essence, the World Bank is like a county agriculture-extension agency trying to irrigate a dry plain, while Hernando de Soto is the geologist patiently explaining that underneath is an immense and untapped water table.
How can we tap this ocean of capital?
What the developing world needs is a formal property system that allows the poor to have legal title, to accumulate their wealth legally, and to borrow against it for expansion and improvement. Without such legal rights, de Soto writes, we will continue to have “capitalist apartheid” in which capitalism will remain “a private club, open only to a privileged few” that “enrages the billions standing outside looking in.”
The contrast between the new president and the outgoing one would be interesting. Paul Wolfowitz’s prime focus was on one major piece of the development puzzle — corruption. De Soto focuses on the whole problem: the utter lack of a formal property system in most developing countries.
De Soto would also be a politically shrewd choice. At a time when the United States is widely unpopular, the choice of a South American would be well received. De Soto is the rare economist who is not only a graceful writer, but one who produces books that are popularly read. He has as much real-world experience as any banker, managing one of the world’s most respected think tanks, Lima’s Institute for Liberty and Democracy, as well as advising governments on scores of successful reform programs.
Some might argue that de Soto would lack the standing to significantly reform the inner bureaucracies of the World Bank. Hernando de Soto might likely agree. Why bother with such minutiae when there are trillions of dollars under foot, waiting to be unleashed?
— Mark W. Davis is a business consultant with the White House Writers Group in Washington, D.C.