Lecture Notes: Hernando de Soto and the Power of the Poor

Introduction

• Two-thirds of humanity live in poverty in shanty towns.
• Lack of legal recognition and identity excludes them from globalization.
• Hernando de Soto, a Peruvian economist, discovered the poor have untapped power.

Migration and Urbanization

• Millions are migrating from farms to cities for better opportunities.
• Despite moving, many remain outside the legal and economic systems.
• Example: Lima, Peru, where many live in shantytowns without property rights.

Hernando de Soto's Work

• Founded the Institute for Liberty and Democracy (ILD) in Lima, Peru.
• Mission: Enable the poor to access business and property institutions.
• Worked with international organizations to implement legal reforms.

The Extralegal Economy

• Many live and work in an informal, extralegal world.
• Lack of legal identity prevents access to credit and legal contracts.
• Examples of extralegal entrepreneurs: Doña Herreria Luna and moto-taxi drivers.

Barriers to Legal Integration

• Setting up a small business legally can take months to years.
• Example: Took 289 days to set up a legal sewing shop.
• Legal systems are unfriendly to poor and exclude them.

The Power of Property Rights

• Extralegals have created their own systems with local rules.
• De Soto's research found 98% of businesses and 88% of rural property in Peru were extralegal.
• Legal reforms could integrate this wealth into the formal economy.

Historical Context and Legal Reforms

• In the 1980s, Peru was rife with terrorism from the Shining Path.
• De Soto's legal reforms offered an alternative to violence.
• Proposed reforms: Simplify laws, issue property titles, integrate poor into the system.

Impact of Legal Reforms

• Reforms reduced business registration time from 289 days to 1 day.
• Economics improved: Peru's growth rate increased, poverty decreased.
• Success stories: Miguel Gutierrez expanded his gas company due to reforms.

Global Influence of De Soto's Ideas

• De Soto's ideas were sought by over thirty heads of state.
• He advocates for property rights and legal reforms globally.

Conclusion

• While challenges remain, reforms have greatly benefited Peru.
• De Soto emphasizes the importance of legal identity and ownership for development.
• His work demonstrates the potential power of the poor when integrated into legal systems.