Q&A : Hernando de Soto on Mexico

STEVE SAILER, UPI National Correspondent

LOS ANGELES, May 6 (UPI) -- At the 2002 Global Conference in Beverly Hills, hosted by the Milken Institute and Forbes Magazine, prominent Peruvian economist Hernando de Soto, head of the Institute for Liberty & Democracy, was interviewed about how Mexico could create enough jobs for its growing population.

His research in numerous Third World countries has led him to advocate reforms to allow poor people to establish clear title to assets, so they can more easily borrow money against them. He believes that bringing the poor into the legal economy would help them start more businesses.


Q. What kind of reforms would you recommend for Mexico that would enable poor Mexicans to make a living at home and live with their families, rather than have to migrate to America?

A. We were called in by Vicente Fox in 1998 when he was still governor of Guanajuato. And he said, "I intend to be president of Mexico, but why don't we start off by doing the first stage of your program, which is a diagnostic: How much of Mexico is in the 'gray' or extra-legal economy?" So we did that, and he announced it as one of his five top programs when he was running for president. And now that he's won, we are now putting into place the whole organization that will now design the reforms.


We are working with him now. It's going to be a long haul. We have over 150 people working on it.

The assets which are now over in the gray side of the economy -- what we call the dead capital economy -- are over 11 million houses, 137 million hectares (338.4 acres), and 6 million unregistered micro, small, and medium-sized businesses. About 78 percent of the population is related to that side of the economy. We've estimated that all of these assets that I mentioned are worth about $315 billion, which is equivalent to 31 times all foreign direct investment in Mexico for all time now. That's seven times the size of the Mexican oil reserves. So, the poor are really the largest potential capital that Mexico has.

What we recommend is revamping the whole legal system stage by stage. It's a long process, you know. When the European Union told Spain that they were willing to bring it into the European Economic Commission, the process of legal reform took 10 to 15 years. We take about five years to do it.

But what do we have to modify? For example, creating a mortgage in Mexico takes 24 months, working eight hours a day. Foreclosing a mortgage takes 43 months. Selling a house if you're among the 78 percent of Mexicans that are poor takes, if you want to do it legally, 24 months working eight hours a day. Obtaining legal access for a business, that is to say, setting up a limited liability corporation, or whatever allows you to have shareholders, takes you 17 months working eight hours a day and 126 contacts with government.


So basically the whole system -- and if you go from country to country you can see that it's pretty much the same -- is made for a privileged elite that knows how to navigate within the existing laws, that's got access to the big-time law firms. But the country isn't safe for the enterprise of people who have low incomes.

So the recommendations would be varied but, essentially, we have a program. It'll take about three years from here on to look at just about all the laws, talking to poor people, finding out how they see the law, then proposing a strategy and legislation that helps take away some of the main obstacles and puts all the leverage points that are needed in place.

Q. How would you get rid of the culture of corruption, in which every president of Mexico leaves the office as a billionaire?

A. The first thing to keep in mind, so as to have some degree of hope, is that all countries started by being corrupt. Britain, which is today the epitome of cleanliness, especially its judges, was pretty corrupt in the mercantilist era. Oliver Goldsmith, a British poet of the 18th Century, defined a British judge as a living creature who sold a dozen laws against half a dozen chickens.


You Americans were pretty corrupt all through the 18th and 19th centuries. In other words, corruption is not something that comes with a special ethnic group. It's just traditionally what happens when big government starts getting organized all over the world -- the French, the Italians, the Swedes, everybody. That's the nature of things. People get corrupt when big government comes around and you can use the law to privilege yourself.

In the case of the Mexicans, I think they have already begun to reform. The interesting thing about former President Zedillo is that he's the first president to say: This is the amount of money I came in with; this is the amount of money I'm going out with. It certainly helps to have competition with two political parties capable of criticizing each other, with more or less even access to television and the media. All of that helps.

Now corruption occurs for many reasons. One is when it's the only way to get something done. During one of my interviews with a large entrepreneur in Egypt working in the extralegal system -- we cultivate them to get their side of the story -- I asked him, "How about baksheesh (payoffs)?"


"Baksheesh, oh, I love baksheesh!" he answered. "It gives me predictability. I have at least five policemen whom I pay half their income. They are poor people and they allow me to know what I can do. I don't recommend judges, though, because they are unreliable and expensive."

So, when I was asked by the Egyptian government at the end of our year-long exercise what kind of law they should bring out, I replied, "You've got to give a legal system that's more reliable than the mafia's." If 70-80 percent of the economy in Russia, Peru, or Colombia are run by extra-legal organizations it is not because they break your leg -- after awhile you rebel against that -- it's because they offer alternatives to the law that are more efficient.

The reason your law in America is obeyed, to a great degree, is because your law is more cost-efficient. It makes more sense for you to work inside the law.

So, part of the reason for corruption in Mexico is culture, politics -- the lack of party competition for 70 years -- and the bad examples of leaders, but a lot has to do with the cost efficiency of the law. People pay bribes in Mexico because it's the only way to get away from an unfair traffic ticket, or an unfair time in jail, or for providing enough business for your family to survive. But I don't think corruption is something you can't tackle. You can clean up your act. And a lot of it has to do with good institutions.


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