Magazine February 24, 2014, Issue

De Soto’s Excellent Path

A visit with Peru’s economist and global activist, Hernando de Soto

Lima, Peru — Sitting here listening to Hernando de Soto, I think, “How am I going to avoid describing him as a ‘force of nature’?” That is one of the laziest clichés. But de Soto is, I’m afraid, a force of nature. He seems to be thinking constantly, and the thoughts come out in great waves of speech. They are big thoughts and little thoughts, grand concepts and details. As he speaks, de Soto draws on huge reservoirs of reading and observation. He seems to remember everything he ever encountered. Sometimes, he will think for a minute or two, before releasing the waves of speech. This is unusual, in my experience — a long period of silence before the talking begins.

De Soto is a talker and a doer. He is an economist, one of the most influential intellectuals in the world. He is also an “economic activist,” as someone once put it. He has an organization called the Institute for Liberty and Democracy. De Soto is a classical liberal, a free-marketeer, a capitalist (pick your term). He is best known for his advocacy of property rights and the general rule of law. He has spent many years trying to lift the poor out of their poverty. In his career, he has been everywhere, met everyone. He has been praised by U.S. presidents starting with Reagan. Of course, he has won a slew of awards, from governments and private groups. Three of those awards are named for Adam Smith, Friedrich Hayek, and Milton Friedman. That gives a strong flavor of de Soto’s thought.

I have come to deepest, darkest Peru to talk with him about several things. This is a phrase that he himself uses — “deepest, darkest Peru” — and he reminds me of its origins: the Paddington Bear stories. Paddington is a native of this country, an immigrant to England. De Soto lives here in Lima in a beautiful home complete with lush gardens. It is something out of a South American fantasy — and it gets more fantastic when you see the alpacas, gazing at you from their pen. (An alpaca is a smaller cousin of the llama.) De Soto’s walls are covered with more than the usual number of books, photos, and mementos. The photos are mainly of statesmen and intellectuals. Two in the latter camp are Hayek and Friedman: De Soto brought both down to Lima, to talk up classical-liberal ideas. As far as I can tell, security is light, but not nonexistent. There used to be a need for a great deal of security: De Soto was a key enemy of the Shining Path, the Communist guerrillas who killed about 40,000, and terrorized many more, before they were finished.

On my agenda are three main subjects: de Soto’s life, his latest documentary, and some of the big issues in economics — especially the perpetual struggle between socialism and capitalism.

His parents had the conquistador in mind when they named him: The first Hernando de Soto was born some 450 years before the economist. The economist was born in 1941, in Arequipa, a town in southern Peru. His father, Alberto, was a diplomat, and his mother, Rosa, was a local beauty. After a military coup in 1948, the family went into exile, living in Geneva. In that international community, Hernando learned many things, including utterly idiomatic American English. He visited Peru frequently and returned to live in 1979. Here, he found himself haunted by a question: Why did his native country lag so far behind Europe and the rest of the developed world, when Peruvians were just as talented as anybody? He concluded that the system was rigged against the majority, working only for a privileged few. In 1980, he set up a think tank with Mario Vargas Llosa, the writer. This was, is, the Institute for Liberty and Democracy, or ILD.

For seven years, de Soto walked the shantytowns and other “outsider” areas of the country, and thought. He then came out with his first book, a blockbuster: The Other Path. The alternative he presented was the path of — well, liberty and democracy, as opposed to the Shining Path and its Communism. Prior to publication, it was clear to de Soto that the guerrillas would come after him. He took some security precautions. He also decided to change the title of his book — to “The Path of Liberation.” Maybe the guerrillas would take less offense to that. But a few days later, de Soto was shaving, looking at himself in the mirror, and he said, “You coward.” He changed the title back — and was entirely, permanently committed to the fight.

In 1990, there was an epic presidential contest between Vargas Llosa and Alberto Fujimori. Fujimori won — and adopted many of the recommendations of the ILD. Indeed, ILD implemented those recommendations, carrying out its own program, for Peru. The country liberalized, bringing more and more of the poor and dispossessed into the mainstream legal and economic frameworks. The Shining Path persisted, of course, including against de Soto: No fewer than 17 guerrillas were assigned to kill him. Shining Path bombed the ILD in 1991, wounding two. They bombed them again the next year, this time killing two, though not the principal target, and wounding about 20.

During the 1990 presidential campaign, de Soto and Vargas Llosa had a falling out. (More about that in due course.) And, for two years, de Soto was close to the president, Fujimori. They met every other night, in the presidential residence, from 10 or 11 to 2 in the morning. They talked about whatever challenges were at hand. De Soto says that Fujimori had enormous self-confidence, chutzpah. In getting elected, he had bucked the system, all the elites, on left and right. He was a very quick study, says de Soto, assimilating ideas and then acting on them, or having them acted on. He was also brave, very brave, especially against the Shining Path. More than once did he provide an example of sangfroid. So, those are good sides to Fujimori — but there proved others, including egomania, corruption, and gangsterism. De Soto broke with him in 1992. At one point, Fujimori told de Soto, “Doctor, I live under a lucky star.” He apparently thought himself a man of destiny, invincible. But the star went out and Fujimori has been in prison since 2007.

