“Lessons are not given, they are taken.”
—Cesare Pavese
Although subtitled The Invisible Revolution in the Third World, Hernando de Soto’s The Other Path is as much revelatory as revolutionary. For one who has grappled with the problems of Third World development, seeking to define and articulate a certain truth sensed to be hidden beneath the muck of pseudoscientific political economic theory, The Other Path is a profoundly refreshing exposition of reality. But perhaps of greater importance, it is a moving testament to the indomitable spirit of the common man.
While The Other Path is a worthy account of the grass-roots entrepreneurs of Peru, it could just as easily be a study of the “black market” or informal economic sector anywhere in the world. Immense underground economies exist in countries as diverse as the Soviet Union, Italy, and Nigeria—places where, de Soto says, “underdevelopment was not a problem of people but of the system.” In a general sense, the problem in Peru as elsewhere is the state, or, more specifically, an archaic and unbelievably byzantine legal system crafted to protect the interests of the elite and punish those seeking upward mobility by making them outlaws. The black market is therefore a natural means of remedying an unnatural denial of human aspirations.
Hernando de Soto is a revolutionary. His work is sprinkled with the terminology one associates with Third World radicalism, from “the path to liberation” to “the country’s structures must be transformed.” Yet de Soto is a revolutionary not of the left or of the right but truly of the people. Cognizant of the false appeals to the poor’s frustration made by Marxist-Leninists, he seeks liberation through economic empowerment rather than bloody insurrection. The very title of his book is a symbol of his opposition to communism, for The Other Path is offered as the only viable alternative to the Shining Path, Peru’s burgeoning Marxist guerrilla movement. He warns that “the more the forces of change are repressed and the greater the level of unrest, the more likely it is that professional revolutionaries will seize power and impose totalitarian systems.”
De Soto’s indictment of Marxism-Leninism is equaled by his attack on what he calls “Mercantilism.” Although the author’s definition of mercantilism differs somewhat from mine (I question whether “the raison d’etre of the mercantilist state was to redistribute wealth according to its fiscal and political interests”), it nevertheless serves as an approximate model for modern Peru and other statist political economies. De Soto is correct in stating that “Westerners often do not realize that their Latin American counterparts function in economies governed by politics rather than markets.” This is the primary failing of development “specialists” in North America and Europe, who assume that a democratic or rightist authoritarian regime in the developing world automatically equates to a modern market economy.
Some of the most pro-US regimes, most notably that of the former Somoza government of Nicaragua, have also been highly statist. Nicaragua comes to mind when de Soto says “the traditional left also confuses the two systems [free market and mercantilist], but they conclude that, although private ownership of the means of production predominates, the development the country needs has not been achieved, proving that capitalism has failed and that a collectivist model is needed.” Bilateral economic assistance given to a fragile young democracy in Latin America or elsewhere can prove counterproductive unless the regime is actively pursuing market-oriented structural reforms, for an unwillingness to unravel the barbed wire shroud of statism ultimately discredits the concept of development via a formal private sector.
Third World Marxists continually seek “evidence” to use in repudiating the free market model so that a country can be electorally kicked back onto the statist path. The most glaring recent example of this is Ecuador, where a tragic combination of natural disasters and falling oil prices, coupled with an inability to retract the state’s tentacles, cast a dark shadow over the free market policies of former President Leon Febres Cordeiro and led to a decisive leftist victory in the last national elections.
De Soto’s development theories do not easily fit into an ideological matrix. Whereas his strongest advocates in the United States have been conservatives or libertarians, in Latin America he is generally viewed as a threat by the old conservative elites while winning a surprising degree of support from the “soft” left. The Institute for Liberty and Democracy, de Soto’s Lima-based think tank, is funded by the US Agency for International Development (AID), the John M. Olin Foundation, and other organizations identified with the Reagan and Bush administrations. Yet the 40 full-time economists, lawyers, and engineers employed by the institute would tend to identify themselves as politically left-wing. De Soto explains this seeming contradiction by saying that American conservatives are actually classical liberals and philosophical descendants of revolutionaries such as Jefferson and Franklin, whereas the Peruvian right continues in the tradition of Francisco Pizarro! As I number among my friends several thoughtful Peruvian conservatives, I find this characterization unfair, and wonder whether such rhetoric impedes de Soto’s efforts to build bridges to Peru’s political establishment. De Soto must know that revolutions are, in practice, usually made from the top down rather than the bottom up.
