THE OTHER PATH

PREFACE

"Boooom!!!" The massive explosion hit at 8:00 p.m. on July 20, 1992, while many of us were still working at the Instituto Libertad y Democracia (ILD) offices in Miraflores, a suburb of Lima. The blast was so powerful that it smashed walls and windows, sending splinters of glass, metal, and furniture shooting through rooms like jet-propelled daggers. It was a car bomb, and the explosion hurled the car's engine across the property, destroying everything in its way until it crashed into the wall of a neighbor's house some one hundred meters to the rear of our building. For miles around, a huge mushrooming cloud could be seen rising above our devastated headquarters.

It was not the first time we had been the target of terror. The Shining Path, which had been terrorizing Peru since 1980, considered the ILD their intellectual nemesis. They had bombed our offices before, shot at our automobiles, and threatened our people. That nagging feeling that there is bound to be a next time saved many lives. Three minutes before the bomb went off, we heard the familiar cracking of the gunfire directed at our building intended to force our security guards to take cover behind the outer walls protecting the ILD so that a group of Shining Path commandos could deliver a much more deadly package —in this case, according to the police investigation, a car containing four hundred kilos of dynamite and ammonium nitrate. The warning shots gave us precious seconds to dive for cover and avoid the deadly debris that soon was flying through our offices.

Some, however, were not so lucky. According to the press, three people died in the attack and nineteen were wounded. Among the wounded, Edilberto Mesías, an ILD security guard who had taken a bullet in the stomach, crawled to a nearby hospital and managed to survive. Marco Tulio Ojeda, a policeman assigned to the ILD, heroically rushed to the car to try to tear out the bomb's burning fuse but was seconds too late: the car blew and Marco was immediately killed. By the time the twenty of us who were inside the building got up from the floor, shook off the glass, metal, and dust, and rushed outside to assess the damage, we found a Franciscan priest already administering last rites to some of the victims lying on the sidewalk, innocent passersby who had been killed by the gunfire and explosion.

It was a tragic moment. All of us were stunned by the violence of it and saddened by the innocent lives lost. But nobody was surprised. In fact, some of us were convinced that this attack was another sign that we were actually winning our intellectual war against the Shining Path. The most optimistic among us was Mariano Cornejo, the guru of our think tank, who rushed into the remains of my office fifteen minutes after the explosion. Living just a few blocks away from the ILD, Mariano knew who the target was as soon as he heard the explosion. "What more proof do we need that we have the Shining Path on the run?" he asked me. "They have run out of arguments. They can only make statements with gunpowder. They don't know what to do any more."

Mariano was referring to the fact that the ILD had openly taken on the Shining Path five years before, when we published The Other Path in Peru. As the title indicates, the book was an intellectual challenge to the terrorists. Based on solid fieldwork and hard facts, the book puts forward a much more realistic picture of poverty in Peru and a more effective alternative to remedy underdevelopment and injustice than that proposed by the terrorist.

WHY DID THE SHINING PATH SPEND SO MUCH OF THEIR EXPLOSIVES ON A THINK TANK?

The Shining Path described themselves as a Maoist movement. To Bernard Aronson, the U.S. Assistant Secretary of State for Latin America, they were "the bloodiest and most murderous guerrilla group ever to operate in the Western hemisphere." Aronson saw Sendero (the Path), as the terrorists were called in Peru, as the Latin American version of the Cambodian Khmer Rouge. "Latin America has seen violence and terror," he told the U.S. Congress, "but none like Sendero's … and make no mistake, if Sendero were to take power, you would see this century's third genocide." Peru would enter history, in other words, alongside Nazi Germany and Pol Pot's Cambodia.

Since it began operating in 1980, Sendero had mobilized some eighty thousand subversives in a war that killed over twenty-five thousand people. This made the terrorist group, according to Carlos Tapia, one of Peru's principal experts on violence, the nation's most important political party. It was certainly the most destructive, paralyzing the Peruvian judicial system by threatening judges and freeing prisoners from jails; displacing over 2 million Peruvians from their homes and sending a million more fleeing into voluntary exile; terrorizing entire villages and cities where they executed, tortured, and scalped people alive in public; and taking control of a substantial part of Peru's coca-growing regions.

As early as 1984, I became convinced that the Shining Path would never be eliminated as a political option, without first being defeated in the world of ideas. Like many, I felt that Sendero's major strength stemmed from its intellectual appeal to those excluded by the system and its ability to generate a political cause for natural leaders, whether in universities or shantytowns. Sendero's chief, Abimael Guzman, was a former philosophy professor at the University of Huamanga, in the south-central Andes of Peru. His strategy was no mystery: he wanted to bully the intellectual opposition into silence, capture the people's imagination, and create a revolutionary argument "secure from all refutation," as the French Marxist thinker Georges Sorel (1847 - 1922) would have said.

Many Peruvian intellectuals spoke and wrote against violence in general and participated in candle-carrying marches calling for peace, in general. Few, however, dared attack Sendero publicly by name. In fact, the name "Sendero" itself inspired such fear that it was uttered only in a whisper. This expansive wave of terror allowed Guzman to appear invincible, an alpha male that few intellectuals were prepared to mess with. By terrorizing his critics into silence, the murderous professor had more than enough rhetorical space to advance his "revolutionary message" within Peruvian society.