It was in 2000 that de Soto came out with his second book, another blockbuster, The Mystery of Capital. It has been translated into some 30 languages and has sold more than 2 million copies. The ILD has been very busy, fulfilling its mission, which is “to assist emerging nations in integrating their poor majorities into the economic mainstream under a single rule of law.” De Soto and ILD have been “called in,” as de Soto puts it, by about 30 heads of state, not all of them nice democrats, but dictators, too. It seems to me that de Soto has a wide streak of realism, to go with his idealism: He will work with nearly anyone, as long as it means improvements for the poor. His rule is, ILD will work in any country that is accepted by the “world community” — wherever a U.S. embassy and a U.N. representative are found.

De Soto has made three documentaries with the Free to Choose Network, based in Erie, Pa. The latest of them is Unlikely Heroes of the Arab Spring, now airing on PBS. This “spring” began in January 2011, when a Tunisian fruit vendor named Mohamed Bouazizi committed suicide in a public self-immolation. De Soto sent an ILD team into the region. He says, “I’m a researcher, really. It’s kind of like Joe Friday in Dragnet: ‘Just the facts, ma’am.’” He wanted to know why the Middle East in general was ablaze, from the lips of the very people doing the blazing.

The team discovered that, in the two months after Bouazizi self-immolated, 63 more men and women had done the same. They did it in country after country. Like Bouazizi, they were entrepreneurs, or would-be entrepreneurs. ILD talked to their families, and they also talked to survivors: Thirty-seven of the 63 failed in their suicide attempts. In the documentary, one of these 37 shows the scars all over his body. “I tried every possible way to get my rights in society, to find work,” he says. “I tried a thousand things,” with no success. He felt trapped, finished.

De Soto testified to the U.S. Congress about the Middle East last year. In an understatement (as I see it), he said, “Mass suicide in defense of property rights is hard for the modern Western mind to understand.” Why would someone like Bouazizi kill himself over the confiscation of some fruit and the scale with which to weigh it? But Bouazizi’s act was motivated by a lot more than that, de Soto has explained — to Congress, in his film, and to me: Bouazizi was under the whim of local authorities, who could choke off his every avenue. There was nowhere to go, no other authority to appeal to, no veritable rule of law. His last words, before he lit the match, were, “How do you expect me to make a living?” ILD asked Bouazizi’s family what they thought he had died for. They answered, “For the right to buy and sell.”

To Congress, de Soto said, “The average Arab entrepreneur needs to present 57 documents and faces two years or more of red tape to obtain a legal property right over land or a business.” In Egypt, the legal opening of a business “requires dealing with 29 different government agencies and navigating 215 sets of laws.” Arabs, like the majority of the world’s population, lack basic property rights and related rights. They feel left out of the good life, unable even to strive for it. In his film, de Soto says that the Arab Spring amounts to “a huge shout for inclusion.”

He is also entitled to say something about terrorism, I think. The Middle East is plagued by it, as are other regions. He told Congress, “Not so long ago, we at the ILD saw with our own eyes . . . how the entrepreneurial frustrations of ordinary Peruvians could easily be whipped up into terrorism.”

I want to ask de Soto about the word “capitalism.” Where I come from, it is a dirty word, usually said with a scoff or a sneer. De Soto is quite practical about the matter: “If the word is in bad odor, avoid it. Words are what people want them to mean, and if ‘capitalism’ is a bad word, I can think of a lot better uses of our time and talents than to defend it.” When he first arrived back in Peru, capitalism (or whatever we wish to call it) was known as “la economía de la selva” — “the economics of the jungle.” Well, what word does he himself use? It depends on where he is, he says. It depends on the local vocabulary. “Private property,” to some, means “what the rich have” — not the materials a humble fruit vendor has. In the Middle East, the term “property rights” may not mean anything (de Soto and ILD found). But people know the word “expropriation” — they have been victims of expropriation. In any event, says de Soto, “Never go die for a word, if what is important is the idea behind the word.”

He is not one who believes that the free market or “Western values” are for some and not others. He is more a universalist. He recalls a crisis in the Peruvian Amazon, where people were rebelling violently. He spoke with them, and they said, “Sir, your ideas are absolutely alien to our ethnicity. There are things that are Western that are not made for the rest of us.” “Oh?” said de Soto. “Like penicillin?” And “how about soccer”? He then went through the list of demands that the rebels were making of the government in Lima, pointing out all of the items that were “Western” — including computers. De Soto says, “There is no such thing as a Western thing or an Eastern thing: If it works, everybody wants it.”