De Soto claims that his institute’s staff, along with thousands of other Latin American intellectuals, had turned to the left out of concern for the poor rather than because they had been converted by the writings of Marx, Engels, and Lenin. Offering the free market as the best means of solving the problems of underdevelopment, the author has induced many of these would be (or perhaps more aptly, armchair) revolutionaries to tread his “Other Path.” Now, de Soto says, not a single one of his staff “believes that state control of the economy is the panacea for injustice and backwardness.”
It is true that many who count themselves among the social democratic left of Latin America and the Caribbean have been affected by de Soto’s ideas, with profound implications for the future course of economic and political development in this region of such importance to the United States. I was acquainted with Jamaica’s Michael Manley for some years before his reassumption of power earlier this year, during which time I had given him books and articles by and about de Soto and privatization guru Stuart Butler. At a recent meeting with US Commerce Secretary Robert Mosbacher, Prime Minister Manley told me that these materials had played a significant role in his decision to continue the privatization policies of his predecessor Edward Seaga, and that he intended to go further by finding ways of bringing Jamaica’s famous parallel marketeers, the “Higglers,” into the formal economy.
Therein lies the crucial dilemma posed by the concluding chapter of The Other Path—how to reform the unbelievably complicated and fiercely resistant macroeconomic structures of the developing world without precipitating the type of bloody anarchy that convulsed Venezuela in the early part of 1989. De Soto recommends that “the formals and the informals should be integrated into a single economic and legal system which outlaws discrimination so that the entire population can make full use of its creative energies.” While he acknowledges the need for “appropriate” macroeconomic policies and corresponding investments, I believe he errs somewhat by stressing that the adoption of microeconomic measures is “the most important element.”
Both are equally important to a country’s development, yet microeconomic reforms can never be addressed unless grander policy issues such as trade, foreign investment, debt, and security are responsibly dealt with. Alan Woods, head of US AID, seems to agree, saying in his recent report on US foreign assistance initiatives that “the same economic and development policies that benefit developing nations as a whole also benefit individuals . . . development means choice; the greater the range of choice, the greater the degree of development.”
With the exception of countries such as Mexico and Bolivia, which are bravely adopting structural adjustments at great political risk to the incumbent parties, macroeconomic reforms have been slow at best and an outright sham in some cases. Unfortunately, most Third World governments respond only to strong external pressure to privatize or reduce trade barriers. While de Soto and his supporters have made notable gains in revamping aspects of Peru’s byzantine legal system, and have certainly caught the attention of the government, they appear powerless to halt the country’s precipitous economic decline that has resulted from the Garcia regime’s maladroit interventionism.
The World Bank has disbursed over $4 billion since 1980 to help Third World countries make “the necessary institutional changes in government programs and policies to modify the economy’s structure.” Yet the World Bank itself concluded that its structural adjustment programs and those of other institutions had largely failed. The reason, according to the International Monetary Fund’s publication Finances and Development, was that recipient governments “were not adequately persuaded.”
This is nothing more than a multilateral development banker’s way of saying that the big lenders and donors lacked the political will to demand reforms in exchange for cash and credits. After all, structural adjustment funds are designed to help cushion countries against the shocks to political and social systems caused by a free market reorientation of economic policy. Despite rhetorical support for structural and sectoral reforms, many recipient countries simply take the money and run, leaving the multilateral institutions wringing their hands.
Hernando de Soto’s Other Path is really the only path to economic rejuvenation in the developing world, yet his recommendations can only become reality when the United States and other sources of aid demonstrate that their patience has ended for those nations that pay only lip service to economic reform. In an era when our own fiscal resources are shrinking, our development assistance policy should be simple and direct: reward those who are willing to help themselves, penalize those who don’t. Unfettered economies are the only solution to long-term stability, and the only secure foundation for a pluralist political system.
[The Other Path: The Invisible Revolution in the Third World, by Hernando de Soto (New York: Harper & Row) 261 pp. $22.95]
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