Many Peruvian intellectuals spoke and wrote against violence in general and participated in candle-carrying marches calling for peace, in general. Few, however, dared attack Sendero publicly by name. In fact, the name "Sendero" itself inspired such fear that it was uttered only in a whisper. This expansive wave of terror allowed Guzman to appear invincible, an alpha male that few intellectuals were prepared to mess with. By terrorizing his critics into silence, the murderous professor had more than enough rhetorical space to advance his "revolutionary message" within Peruvian society.

To prove to my compatriots that there was nothing magical or superior in Sendero's proposal for a new society, I titled my book El Otro Sendero, The Other Path. Though I had written a straightforward book about development and not terrorism, I organized the text to counter the Shining Path's well-worn fare against liberal democracy and capitalism, dealing with their arguments one by one, starting with the obviously assumption —obviously false to anyone who bothered to walk through the streets of Lima— that poor Peruvians were a social class naturally disposed against markets and democracy.

When The Other Path was published in Latin America in 1987, its success went way beyond our wildest dreams. Already the best-selling book ever in Peru, it quickly became a number one best-seller throughout Latin America. In an unusual effort to make the book's findings and arguments accessible to those with little time or inclination to read any book, the editors of Peru's most popular tabloid newspaper, Ojo, summarized The Other Path in a sixteen-five-page special supplement and distributed it nationwide. Newspapers and magazines throughout the country ran stories about the book; many of its principal arguments were broadcast in radio jingles or in TV spots and sketches, and it was even featured in comic strips. The book was also discussed in public squares in shantytowns from northern to southern Peru. In this way the book's message reached deep into the ranks of the people excluded from the mainstream.

The message of The Other Path traveled so well that Guzman continually attacked the book in his essays and speeches. Sendero's newspaper, El Diario, warned that The Other Path was distancing young people from terrorist activities and undercutting recruitment. Guzman himself wrote, "It is clear that the objective of The Other Path is to deceive and mislead the masses … It directly targets young people, who are the driving force of society … It leads the young away from the people's war."

That night, after the bomb attack, Mariano Cornejo was convinced that the ILD had totally stripped away Sendero's intellectual leadership. By 1992, The Other Path had been distributed and discussed so extensively in Peru that it reached an audience exceeding that of Guzman and his supporters literally by millions. It demonstrated so clearly that Sendero's proposals did not respond to the needs of the poor that dozens of poor people's organizations grouping hundreds of thousands of persons openly announced in newspaper advertisements that they had committed themselves to following the other path. Thus Guzman, who had generally not bothered to attack researchers and intellectuals that disagreed with him, decided to make the ILD the principal civilian target of his violence. Surely, that alone sent a message to all of Peru that even Guzman knew his ideas were bankrupt. That night Mariano and I agreed that Guzman's image had gradually evolved from a defender of the poor to a blood thirsty, gun-toting reactionary who murdered people who proposed ideas more effective than his own.

THE POWER OF GOOD CLASS ANALYSIS

The book you hold in your hands contains facts, numbers, and historically based analyses that shatter all the hypotheses on which radical anti-market and anti-democracy thinkers like Guzman base their class diagnosis. In their place, The Other Path makes the following major points:

