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Thursday, June 1, 1989

A Reviewers Notebook: The Other Path

In two trips to post-Allende Chile I skipped over Peru without a decent sight of Lima. -But I’ve seen the shacks of squatters on the hillsides in back of Caracas in Venezuela and in the land around Santiago in Chile, and it is easy to visualize the same ring of unfinished tin and cardboard huts around Lima.

The shacks are illegally situated, but nobody does much to disturb them. For where else can propertyless people go except back to the country, where life is all too hard for a mere peasant field hand? The shacks around Lima belong to what Hernando de Soto, a Peruvian who runs a fact-finding agency called the Institute for Liberty and Democracy (ILD) calls the informal, as opposed to the formal, economy. This economy, which de Soto disdains to call black, is the natural response to an impossible situation of people who, quite understandably, refuse to die. The story of “the invisible revolution in the Third World” is ably told in de Soto’s The Other Path (New York: Harper and Row, 271 pp., $22.95).

The older inhabitants of Lima, with legal businesses staked out and their own housing needs taken care of, don’t welcome newcomers from the country, but they bow to faits accomplis when these come with impressive planning and power. De Soto tells how the invaders from the country move in to seize empty stretches of land on the Lima periphery. One evening there may be nothing stirring on the land. But, come morning, a whole group of invaders will have marked out their plots and set up the first approximations of scores of houses.

Normally the police look on. The police know that the invaders represent a potential political power that they may have to reckon with some day.

The invaders speak of something they call an “invasion contract” based on “an expectant property right.” De Soto’s ILD found in 1985 that out of every 100 houses built in Lima, 69 were governed by the extra-legal system.

After the first seizure comes the long wait. There are 159 bureaucratic steps which residents must complete in order to legalize, or formalize, their settlement. The process of for-realization takes an average of 20 years.

To start a legal business is almost as forbidding. First, there must come an adjustment of land. This takes 83 months to complete. The cost of an adjustment is $590.36, which is 15 times the monthly minimum wage. Sewage and water functions must be arranged for, and there must be access to transport, which is largely illegal. It takes 12 months to obtain documents that allow building to start. Studying cases, the ILD found that “the cost of access to formal markets, in terms of time, was an average of seventeen years, from the formation of a minimarket until the market proper comes into operation.” The difficulties of building their own markets explains why so many people decide to become street vendors. Even when one has a legal, or formal, business going, 40 percent of an administrator’s working hours are used up by bureaucratic procedures.

It is small wonder, then, that newcomers to Lima are inclined to say to hell with formal procedures. They choose “the other path.” Their time is their own, though they may have to pay an occasional bribe. And their money is their own.

There are, however, certain costs of being informal. One is that the contracts between buyers and sellers are not enforceable in law. People must trust each other. Another cost is that credit to buy expensive machinery is hard to come by.

De Soto’s theory is that Peru, and much of the rest of Latin America, is still living in the seventeenth and early eighteenth centuries, when the system of mercantilism governed business dealings. Mercantilist economies ultimately stagnated bemuse, as de Soto puts it, “their elite entrepreneurs specialized in exploiting regulations which favored them over new methods of production.” The changes in England came relatively peacefully as Parliament, impressed by Adam Smith, passed some good laws. In France there had to be a violent revolution followed by Napoleonic dictatorship. Napoleon’s wars smashed mercantilist practices in most of Western Europe.

Michael Novak, Zbigniew Brzezinski, Senator Bill Bradley, and Jean François Revel are among those who are quoted on the jacket of The Other Path. Their laudatory comments are not surprising. What is surprising is to find Richard Nixon, who once imposed price controls, leading a chorus of praise for what Nixon calls “the clarion voice of economist Hernando de Soto, whose book . . . is a pivotal study of the extraordinary entrepreneurial dynamism of Peru’s underground economy.”

De Soto says of his book that there is nothing in it “that needs to be confirmed by complex laboratory experiments. You have only to open the window or step into the street.” What you will encounter in the Lima streets besides the illegal bus lines are 91,000 street vendors who “maintain a little over 314,000 relatives and dependents.” Besides the street vendors there are 39,0(10 proprietors of informal market stalls whose businesses are valued at $40 million. So it is really a misnomer to speak of Peru’s “underground economy.” It couldn’t be more in the open. The “visibility” of it all mocks de Soto’s own subtitle, “The Invisible Revolution in the Third World.”

American readers of The Other Path will find it exciting enough even though de Soto tosses the names of unfamiliar Luna mayors and Peruvian military dictators and civilian presidents into his text with no effort to specify what they stood for individually. For native Peruvians who know their own history and have a detailed map of Luna in their heads the book must be incredibly exciting.

  • John Chamberlain (1903-1995) was an American journalist, business and economic historian, and author of number of works including The Roots of Capitalism (1959). Chamberlain also served as a founding editor of The Freeman magazine.