Underground Riches

By Tim Padgett/Miami

If you think the global economy is vast now, wait until Hernando de Soto is through with it. Where most see Egyptian shantytowns, De Soto sees tiny businesses and homes that together are worth 35 times more than the companies traded on the Cairo stock exchange. That grimy army of Mexico City street vendors, he claims, is part of an underground economy that helps create 85% of Latin America's new jobs. All it takes to jump-start economic growth in poor nations, he insists, is to legalize those clandestine markets, unleashing legions of new creditworthy entrepreneurs who can be trading partners for businesses in the U.S. and elsewhere. And De Soto thinks he knows how to make it happen: just hand out property titles.

It seems too easy a fix for a problem that has bedeviled development experts for a century. But De Soto's commonsense simplicity, laid out in his latest book, The Mystery of Capital, has heads of state from Haiti to Pakistan lining up for his advice.

De Soto, 59, an economist, first cited the potency of shadow economies in his seminal 1989 book, The Other Path. His new work argues that most market-oriented reforms have failed to help the poor because clubby oligarchs and red tape have shut them out. In Peru it takes a year or more to legally start a business--and it costs, in government fees, 31 times the minimum monthly wage. To legally own a home in the Philippines, De Soto says, requires a wait of as long as 25 years and 168 often venal bureaucratic steps. As a result, the Third World's poor--two-thirds of the world's population--have little choice but to work outside the legal system. De Soto estimates the value of their extralegal property at $9.3 trillion--about as large as the annual GDP of the U.S. economy. More than two-thirds of Latin America's construction is never legally registered--a big reason, De Soto found, why cement sales in Brazil bear little relation to official building figures. "We show a President the extralegal map, and it knocks his socks off. He realizes he doesn't govern the majority of his country."

Granting the poor title to their homes and businesses would allow them to use that collateral to borrow or raise capital for business expansion, De Soto says. He notes that the property-title revolution of the 18th and 19th centuries was a catalyst for capitalism's triumph in Western Europe and North America.

With the collapse of crony capitalist regimes like the one in Indonesia, and as oligarchic nations like Mexico elect more democratic presidents, De Soto's timing is propitious. His Third World clients hope that property-title reform will especially benefit industries like clothing, auto parts and agriculture--where the foreign-trade potential for extralegal businesses is enormous. Haitian President Jean-Bertrand Aristide wants to slice through medieval red tape and legalize his nation's extralegal assets, which amount to $5.2 billion--four times its legal assets. "We would," he says, "finally put our people in partnership with the system and with foreign investors."

If De Soto's thesis is simple, registering extralegal property is not. Third World elites, who often control legislatures, tend to eschew reforms that empower workers. But De Soto, a former governor of Peru's central bank, insists the plan showed success while he was ex-President Fujimori's chief of staff in the early 1990s. Some 276,000 underground businesses--including large bus-assembly plants--were legally titled, helping generate $1.2 billion in new tax revenue.

Since its release last fall, Mystery has had five hardcover U.S. printings, and is already the best-selling book in the history of Peru. De Soto almost ran for President last month, when polls showed him coming in third. But he decided he could have more influence working from the outside--and from underground.

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