Furthering his case, he brought Alaskans to the Amazon, “in full regalia.” One of them said, “My name is Bobbi, and I am an indigenous woman from the U.S. I am now running a $2.3 billion company, and I tell you, I’m not ethnically averse to it.” Her counterpart, or would-be counterpart, from the Amazon said, “My name is Irene, and I’m a Bora [a member of a particular tribe], and I have no legal property, and I’m poor as all hell.” Obviously, de Soto grants that there will be local or national adaptations of universal ideas and mechanisms — the Japanese do capitalism in a Japanese way, for example. But he does not accept that economic freedom is suited to some and not others. Pleas about culture can be excuses for the status quo, including the protection of privilege. If you want to know what the poor really want, you should ask them.

William F. Buckley Jr. often asked, “How do you explain the continuing success of socialist politicians in the Third World, and elsewhere, when socialism is manifestly a failure and capitalism the opposite?” He got a variety of answers. De Soto says that capitalists make gross mistakes, and socialists capitalize on them (so to speak). Socialists present themselves as checks and balances on capitalism. The capitalist he sees in Peru, says de Soto, may talk the language of economic freedom, the way plain old dictatorships adopt the rhetoric of Marxism — but he is really concerned with his own interest, regardless of others’. “By ‘capitalism’ or ‘economic freedom,’ he does not mean what Bill Buckley, you, and I mean.” That is a problem.

In the United States, President Obama is making inequality of income a big issue, and it is a big issue elsewhere, too, of course. De Soto notes that there is some “human need for leveling.” And people are sensitive to enormous and unnatural-seeming gaps between rich and poor. In Peru, he says, there is a lot of money to be made in mining, “which is perfectly legitimate.” (De Soto himself was a businessman in mining.) But what do you have to do to be involved in this field? You need a concession, which means that the state has to give you some kind of property right over the subsoil. You have to pay significant fees and jump through many hoops. The native people living on top of those mines, or around them, are not likely to get a concession. And they are ripe for the Marxist language of exploitation. “How do you beat socialism?” de Soto says. “You make sure that everything you do that helps business reaches everybody.” Drawing on his bottomless fund of American idioms, he continues, “Make sure that what’s good for General Motors is also good for the Peruvian Indian, and we’ll wipe them out” — not the Indians, but the socialists.

Since 2008, and the onset of the financial crisis, the capitalist idea has had a hard time of it. But the trends are still with us, says de Soto. “Outside of North Korea and Cuba, everyone accepts that a competitive economy, without privileges, is what is best for the poor” and society at large. What the Left falls back on, he says, is a lack of political viability. They say, “The people are just not ready for that kind of thing yet.” Then there is the curse of “romantic nationalism,” as de Soto calls it — nationalism of the kind represented by the late Hugo Chávez in Venezuela.

I bring up a potentially painful subject, and I introduce it this way: For 20 years, there were exactly two anti-Communists east of the Hudson River (I exaggerate a little): Richard Pipes, the historian of Russia at Harvard University, and Solzhenitsyn (who lived in Vermont). And they were at odds. This was unhappy for admirers of them both. In the whole of Latin America, there are exactly two classical liberals (again, I exaggerate). They are both Peruvian, and they are both from Arequipa, and they are even distant cousins (I learn from de Soto). I am talking, of course, about de Soto and Vargas Llosa. De Soto says he never thinks about their split, until curious people like me bring it up. It happened so long ago. He takes me through the story step by step. He and Vargas Llosa were close friends and comrades. Since the split, there has been occasional sniping between them. They have not seen each other in almost 25 years, except fleetingly: De Soto has spotted Vargas Llosa on the street a couple of times; Vargas Llosa has gone in another direction. I have only one side of the story, of course. Will these two titans ever reconcile? I could not say, but it would be a reconciliation to cause smiles worldwide.

I have talked with de Soto late into the night — late into two nights, actually — and I ask him the big question concerning the United States, which also concerns everybody else: Are we going down the tubes? Is the sun setting on us? Nonsense, says de Soto. We are so far ahead of everyone else, second place is not even close. The U.S. is still a model to peoples all over. We have done better than any other country in “bringing people in,” which is to say, including them in our legal and economic systems. We can show other countries how to achieve liberty and democracy and the resulting prosperity, and save them some steps: The United States has evolved a great deal since the Revolution or the Wild West or some other period you might name. Poor countries can take intelligent shortcuts.

De Soto has his detractors, as everyone does, and some of this detraction is probably driven by envy: De Soto is famous and laureled, and regarded by many as a guru. But he is clearly doing work of extraordinary value. He is like a physician who knows what ails the patient and the medicine he needs. And if the patient won’t take it — or some government won’t let him have it — that is another problem that needs working on.

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