1. Most Peruvians are not proletarians (i.e., blue-collar workers) ready to rise against business. They are emerging entrepreneurs working outside the legal system. Legally employed proletarians make up less than 4.8 percent of the Peruvian population.
2. The real revolutionary class in Peru is made up of the micro, small, and medium-sized entrepreneurs who during the last half of the twentieth century began migrating from rural areas to towns and cities to work in the fragmented market economies of the informal or "extralegal" sector.
3. These extralegal entrepreneurs are hardly a small and marginal sector of Peruvian society. Together with their extended families, they are the majority —around 60-80 percent of the nation's population. They construct seven out of every ten buildings; they have built and they own 278 out of Lima's 331 markets; they operate 56 percent of all businesses of the nation; they retail over 60 percent of all foodstuffs; and they operate 86 percent of all the busses. For some forty years, these people have been trying to convert themselves into an entrepreneurial class resembling more the self-reliant American settlers of the eighteenth and nineteenth centuries than the cowed proletarians who lived in Abimael Guzman's blinkered imagination. Peru's extralegal entrepreneurs are not timid shoeshine boys who run for cover when they see the police. They are forceful pioneers.
4. These entrepreneurs want to live under the rule of law. The proof: even though they are forced to operate outside the Peruvian legal system, they have made their own rules, which in this book I call "extralegal law." For them, the market economy and capital are not "bourgeois prejudices" or "culturally alienating concepts" but goals that they and their informal organizations strive to reach. I describe how their spontaneously created rules do not reflect a feudal, tribal, or communist system, but rather a market economy.
5. Contrary to the arguments of Sendero, The Communist Manifesto, and today's most violent critics of the market, most Peruvians do not lack property. On the contrary, they own assets with a replacement value in excess of US$ 80 billion —fourteen times greater than the value of foreign direct investment in Peru. Collectively, and unconsciously, Peru's entrepreneurial majority has begun a market and social revolution against economic poverty and legal oppression many times more significant and more powerful than the program that the Shining Path wanted to ram down the throats of Peruvians at gunpoint.
6. The principal enemy of these entrepreneurs is the existing legal system, which excludes them. Based on real case histories and simulations, the book demonstrates that in Peru, for example, it takes a new entrepreneur thirteen years to overcome the legal and administrative hurdles required to build a retail market for food that would help take vendors off the street; twenty-one years to obtain authorization to construct a legally titled building on wasteland; twenty-six months to get authorization to operate a new bus route, and nearly a year, working six hours a day, to gain the legal license to operate a sewing machine for commercial purposes.
7. In the face of such obstacles, new entrepreneurs hold their assets outside the law and therefore do not have access to the facilitative devices that a formal legal system should provide to help them organize and leverage resources. Because they have no secure property rights and cannot issue shares, they cannot capture investment. Because they have no patents or royalties, they cannot encourage or protect innovations. Because they do not have access to contracts and justice organized on a wide scale, they cannot develop long-term projects. Because they cannot legally burden their assets, they are unable to use their homes and businesses to guarantee credit. Now stop and ask yourself: if European and American businessmen did not have access to the limited liability systems and insurance policies that the law allows, how many risks would they run? How much capital would they accumulate without legally created paper that can represent value? How many resources would they be able to pool without legally recognized business organizations that can issue shares? How often would Europeans or Americans choose bankruptcy and try to start all over again if the law did not allow them to convert their debts into shares?
8. Class Lines There is class warfare in Peru, to be sure. But the main line bisecting Peruvian society today is not a horizontal one dividing entrepreneurs from workers, where those above make themselves rich with the surplus value from the poorly paid work of those below. For the moment, the principal dividing line is a vertical frontier, to the right of which are politicians, bureaucrats, and businessmen who profit and live off the government's favor and to the left of which are legal and extralegal producers who are excluded from favor.
9. Because the poor cannot hold assets or trade within the law, they cannot be part of the global economy either. How can you fill in a bill of lading if you don't have a legal address or an officially recognized business? How can you move an asset in the international market place if it is not fixed in a formal property system? Obviously you cannot, and that is why the excluded will not benefit very much from globalization. Moreover, can you understand what the poor feel when a foreign investor comes into their country with clear legal property rights that can be enforced both nationally and internationally, while they have none? Do you think they will sympathize with globalization, or do you think they will feel it is exclusive and unfair?
10. The economic system oppressing most Peruvians is not democratic capitalism but mercantilism. The Other Path demonstrates that democratic capitalism, as it is known in the West today, has not really been tried in Peru —or, for that matter, in most places outside the West. Mercantilism can be defined as the supply and demand for monopoly rights by means of laws, regulations, subsidies, taxes, and licenses. The fallout of these privileges creates a wall of legal barriers that exclude the poor. Mercantilism is a politicized and bureaucratized environment dominated by privileged redistributive combines that prevailed in Europe before and during the Industrial Revolution, before the rise of democratic capitalism. Strongly opposed by the great eighteenth century economist Adam Smith and all the classical economists who followed him, and buried by the triumph of capitalism in the West, mercantilism nevertheless continues to be the predominant economic system in twenty-first century Peru. The nation's mercantilist elites find it culturally impossible to believe or understand that today's impoverished masses could become the most important source of prosperity for Peru.
11. In its own way, Sendero also holds a mercantilist viewpoint, since it believes that prosperity can only be brought about from above, through government elites. Like eighteenth century European mercantilists, Sendero has little faith in ordinary people or individual responsibility. No less condescending than the traditional elites they claim to despise, the terrorists believe that, left to their own devices, the poor would produce only more poverty, hunger, disease, and death.
12. The poor are voting against the mercantilist system with their feet. In Peru, for example, they are either walking into the fragmented and incipient market economies of the extralegal sector or migrating in millions to capitalist countries.
13. If its legal system is reengineered to provide everyone the tools for entrepreneurship, Peru will eventually thrive. If Peruvians do not find a way of incorporating the excluded into an open economy, the excluded will be vulnerable to being railroaded into extreme economic alternatives, especially during a recession or war, as in Russia in 1917 and around the world after World War II. Alternatively, mercantilism and its privileges can continue, at least for a while, but only at the cost of prolonged repression and unhappy citizens.

The Other Path illustrates how the poor have become a new class of entrepreneurs and why and how they organize themselves outside the law. It makes the case that social and political peace will not be possible until all of those who know that they are excluded feel they have a fair chance to achieve the standards of the West. The Other Path sets the scene for reform. It was also a landmark in the ILD's own development from a traditional "think tank" to the "think and acting" organization that we became in the 1990's, first in Peru then world-wide.

BEATING THE TERRORIST REQUIRES LISTENING TO THE EXCLUDED

The publicity around The Other Path, along with press reports on ILD fieldwork, created a major stir in Peru. We had pointed out with facts and figures that the millions of people whom elite Peruvians viewed as unruly squatters and urban pests were actually enterprising citizens who were carrying the nation's economy on their backs. It was a revelation that turned the ILD into a major player in Peruvian politics. Felipe Ortiz de Zevallos, one of Peru's top pundits and pollsters, wrote in The Wall Street Journal in 1990 about the "enormous influence" of the ILD in Peru. Local polls indicated that ILD influence in the nation was surpassed only by the President, the armed forces, and the Catholic Church. Between 1984 and 1995, every president of Peru called on the ILD to help change the country.

