The Other Path: The Economic Answer to Terrorism [Paperback]

In the `80s and `90s, Sendero Luminoso (the Shining Path), a communist insurgent group opposed to all forms of capitalism, waged an effective guerrilla war in Peru. Despite the havoc they unleashed on peasants, they were thought to have captured the popular imagination. But what do ordinary Peruvians care about dead men like Karl Marx and Mao? In the Other Path, a play on the name, Shining Path, Hernando de Soto shows that, contrary to the perceptions of the West and the Peruvian elite, ordinary Peruvians do not hate capitalism. On the contrary, they embrace and practise it everyday

De Soto's thesis, the result of painstaking research, is two-fold: First, modern Peru is conceived as an extractive enterprise in which the predominantly white elite, ensconced in the capital city, Lima, economically oppressed the voiceless native population, dispersed in the countryside. Therefore, Lima was built only for the elite; the natives were not supposed to live in Lima. Second, Peru does not have a true market economy; instead, it operates a mercantilist economic system in which privileged groups vie for political concessions (monopolies) from the government. This distorts the economic incentives in society. Therefore, Peruvians expend a lot of energy seeking rent rather than focusing on markets, customers and product/service improvement to customers.

In the twentieth century, however, this dynamic changed. Mass native Indian migration from the countryside to Lima overwhelmed the city's ability to absorb the migrants (Lima's population, for example, quintupled from 1930-1983). More insidiously, the new migrants found out that the formal legal system was designed to shut them out. De Soto shows that it takes 300 days to register a company; and almost six years to get a building permit. The result: the migrants began settling illegally on government land and developed an elaborate informal economy.

Contrary to elite thinking, the migrants (informals, as De Soto describes them) do not form a fifth column seething with anger and resentment against the state; instead, the informals quickly organised themselves, selling their wares on the streets, building marketplaces and providing much-needed transportation services in Lima. By 1980, the informals had become so successful that they virtually controlled the housing, retail and transport sectors within the capital city. However, because the Peruvian elite cannot reform the legal institutions to absorb the informals, the state cannot benefit from the drive, energy and entrepreneurial abilities of the informals. What a pity! Peru's elite seem to be stuck in a romantic, hacienda mind-set. Finally, De Soto proposes an agenda for reforming Peru's institutions. This is work in progress.

The Other Path was written for a Peruvian audience; therefore, it may be difficult for a non-Peruvian to understand some of the dramatis personae that play important roles in the country's informal economy. I had no spark of recognition when I read about Alejandro Toledo or the leader of the Union of Bus Drivers in Lima. However, there are some important lessons. De Soto successfully challenges the conception among elites of post-colonial societies that the poor in their countries are, at worst, an undifferentiated mass of imbeciles, who should be kept in the rural areas and, at best, people who need to be spoon-fed by the state. In my native Nigeria, for example, the Minister of the Federal Capital, once stated, "poor people are not allowed to migrate [from the rural areas] to the Federal Capital". No, the Third World is bursting with entrepreneurial energy; markets, trade and exchange are not uniquely Western institutions.

De Soto points out why his native Peru is poor: the absence of property rights for the informals and the perpetuation of an outdated form of capitalism--mercantilism, not the absence of creative entrepreneurial spirit. Market economies can work in the Third World. However, the ruling elite have to cast off the post-colonial extractive mentality. Due to unprecedented migration from the rural to urban areas (Lagos, for example was a city of 300,000 people in 1965. Today sixteen million people live there.), Third World elite need to reform their property rights to include the informals. They need to make it easier for their population to form companies, obtain building permits and monetise their considerable assets. Only so, will these countries lift themselves out of poverty and avoid the social discontent that happens when the majority of the population is excluded from the economic system. De Soto's message is an old one; it remains to be seen whether Third World elite have heeded it. If you want a more international treatment of the subject, then I'd recommend De Soto's, The Mystery of Capital.