When in the year 2000, Hernando de Soto came up with his magnum opus The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, it was a fundamental shift in thinking about an economic system that has had as many cheerleaders as critics. The book examined capitalism through the prism of legal rights and how they needed to change in order that the rest of the developing world, particularly the poor, engages in the creation of capital. Since then this Peruvian economist has been turning his think tank, Institute of Liberty and Democracy, into an ‘action tank’; he serves as co-chair of UNDP-supported Commission on Legal Empowerment of the Poor, the first global initiative to focus on the link between exclusion, poverty and law. Gautam Chikermane and Sandeep Singh questioned Hernando de Soto on the subject, and its relevance to ideas that India is currently grappling with — land rights, squatters, SEZs, development and eminent domain. Excerpts:• The Left hates your ideas, the Right wants to smother them. You must be doing something good.There are many people in my organisation who have Left leanings and many are with the Right. You are probably referring to the assassination attempts on me. Those were specific. They had to do with the fact that I wrote a book The Other Path. The Peruvian Marxist terror group Shining Path had intellectual pretensions. The advantage for them in the country was that there was no challenge to them from the right or the centre. After the book there were a variety of organisations, which originally were trade unions, that created the ripple effect.• What was their grouse?The main problem is: we are talking about the majority and no nation can progress which excludes the majority. Whether you are left or right, democrat or dictator, exclusion will sooner or later destabilise you.• Have you studied India?Not really.• Much of the current economic debate here is tied to land acquisition for development through special economic zones, industrial belts and so on. A lot of ideas and critiques are being thrown up and policies are being drafted and redrafted. What has been your experience in other countries?The question is that if you have a decent system of property rights that are fungible, where people can freely decide what they are going to do with their assets, the price mechanism will define whether that land will be bought or not bought depending on various things, including the price. The whole principle behind a market economy that works is that you do a transaction because it allows you to pass a resource or an asset from its lower to higher value.So the first thing is that land would be purchased only when you have got something better to do with it, in which case it is good because you will do something more productive and it will help generate more employment. On the other hand, the person who is sitting on that land or owns it would also have made a gain.• Any example of this happening?I have seen similar practices in Latin America. There the subsoil rights were not in place. The land owners who sold the land did not get the benefit of the oil and gas exploration or other mining operations.• But there might be instances where the majority might be ready to sell but a minority may not, the result of which would be an uneconomic and fragmented holding. How then do you reconcile individual property rights?What really needs to be in place is a good property rights system where the interests of the majority are taken into account. If 90 per cent of the people are ready to sell their land, the remaining ones will have to give up their land for the benefit of the larger society.• What about eminent domain? When should government enter and enforce a sale?The buyer should have a good argument as to why he wants to buy the land and how it will benefit the larger society. It is good if the fragmented pieces of land which were earlier not contributing to the GNP start contributing to it. At that point, if it is fairly clear that the end result is going to generate a higher per capita GNP, employment or other benefits, the government can come in as the last resort. But in a system where the legal rights are in place and are fungible, commercial transactions between economic agents should be the rule.The buyer has a group of sellers to choose from while the seller can get a return that would be much higher than the cost of his land. It may be worth four such tracts. These decisions are best left to the market.• You also talk of the informal economy. How can the informal economy be made a part of the formal economy?The first thing that needs to be done is to quantify it. You can’t do anything before you know how big the informal economy is. This has been done in Egypt. You should know how much is formal, and how much is illegal. So the first step is to quantify it. Only then solutions will follow.• You suggest giving legal rights to squatters because they will not move away. So, by giving them these rights, the money flow becomes smoother and credit availability makes that land or house more productive. But what about non-squatters, people who go by the law. Won’t they feel cheated?It may seem like I’m saying that, but that’s not the case. What I’m saying is that we need a legal system that recognises this majority of people who currently are outside the western system of law. In fact, the US and Europe itself has gone through the evolution of squatter rights to its present form. It is this system of legal rights that makes capitalism work there and not in developing countries.• But what do you do when vested political interests turn this upside down and nurture squatter constituencies?That’s bound to happen. But once you know that only 20 per cent of the people’s property rights function under the legal system while 80 per cent of them are outside it, the politics will ensure that the majority is brought into the legal system. Of course, safeguards must also be put so that the transition is not hijacked.• So, how do countries like India, China, Brazil, Russia and South Africa get capitalism to work for them?By first quantifying the problem of property rights. And then getting the poor to make their properties legal by enabling them to buy.• But how will the poor buy? If they could, they would.You can have long mortgages, where they buy on monthly instalments and so on. But as I mentioned before, the first challenge is to quantify the problem.• After Mystery of Capital, there has been no new work from you.I’m currently doing a lot of things, but not writing, as I’m neither an academic nor a professional writer. I write only when I have something strong to say and on an average it takes me eight years to put that together. But for your information, I am indeed writing a new book.• And what’s that about?It is a book about why the market economy has so manydeficiencies in spite of being the only solution. Why it does not manage to include everybody. It is a book about why a market economy works better because it captures knowledge much more and that it can really only work decently if looked at from a knowledge point of view which it hasn’t been so far.
