Poor people often stay poor because laws are stacked against them. For 20 years, Hernando de Soto has been hard at work to change this
WHO? Hernando de Soto WHAT? Instituto Libertad y Democracia (ILD), an international think tank that registers the property of poor people WHERE? Lima, Peru WHEN? 1981 WHY? The right to property ownership is the best way to fight poverty
Why are people poor? That question doesn’t particularly interest Hernando de Soto. He believes a better question is: Why do people stay poor? Twenty years of research in numerous countries has convinced De Soto that there are two reasons why poor people stay poor: their property is not legally recognised as theirs and laws rob them of the opportunity to start businesses.
In Peru, his own country, De Soto put his theory to the test by attempting to set up a textile factory. It took him 289 days to get all the required permits (and Peru isn’t even the worst when it comes to bureaucracy, according to a comparative world study). No wonder that the so-called ‘informal sector’, where no permits are required, is the largest employer in developing countries.
De Soto’s solution? Change the law. Take away the bureaucratic obstacles. And give poor people legal ownership to the buildings and businesses they have created themselves. Between 1984 and 1990 De Soto’s organisation, the Instituto Libertad y Democracia (ILD), helped enact an impressive series of legal reforms in Peru, including a law that helped speed up the process granting people legal ownership of their property and making it far less expensive. Legally owning a small business or hand-built home gives people collateral, which they can present to the bank for a loan. They also gain freer access to water and electricity, simply because utility companies know that these people and their property exists.
The reforms in Peru helped 1 million families acquire property ownership rights. ILD is currently operating in a handful of countries – including Egypt, Ghana, the Philippines and Mexico – where similar legal and bureaucratic asphyxiation of small businesses is the order of the day. Russia, Nigeria and Thailand are now considering working with De Soto.
According to the ILD, there is a whopping 9 billion euros ($11.2 billion U.S.) in untapped capital worldwide. The institute calculated, for example, that 90% of all economic activity in Egypt circumvents the law. All of this unregistered ownership and informal economic activity is, strictly speaking, dead capital. It stimulates few other business opportunities. But things don’t have to be this way, says De Soto, and he’s got results to prove it. – BP