This unusual partnership between an independent research organization and Peru's heads of state began in 1984 when President Fernando Belaúnde Terry invited me to his offices and told me that the ILD's work had "gotten under the nation's skin" (agarró carne) and asked what the next steps should be. A reply was urgent, he noted, because Sendero continued to grow.

I explained to the President that if the majority of Peruvians worked outside the law —in the extralegal sector— the inescapable conclusion was that the nation's people viewed the law, and the government that was trying to enforce it, as hostile to their interests. If he wanted Peruvians to avoid the temptations of the terrorists, he would have to show the people that working within the law was in their interest. ILD research had already demonstrated that due to bad law, the poor were facing huge entry and operational costs and were missing some of the crucial institutions needed to create prosperity. The President's primary concern should be to reform the legal system.

That would be no small task. By our count, the Peruvian central government had issued more than 700,000 laws and regulations since 1947. The question was, how does one find out which laws are bad and don't work and which have to be modified? Reading laws as they are written gives no clue to how they will work in practice. The Peruvian government had reviewed the legal texts many times, using the most prestigious foreign consulting firms, but nonetheless was unable to make it easier for the poor to enter the legal system.

In the face of this labyrinth of Peruvian norms, we needed to find some criteria for where to cut and where to build. The only people who could provide us with such criteria for reform were the excluded themselves. We were like the dentist who cannot begin without asking the patient which tooth hurts. The poor not only knew where the problems were, but they also knew what institutions and services were missing —the very ones the local communities and terrorists were busily trying to provide by default. For too long, the Peruvian government had been acting on the basis of outdated theories and prejudices and with little access to hard facts. We needed to know what was really going on in our streets and fields if we were to discover how to put the official law in line with how people actually lived and worked. And to find that out, we had to enable government to do what few governments in history have ever done: listen carefully to the excluded.

Over the next decade, until 1995, the ILD designed rules, procedures, and organizations to help the government listen to its own people. We not only found out where some of the major bottlenecks in the system were located, but we also learned to devise solutions, build institutions, and draft, promote, and then implement major legislation and reform projects. During that period, the ILD initiated some four hundred major laws and regulations and managed one of the world's largest property-creation projects.

One of the first instruments the ILD created for government to use in listening to people was the "Pre-publication Legislative Decree" obliging the executive branch to publish in draft form any law and regulation that it wanted to enact (including an estimate of the costs and benefits of the proposed norm for Peruvian society). Citizens and the press would now be in a position to scrutinize the government's intentions and provide it with feedback to ensure that any new norm was suitable for ordinary citizens.

Another measure was to campaign for and finally create Peru's first "Ombudsman" to represent the interests of citizens, first in the Attorney General's Office in 1986 and then as an independent office created by the new Constitution in 1993. Under contract with the Attorney General's Office, we set up special offices and, with the help of the press, put out a call for grievances. During the first month, we received complaints from 153 civic organizations representing some 300,000 individuals. The most notable result was that more than half of the grievances were about difficulties people had gaining legal title to real estate —in the form of houses, offices, factories, or agricultural land— and the obstacles they faced when trying to initiate and operate their businesses. Over the years, the other listening and feedback mechanisms that we set up for government continued to lead us to the conclusion that the primary concern of the poor was how to gain legal access to property, either in the form of real estate or business, or how to leverage it.
Interestingly, Sendero had reached that same conclusion. In its 1986 war plan, "Rematar el gran salto con sello de oro," Sendero had begun titling land, homes, and businesses throughout Peru to win the favor of poor people. They were simply following what Mao Zedong did in the 1940s in China and what Ho Chi Minh did in Vietnam in the 1960s. In the rural areas, they were awarding and enforcing property rights in the Huánuco, Huallaga, and the Sierra de la Libertad. In cities, like Lima, they were organizing squatting and property titling in shantytowns like Raucana, Vitarte, and Huaycán. Further research told us that one of the primary functions of terrorists in the Third World —what buys them acceptance— is protecting the possessions of the poor, which are typically outside the law. In other words, if government does not protect the assets of the poor, it surrenders this function to the terrorists, who then can use it to win the allegiance of the excluded.

Clearly, one way to put terrorists out of business is for the government to assume its modern role as the enforcer of property rights. This line of reasoning allowed us to lobby government to accept our proposal for bringing the poor into the legal system. What originally moved us, however, was not a military objective but our conviction that the property system was crucial to development. As we listened to the poor and analyzed what they were missing, my ILD colleagues and I began to realize that property is more than just ownership; it is the hidden architecture that organizes the market economy in every Western nation. Without a legal property system, efforts to create a sustainable market economy are doomed to fail, as I have argued at length in my new book, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else.

The connection between the formal property system and the creation of wealth is something that the rich nations of the West take for granted. But this essential connection became clear to us only when we realized that in spite of owning houses and businesses, most Peruvians could not generate wealth because their assets were held outside the legal property system. And thus in numerous articles and pamphlets, posters and TV spots, the ILD argued that without property institutions and organizations, a modern market economy cannot work. Why? Because ownership cannot be certain, addresses cannot be systematically verified, assets cannot be described according to standard business practices, people cannot be made to pay their debts, authors of fraud and losses cannot be easily identified. As a result, buildings and land cannot be used to guarantee credit or contracts. Ownership of businesses cannot be divided and represented in shares that investors can buy. Without property law, capital itself is impossible to create because the instruments that store and transfer value, such as shares of corporate stock, patent rights, promissory notes, bills of exchange, and bonds, are all determined by the architecture of legal relationships with which a property system is built.

