This Nobel Prize-worthy Economist Figured Out How to Destroy Terrorism
This article originally appeared in MarketWatch.
We’re used to academic giants who win Nobel prizes in economics for their myriad articles and clever theories.
But what about a Nobel Prize for an economist who can fight terrorism and raise living standards in emerging economies? That would be Peruvian economist Hernando de Soto, president of the Institute for Liberty and Democracy in Lima, Peru.
As the Nobel prizes rolled out this month, I hoped that de Soto, born in 1941, would be awarded the Nobel Prize in Economic Sciences. French economist Jean Tirole, who used game theory to analyze markets, was a worthy choice, and has more academic publications to his name than de Soto does. But de Soto’s efforts in advancing entrepreneurship and raising living standards in developing economies around the world make him a leading contender for the prize.
These days, with terrorists taking back Iraq and entrenching themselves elsewhere in the Middle East, it is helpful to see how economic systems can be used to fight back. We’re not using boots on the ground, so why not use economics? If people have jobs, homes, families and a life where they can progress, they become less willing to rebel.
As an adviser to Peru’s president, de Soto worked with the government to roll back red tape. ... Over the past 20 years Peru’s GDP has grown twice as fast as the average of the rest of Latin America.
De Soto meticulously measured the cost of bureaucracy and documented the obstacles to starting a business and getting housing and transportation in Peru in the 1980s. The costs of getting formal approval were staggering, and explained why standards of living were so low and why many residents turned to the unprotected informal sector in despair. De Soto described the bureaucratic nightmare in 1989 in his first book, The Other Path: The Invisible Revolution in the Third World. The title is a reference to the Shining Path, the communist-guerilla movement that terrorized Peru in the 1980s, touting the “shining path to revolution.”
Just a few examples: De Soto calculated that it took 289 days for someone living in Lima to get the necessary permits to set up a company. Potential entrepreneurs had to visit multiple government offices, including the Ministry of Industry, the City Council, the Ministry of Labor and the Ministry of the Economy. The cost was $1,231, or 32 times the monthly minimum wage at the time. Opening a formal market, a group of stores, took over 14 years. No wonder that more Peruvians did not start legal businesses but became informal sector street vendors instead.
It took even longer to build houses. Approval of plans, building permits and certifications took almost seven years for a group of houses to be built on wasteland.
In the 1980s there was no legal access to transportation. Only the state could award rights to groups of transport operators. The Ministry of Transportation and Communications had assigned responsibility to the City Council, which had not issued the requisite regulations. Any transportation provider was breaking the rules.
As an adviser to Peru’s president, de Soto worked with the government to roll back some of the red tape. The terrorists practically disappeared. And over the past 20 years Peru’s GDP has grown twice as fast as the average of the rest of Latin America.
De Soto’s second book, The Mystery of Capital, published in 2000, showed how lack of legal title to property puts its owners at a disadvantage. When you have a deed to your house, you can use the house as collateral and borrow against the asset to start a business. No deed, no loan. De Soto linked economic development in modern economies to the percentage of assets that are owned through a formal system.
Outside the West, 80% of the population could not use their assets because they had no legal title to them. “They have trillions of dollars in dead capital, but it is as if these were isolated ponds whose waters disappear into a sterile strip of sand, instead of forming a mighty mass of water that can be captured in one unified property system and given the form required to produce capital,” de Soto writes.
In emerging economies, capital is concentrated among a lucky few because they are the only ones with formal ownership. Economic progress is not due to cultural traits, but to the development of this system of property rights. Even Bill Gates could not be successful without these property rights.
In Saturday’s Wall Street Journal, de Soto recommended economic empowerment and entrepreneurship as a cure for global terrorism, just as in Peru in the 1980s and 1990s. Terrorists can be defeated “by reforms that create an unstoppable constituency for rising living standards in the Middle East and North Africa,” he argued.
Reading the headlines on ISIS’s gains in Iraq, it might just be worth a try.
Diana Furchtgott-Roth, former chief economist of the U.S. Department of Labor, directs Economics21 at the Manhattan Institute. You can follow her on Twitter here.
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