New Delhi: Peruvian economistHernando De Soto has pioneered the concept of empowering the poor with the use of market principles of property titling. This single action managed to blunt the extremist threat in his own country. De Soto was in India recently to participate in a day-long session on inclusiveness, hosted by the Federation of Indian Chambers of Commerce and Industry (Ficci). Alongside, he met Prime Minister Manmohan Singh, senior government officials and politicians such as Congress general secretary Rahul Gandhi. The government will be consulting him to fine-tune its strategy to make the economy more inclusive. The economist spoke to Mint on a range of issues, including his conversations with officials and impressions of Gandhi. Edited excerpts:
What brings you to India this time?
I was invited by Ficci to give a few conferences and to meet a few people in government that had an interest in the sort of things I was talking about. I just met your Prime Minister (on Saturday). We talked about his projects of inclusion. And he felt that I could be of assistance to them during our discussion and if some of the things that we had learnt that worked and didn’t work in the world could be of benefit. So we have agreed that I would write up something to that effect and we will meet very shortly again.
Empowering the poor: De Soto says no titling process of homes in slums such as Mumbai’s Dharavi is going to work unless the government includes all aspects of life. Madhu Kapparath/Mint
I’ve also had a very good, frank talk with Rahul Gandhi. And I will also be meeting three or four of your ministers, explaining what it is we do, because India very much wants to get into the inclusion programme, and we know inclusion. This time I’ve toured a lot of slums and in Mumbai I was accompanied by the press and they say: “What do you find particular about India?” Well, apart from the fact that I saw much of the scenes I’d envisioned in Slumdog Millionaire, which was of course thrilling to see, the reply is not much. It’s pretty much the same reality.
What gives you the impression that this government is serious about inclusion?
The first thing is it’s an important government. I mean, this is not a government of a Central American country with a population of five million. This is the Central government of a country with nearly 1.2 billion. So the government, I suppose, doesn’t get into a subject unless it is a crucial subject. To me, it is quite clear in my discussions with them that they have identified the problems. Everything I have seen in my talks with your Prime Minister and with all the government officials I’ve talked to or members of Parliament, they’ve got a clear idea where the problems are and I got the feeling that we can contribute.
What are these problems?
They are of various sorts. One of them is how you tackle the issue (of poverty). There are some people who believe that what you should do is give away property titles. That is not the way it works. That’s a Western way of looking at it; the Western world in the 21st century. To make it really simple, if you go to somebody that I have seen in Dharavi and you say I am going to give you security over your home, he will say thank you, but he won’t say much. He’ll take that piece of paper and he will slip it in the desk and not recirculate it again.
Why? Because from what I have seen in Dharavi, he not only has a home, he has an industry. So his question will be, you are telling me that it’s okay to have my home, but you’re not telling me if my industry is okay and you’re not telling me what you’re going to do with taxes. So, you cannot title homes in developing countries. You got to title everything.
Today, in the West you can say that, because you live in one place and you work in the other. But in the 19th century, Americans had industries in their home too. And they didn’t go around just titling homes. They did the whole thing. The first thing, no titling process of homes is going to work unless you include all other aspects of life—commercial, business, identity, credit and you wrap it up. We learnt that the hard way. It doesn’t work.
So what is the solution you will offer?
The discussion we had in Mumbai was how were you able to defeat terrorists in Peru, (for) which I designed a policy. For example, I found out that the Shining Path, the Maoists, were protecting the assets of the poor. How can a group that is murderous get the allegiance of poor people unless it is doing them a service? You have to look for a reason. So I said, if I were Indian, what were the services that they were giving. And you will find out that it is exactly the formalization of everything.
Because the government can’t give it, doesn’t know how to give it—it wants to, but hasn’t yet found out—well, the terrorist groups will give it to them at gun point. And so, anything that you are looking at that you don’t like in India—you want education, you want clean water, you want all sorts of things. The issue is, can you do any of the things that creates the wealth to get that without one way or the other getting property to people and my reply is still—no.
This holistic vision runs contrary to what the government does in practice, which is direct cash transfers that helps it politically. How does this contradiction play out?
Well, you know, I have a good case, because I have thought it out and because I dedicate a lot of time to it. But I still don’t pretend to have a silver bullet. So I’m not saying that what we do is the only thing you have to do. And a lot of the solutions I propose are rather medium- to long-term simply because to identify the assets of everybody is a major issue that requires all sorts of information and incentives in place.