Gaining this insight not from books but by talking to the poor and observing how they lived, we were able to design and implement a legal property system around the objective interests of the poor themselves. The legal devices we created worked because we made sure that they were compatible with the principles that the poor already used in the extralegal economy. More importantly, by relying on the poor for rule making and support, the Peruvian government could now push for reform, but not in the name of a foreign ideology, philosophers the people had never heard of, or the dictates of an international financial institution. They could institute major reforms in the name of the nation's poor. This allowed us to convert (at least for a while) the transition to capitalism and liberal democracy into what it should always be —a truly humanist cause, a genuine war against exclusion, rooted in the best interests of the nation. This provided the Peruvian head of state with a formidable argument: "The majority of the nation's population is cut off from the official market economy and access to capital as starkly as apartheid once separated white and black South Africans and we are going to correct that."
By 1990, after six years of listening to the poor, the ILD was actually in a position to help them. We put into place all the legislation and mechanisms required to bring into the law most extralegal real estate and businesses. On the real estate side, we brought down the administrative time needed to record the property of the poor from more than a dozen years to one month, and cut the costs by 99 percent. By 1995, such reforms had brought into the legal system some 300,000 owners whose property on average at least doubled in value. Twenty-five credit institutions began giving loans to these now legal owners. By 2000, some 1.2 million buildings on urban land had entered the legal system, about 75 percent of the extralegal market.
On the business side, we cut the cost of entering business from some three hundred days down to one. We also put registration offices in the right places and made the government bureaucracy more user-friendly for small entrepreneurs. By 1994, over 270,000 formerly extralegal entrepreneurs had entered the legal economy, creating over half a million new jobs and increasing tax revenues by US$ 1.2 billion.
In 1991, in Peru's northern jungle areas, the ILD began organizing the legal recognition of existing coca farmers. In gratitude for being allowed to enter the legal system and have the right to gain legal title to their assets, the farmers provided the Peruvian government with most of the information and maps required to flush out the terrorists, as well as drug traffickers, from the area. As the farmers switched to legal crops, Peru's participation in the international cocaine market began gradually to descend from 60 percent to 25 percent.

These reforms, along with change in the nation's macroeconomic policies, also initiated by the ILD even before President Fujimori's inauguration in 1990, gave Peru very high growth rates —including the world's highest (12 percent) in 1994.

We also tried to make the Peruvian government more accountable to the people and, though laws drafted by the ILD for access to public information did not pass, authorities incorporated ILD principles into the 1993 Constitution, the rules governing the consumer protection agency, the Civil Procedural Code, and the law for citizen participation.
To deal with queues, paper work, and all the excessive bureaucratic procedures that waste everyone's time in developing countries like Peru, we presented a legislative proposal for "administrative simplification" that was debated in public hearings throughout the country and was unanimously approved in Congress by all political parties. To make it as convenient as possible for people to file their complaints about excessive bureaucracy, we put bright yellow boxes in the ILD headquarters, in several government offices, and in all the radio, television, and newspaper outlets. When an astonishing or outrageous story came their way, the media were encouraged to take up the cause, creating the kind of public pressure that was impossible for politicians to ignore.
The complaints were dealt with in a publicly televised tribunal every two weeks, on Saturday morning. Managed by the ILD and presided over by the President of the Republic, these "Administrative Simplification Tribunals" racked up ratings that would have been the envy of any entertainment series; Peruvians sat in front of their TV sets amazed to see hundreds of the kinds of knots that were strangling their lives untied. The time previously required to fulfill hundreds of different kinds of official procedures, including obtaining a passport, applying to university, and getting a marriage license, was cut across the board at least seventy-five percent. To get a marriage license, which used to take 720 hours of bureaucratic hassles, was reduced to 120 hours —thus helping women secure their rights as a marriage partner. The same law that created these procedures also contained the mechanisms that allowed government to carry out most of the structural adjustment reforms required to insert Peru into the global economy.

The ILD worked to make the administration of justice more accessible to the poor by proposing various low-cost arbitration procedures to help parties sort out their conflicts in a quick, inexpensive, and fair way out of court. The ILD also modified the Penal Procedure Code to release untried prisoners who had already served jail terms that were longer than those set by law for the crimes they had allegedly committed. In 1990 - 1991, the first year of the program, four thousand prisoners were released —30 percent of the prisoners behind bars without trial— proving to the Peruvian population that government was serious about reform.

All in all, these and hundreds of other reforms helped put the Peruvian government in better standing with its citizens. To help draft pertinent legislation and regulation, the ILD continually incorporated extralegal customary principles that common people understood, respected, and obeyed. The ILD held hundreds of public hearings, involving thousands of people representing informal organizations throughout the country, so that each law would be grounded in reality and Peruvians would understand that the government was taking them seriously.
Our quick success connecting the concerns of grassroots Peruvians with legal reform was confirmed by no less an authority on the people than Sendero Chief Guzman. "The ILD is a source of legislation," he wrote in 1991. "They make laws. They themselves draft laws and have them enacted." Competition was not what the Sendero leader was looking for, so he redoubled his efforts to knock us out of the game by taking shots at my car, trying to kill me at home, and setting off bombs on our office doorstep.
That Sendero was targeting the ILD for using the legal system to give the poorest of the poor a stake in the political and economic life of Peru was a curious way to win the hearts and minds of Peruvians, most of whom, after all, were poor. My colleague Mariano Cornejo was right. Guzman had run out of arguments; our work had helped undermine the appeal of terrorism among Sendero's prime constituency —the excluded. Shortly after the July 1992 bombing of our headquarters, Abimael Guzman was arrested as a result of the outstanding work of the Peruvian police, especially Colonel Benedicto Jimenez Bacca, who had been tracking Guzman for years. Thanks to this major police coup, Sendero's cell-based organization was quickly dismantled and, by 1993, most of hit squads were identified and captured, including the 17-person cell who had been trying to assassinate us. This was the last of many successful battles waged against Sendero by millions of Peruvians. Sendero was defeated in the Andean countryside by farmer organizations led by brave people like Hugo Huillca, in the coca growing regions by heroic peasant leaders like Walter Tocas, and by enlightened military leaders like General Alberto Arciniega, who brought the government closer to the farmers. In the cities, urban leaders like Maria Elena Moyano and Michel Azcueta, from Villa El Salvador, organized resistance against their incursions.

There were many heroes in Peru's war against terrorism, both inside and outside of government. That history remains to be written. What is certain is that Sendero lost because the excluded rejected terrorism. Their goal was to improve their lives, and to this end, they became convinced that there was a better path than the one offered by terrorists.
Unhappily for us, Sendero's bombs were replaced by political minefields. The majority of our reforms had been initiated during the last years of Alan Garcia's government (1985 - 1990) and with his support. Most of the actual reform programs, however, were fully implemented under the first government (1990-1995) of Alberto Fujimori, who publicly stated that his reason for entering politics in the first place was that he had discovered his constituency in The Other Path. In fact, our reforms pretty much set the scene for Fujimori's role as a leader during that period. As Peru's premier historian, Pablo Macera, put it: "Fujimori was unaware [when he became president in 1990] that he was going to be the vehicle of a dynamic renovation project which had the ILD at one extreme and Abimael Guzman at the other."(1)

While President Fujimori publicly applauded the successes that the ILD brought to his government, in private he was annoyed by our high public opinion ratings for designing and implementing institutional reforms. Initially, the President seemed happy that we were in charge of explaining the reforms to the public because he was not yet comfortable as a political communicator. In retrospect, publicly taking the leadership of the projects was a political mistake on my part because it gave Fujimori's enemies the opportunity to needle him incessantly for nearly two years about the rumor that the ILD was actually running Peru. As flattering as such publicity might have been, it was clear that we, an independent think tank, would not be allowed to outshine the President for long. Our days as a government partner were numbered. Finally, in 1992, I resigned as his principal adviser and personal representative, and in 1996, the ILD ceased running government projects.

While President Fujimori publicly applauded the successes that the ILD brought to his government, in private he was annoyed by our high public opinion ratings for designing and implementing institutional reforms. Initially, the President seemed happy that we were in charge of explaining the reforms to the public because he was not yet comfortable as a political communicator. In retrospect, publicly taking the leadership of the projects was a political mistake on my part because it gave Fujimori's enemies the opportunity to needle him incessantly for nearly two years about the rumor that the ILD was actually running Peru. As flattering as such publicity might have been, it was clear that we, an independent think tank, would not be allowed to outshine the President for long. Our days as a government partner were numbered. Finally, in 1992, I resigned as his principal adviser and personal representative, and in 1996, the ILD ceased running government projects..

NOTES:
1 Pablo Macera como fue citado por Dennis Falvy en "Pensamiento Macera", La República, Lima, julio 1, 2000.

THE LESSONS FROM PERU'S SUCCESSFUL WAR AGAINST TERRORISM

The ILD did not set out to take on the terrorists. Our goal was to figure out ways of bringing the majority of Peruvians into a legal system that had traditionally shut them out and thus stunted the nation's economic development. We never had any intention of joining the war. Like the historian Arnold Toynbee, I firmly believe that war is not only tragic but a total waste of human energy. But if you happen to be committed to development and helping the poor, and in time of war you are caught in crossfire, you had better try to understand what is happening and why. Our participation taught us much about the politics of exclusion and development in today's circumstances.

What I came to understand is that today, a massive social and economic revolution is taking place in the developing world that rivals the Industrial Revolution in the West that gave rise to market capitalism. In the last forty years, some 4 billion people, who had been living in the hinterlands of developing countries and former Soviet nations, have abandoned their traditional way of life. They are moving away from small, isolated communities towards a larger and more global division of labor in the expanding markets that both Adam Smith and Karl Marx had seen emerging in the West two hundred years ago, and that are now struggling to emerge outside the West.

These people clustering around big towns and migrating by the hundreds of millions to larger cities are the newest players in the global scene. Over the past four decades, for example, the population of Peru's capital city of Lima has increased six fold; Port-au-Prince, Haiti's capital, has increased at least fifteen times during the same period; the population of Ecuador's Guayaquil has also increased eleven times. The underground economies in Russia and the Ukraine now account for 50 percent of GDP; the black market in Georgia generates a whopping 62 percent. The International Labor Organization reports that since 1990, 85 percent of all new jobs in Latin America and the Caribbean have been created in the extralegal sector. In Zambia, only 10 percent of the workforce is legally employed. From Peru to the Philippines, these extralegal workers and entrepreneurs are improving their lives. They now read, travel, and have radios and televisions. As a result, they know that the Westernized elites of their nations live well, and they too aspire to that good life.