And governments have to, in the mean time, do something to keep the short-term alive. You remember the Keynesian thought that in the long term, we’re all dead. So you have to do something. So, I cannot talk about the Indian government about what it does. All I can tell you is for the medium-long-term, I think from all the people I talk to, I see eye to eye.
What is your impression of Rahul Gandhi?
Oh, I liked him. I felt sincerity, a real concern. All of his questions were, “How do I, how can I, how can the government help assist the poor in ways that we do not know.” Now, that to me is already pretty good because the tendency of anybody who is a politician in such a large country—you’re not just any politician. And especially if you come from a smaller country like I do.
It’s happened to me with Brazilians. When you talk to the highest level, well, I can assure you that (Brazilian President Luiz Inacio) Lula is going to say, “What do I have to learn from somebody who comes from a smaller country.” And so, when you come to a country that is seven times bigger than Brazil, and the person says you may have seen something that we didn’t, I come out well impressed.
You are aware that India has launched a huge programme to give an ID to every citizen.
Absolutely. The general idea behind this is that when you look at developed countries, even say Germany, 130 years ago, it was 50 or 60 little countries. But since then, it has become a country of 80 million and the world’s become a country of seven billion, and there’s just no way we can get to know each other if it is not through documentation. And documentation means identity.
The property system is one of many ways in which you are able to identify. It doesn’t tell you as much about the biometric distance between your eyes and ears, but it essentially tries to tell you a little bit about what you own, what risks you run. It gives you a history of the asset; and because the asset changes hands, it also gives you a history of the transactions and the enterprise. So when you are talking about identity, of course what you want to know is where are the one billion and 100 million Indians and how can I find where they are to help them better... I would consider, as I said before, anything that relates to property formalization or business formalization is a close cousin of identification, because it is essentially about knowing how things relate to each other.
Since your visit to India in 2007, the world has undergone a dramatic reality check on market economics. Do you still believe in the power of the markets?
I asked my friend Chris Cox, over in 2009, who was chairman of the Securities and Exchange Commission, how much there was, of these derivatives. And he brought out a reply in an article saying his estimate is that there were $600 trillion (Rs27,840 trillion today) of them. Now to get an idea what this means, the whole production of the United States—the GDP (gross domestic product)—is $13 trillion. The whole production of the world altogether is $55 trillion. So $600 trillion is nearly equivalent to 12 times the production of the world. That’s a lot of money..., but it’s not written.
But now, we are going to find that truth will be established. I figure, the next two-three years, as all of a sudden everybody starts beginning to understand that the recession we’re facing, is basically an epistemological crisis. It’s the lack of knowledge of how much paper there is representing wealth that could be either very deflationary or very inflationary... So I maintain my faith in markets that are ruled by law. When markets are not ruled by law, they become shadow economies. And what is surprising since the time you and I last met, is that I would have expected a developing country to produce the biggest shadow economy. It is the West that has produced the largest shadow economy.
What happens to your thesis of empowering the poor through the power of the markets, when the market itself is undermined in this manner?
It works better than ever. Because what I’m telling you is, look what happens to countries where they don’t have property rights. They get into a crisis. All I’m telling you is, the poor are in a permanent crisis. If the poor had their assets identified, over time, they would become a lot more interesting than even these derivatives. So my argument is that everything that is secure and identified is a lot better than anything that is insecure and unidentified.
Do you believe that market economics are a natural corollary to democracy?
Yes. Very much so. In one case you are accepting political vote, an independent vote; and in the other case, you are thinking of an economic vote, which is, do I buy this or do I buy that? So, I do think that they are complementary. I don’t think that market economics means that there’s one model. There are many models. So you’ve got the Norwegians, who believe in lots of government, lots of government services, generally high taxation, the Nordics generally do it. And you’ve got others like the Americans, who don’t even want a national identification system, they want to be so independent from government.
So within the market economy, you’ve got all sorts of variants. You also have a lot of political variants. The Swiss have seven presidents at the same time. The Americans have a president, the British have a prime minister, but not at all like the Swedish prime minister. So, they all come in different variants. Yet, in each of them there is a degree of freedom of choice.