The economic potential is clearly there. Although the new migrants of the developing and post-communist world live in shantytowns and are horribly poor by Western standards, they are not without assets. The ILD's work over the past twenty years has revealed the extraordinary entrepreneurial potential of the people of the Third World. According to our estimates, over the last forty years, these people have created more than US$ 10 trillion of wealth, a value ninety times greater than all bilateral foreign aid and forty times larger than international development loans received by undeveloped nations, and a value larger than the size of the world's twenty largest stock markets.(2)

The difference between today's industrial revolution and that which began in the West over two hundred years ago is that this new revolution is roaring ahead much faster and transforming the lives of many more people. Britain supported just 8 million people when it began its 250-year progression from the farm to the laptop computer. Indonesia is making that same journey in only four decades —with a population of more than 200 million. Is it any wonder that Indonesia's institutions have been slow to adapt? But adapt they must. A tide of humanity has moved from isolated communities and households to participate in ever-widening circles of economic and intellectual exchange. It is this tide that has transformed Jakarta, Mexico City, São Paolo, Nairobi, Bombay, Shanghai, and Manila into megacities of 10, 20, 30 million and overwhelmed their political and legal institutions.

Instead of helping them, the law excludes them. It is this legal lag that produces a pervading sense of alienation —of being a class apart. And it is this extreme class differentiation that gives rise to terrorists who will always be around to champion the cause of the excluded. In Peru, the intellectual and political leaders of Sendero were willing to resort to terror to take power because they perceived that a majority of Peruvians were totally unhappy with the status quo. Sendero felt that the strength of this sentiment could be harnessed and channeled to subvert the existing political and economic systems.

Some have argued that the appearance of small enclaves of prosperous economic sectors in the midst of large undeveloped or informal sectors marks the dawn of an uneven but nevertheless inevitable and easy transition to capitalist systems. I do not buy this. The existence of prosperous enclaves in a sea of poverty conceals an abysmal retardation in many nations' capacities to create channels of communication with these excluded and to make available the underpinnings of the rule of law by providing formal property rights to the majority of its citizens. This becomes an invitation for political minorities to form terrorist movements with a view to capturing these large constituencies.

What we did in Peru, by making important parts of the rule of law accessible for all people, was deprive Sendero, to a great extent, of the isolated nooks and crannies it needed to hide in and to operate from. We were able to find out just in the nick of time that people don't rebel because they are poor but because they are excluded from the system. To give people a stake in the economy, to prove to them that government is in the business of including them in formal society, is to put the terrorists out of business.

Ten years have now passed since Sendero's political defeat and five years since the ILD stopped working for the Peruvian government. There was a war and, as patriotic Peruvians, we decided that it was an opportunity to start important reforms. Still based in Lima, we are now working in other developing countries to bring the excluded into the legal economy on a purely technical basis. We work as an independent non-governmental organization that assists governments in discovering and sizing up their extralegal economies. Once that research is completed, we help the country pull together all the dispersed extralegal systems that function outside the legal economy under one rule of law in one consistent network of legal devices. We try to create legal systems where the assets of all citizens can be securely held and moved to their best possible use. Our general recipes are summarized in Appendixes 1 and 2 (PROFORM and BUSFORM).

Since I stopped working for Peru, I am no longer involved in the politics of reform. However, using hindsight, I would like to take the opportunity of writing this preface for the new edition of The Other Path to draw some useful conclusions.

In spite of the lives lost and the terrible suffering, it is morally correct to get involved in reforming your nation's institutions when terror strikes. For some recurring historical reason, possibilities for change are frequently initiated by a crisis, many times by violence. Rudolph von Jhering, the great nineteenth century German jurist, argued that the rule of law is not a preset order —it arises from conflict and as the legal system responds to circumstances. If you are committed to economic development in your country, should terror suddenly erupt, you cannot just stand on the sidelines claiming that you are an economist or a lawyer or businessman without any expertise in political violence. You have an obligation to use your professional training to try to understand the economic and legal reasons why poor people take up arms and then identify ways of using that bitterness and anger against the status quo to create an efficient legal system under which everyone can prosper.

It would be wonderful if economic development could always be initiated in peacetime when an enlightened leader decided it was time to boost all his people to a superior standard of living. But economic progress does not always work out that way. When it doesn't, you need to channel that demand in the right direction; you need to use the despair and suffering to build hope, and you need to learn how to divert the concerns that breed terror to creating peace and wealth. You need to get involved. Otherwise, how can you live with yourself?

I am convinced that we received overwhelming support from the poor in our reforms because our actions were geared not to preserving the status quo but to changing it. Make no mistake: the poor don't like the present. What they want is change, and they want it badly.

You can initiate institutional reforms only if they are championed by the head of state. And the reform process will continue only if the head of state sticks with the program. In developing and ex-communist countries, only the head of state and his immediate entourage can command the attention and garner the overwhelming political support required to wipe out the willful inertia of the status quo. Elites and bureaucracies are initially inclined to resist even small changes. Any decision as far-reaching as creating a legal property system, which will include and emancipate the poor, is essentially political and should be put in the hands of the head of state right from the start.

Keeping the head of state with the program is a major challenge for any reformer, as we found out in Peru, where the enemies of the reforms sought to dampen the President's commitment to change by continually labeling us as potential political rivals. It was a mistake for us as a think tank to get into the political front lines of the reforms. When Presidents Garcia and Fujimori called, I should have found ways to make sure the limelight was always on the president. Or perhaps I should have accepted Fujimori's proposal to become his first Prime Minister and build within the government an elite team to lead the reforms. My initial belief that an independent think tank could carry out the reforms on its own, without a political commitment to the government, was sheer illusion. It is the head of state himself, and the politicians he trusts, who should implement the reform process to make sure that those who take the political risks get the credit. That is why the ILD has no problems in working abroad, where we operate as hired technocrats, foreigners without any political involvement.

The legal reform process required to bring the extralegal entrepreneurs into one official legal framework is essentially a cultural exercise: adapting Western market and corporate law to the vibrant cultures and customs of the new entrepreneurs of the developing and former Soviet countries.

What about the famous "clash of cultures" according to which many people in developing nations just don't have cultural traits that would allow them to succeed? Arguments about the cultural reasons for economic success operate a bit like the tourist industry: they concentrate on the differences between people and totally miss what they have in common. Granted, it is amusing to read that Americans will never get along with Chinese and Koreans because Asians have been eating dogs for the last five thousand years —the pets of Charlie Brown and Dennis the Menace. The Japanese continue to enjoy eating "Free Willy" the whale, while the French insist on eating horses. And Tiger Woods keeps winning by eating his Wheaties.

Those who are serious about solving the world's conflicts will find it more useful to focus on real-life political achievements in bringing cultures together efficiently: the accession procedures in the European Union, for example. From World War I to the end of World War II, Europe had no shortage of "cultural gurus" writing that Europeans would never find peace. People who cultivated grapes and drank wine could never get along with those who preferred beer. Such cultural differences, the argument went, doomed the Christian nations of Europe to eternal warfare. Notice the echo in the equally absurd claims of various authors today claiming that Islam is fated to battle the "infidel" West. These make amusing bedside reading, but surely more interesting and relevant are the stories of how European legal craftsmen —set in motion by political leaders such as Robert Schumann of France, Alcide DeGasperi of Italy, and Konrad Adenauer of Germany— used the law to reorganize isolated pieces of European culture until they were all able to fit comfortably together.

Rather than succumb to this pessimistic culturalist literature and repeat absurd claims, I prefer to point to real evidence regarding the work of people like Jean Monnet, the father of European integration, who hunkered down to examine under the microscope the legal details of different European laws and institutions.

And what did they find under the microscope?

That in spite of their differences, Europeans had much in common. By looking at culture through the legal prism, the Europeans found ways to build bridges between different cultures. As a result, the very nations that fewer than sixty years ago broke the record for wartime carnage have come together in a European Union that shares a parliament, market, and common currency. E pluribus unum —in spite of the different cultures.

The only way you can deal with culture when you are in politics, without being railroaded in a specific direction by unconscious prejudices, is to deconstruct the large inimical concepts that come from examining different cultures into legal categories where the hooks and loops that allow different cultures to hang together can be found. When it comes to culture, the devil is in the details, and you can only catch him by the tail with legal tweezers.

The study of cultures need not be a breeding ground for creating myths or stimulating conflict. That only helps terrorism. If you want to find out how cultures can be brought together, read the documents leading to the formation of any international organization, the European Union or the evolving law of the United States, or read Appendixes 1-2 in this volume, or give the ILD a call.

You cannot sell expanded markets and capitalism to the poor outside the West using Western paradigms. It is no use telling people in Haiti or Ghana how General Electric transformed itself from a successful American company with $25 billion in sales in 1980 to an almost $200 billion international conglomerate twenty years later. You have to represent progress to people using case histories that come from their own social environment. That is what The Other Path tries to do: it organizes in descriptive form and puts into numbers a reality so recognizable to Third Worlders that most of them can understand what it is that they are doing collectively and what their real options are to survive and achieve prosperity in the context of a market economy formally governed by the rule of law.

The final and most important lesson I learned is that the excluded hold the key to victory. They are the overwhelming majority, and it is they who are looking for change most fervently. Few people in the developing world are unaware of how well their counterparts live in the market democracies of the West. If governments create the legal property tools that they require for their enterprises to prosper, they will become part of the legal expanded market. If governments do not take them seriously as economic agents, if governments see them only as a nuisance or passive recipients of charity, the resentment among the poor against the status quo will only increase. Enter the terrorists, eager to exploit this hostility against the state, encouraging the poor to focus on their exclusion rather than on their aspirations to resemble the affluent citizens of the market democracies of the West.

The poor want only what everyone reading this book wants: a secure, prosperous life for themselves and their children. The Other Path is the story of how the poor in one country are spontaneously creating a market society. They are on the right track. Do we help them create the legal framework to achieve that goal by themselves or do we ignore their economic aspirations and, by default, open an opportunity for terrorism?

Hernando de Soto,
Lima, Peru,
May 2002