The ILD’s Reputation Grows - Beyond Peru
By the end of the 80’s, however, international development organizations began to take notice of ILD’s achievements. And then in the early 90’s, the ILD’s phone began to ring with calls from governments that viewed ILD’s approach as a practical alternative to solving the problems of persistent poverty and legal exclusion in their own countries. The first was El Salvador.
El Salvador
In 1990, President Alfredo Cristiani, impressed by what the ILD had accomplished in Peru, asked the institute to adapt that work to El Salvador, which was in the last gasps of a decade-long, bloody civil war and had just four years before suffered a devastating earthquake.
The ILD agreed to help, but did not intervene directly. After conducting a pilot study, the ILD trained a group of Salvadoran professionals to develop a titling system. The objective was to provide titles for approximately one million properties a year. By the end of 2003, the real estate formalization system designed by the ILD brought one million people under the rule of law, and also helped settle peacefully former wartime combatants and refugees on productive land, thus reducing incentives to violence. Today, the Salvadoran registry system handles more than US$ 800 million in mortgages yearly. As ex-President Francisco Flores (1999-2004) has said about the effects of the ILD reforms:
El Salvador is a different country today. It has the highest poverty reduction rate in Latin America... In 12 years, El Salvador has reduced its poverty rate by half.... Unemployment dropped from 30% in 1992 to 6.8% in 2003.
A Victim of Success
After the ILD’s successful reforms in Peru and El Salvador, other countries began to ask the Institute for help. The nascent ILD, however, had never conceived of itself as an international organization: from the start De Soto, his supporters, and his team of researchers had been inspired by the vision of creating a legal environment in Peru that would make it easier for all their compatriots, especially the poorest, to get a stake in economy and lift themselves out of poverty.
Once again, however, the ILD got embroiled in internal Peruvian politics, ironically a victim of its own successes --against Sendero, making effective legal reforms, and an increasingly high profile in the local press. A survey revealed that along with the executive branch, the army, the parliament, and the church, the ILD was one of Peru’s most powerful institutions. The joke among Lima’s political and media classes was that the ILD was running the country.
Not laughing, however, was President Fujimori, legitimately proud of his own successes against terrorism and sowing the seeds of economic reform in Peru, and annoyed that the ILD was getting better press than the most popular president of Peru in recent memory. Unlike the U.S., where organizations and individuals outside of government can influence policy --from Ralph Nader’s consumer reforms and Martin Luther King Jr.’s civil rights revolution in the 1960’s to the current influence of various environmental and immigration reform groups-- civil society traditionally had played no significant role in Peruvian politics. And the President was not about to let a non-governmental organization outshine the Presidential Palace. As the respected political commentator Alvaro Rojas noted at the time, “ILD was perceived as a political power.”
In 1996, the Government informed the ILD that it was no longer running the Registro Predial.
Continued Influence in Peru
Even though the ILD was no longer in a position to work in Peru, its influence could still be felt over the next decade, particularly in the universities and among other reform-minded people who believed that Peru would never create the kind of market economy it wanted never mind take its rightful place in the global marketplace so long as the majority of its entrepreneurs --and their assets-- were languishing in the extralegal economy unable to make potentially lucrative or secure transactions with fellow Peruvians much less with foreign buyers or investors.
Hernando de Soto reiterated that point in 2006, for example, as part of the public debate over a Free Trade Agreement between the U.S. and Peru that was awaiting the ratification of the U.S. Congress. He noted that the Free Trade deal could be a perfect opportunity to integrate Peru’s small and poor entrepreneurs into the benefits of globalization --by creating an “Internal Free Trade Agreement” that would grant all Peruvians access to the legal tools that businesses in the U.S. and Europe took for granted: legal property rights, forms of business organization to divide labor more productively, and devices to expand markets, nationally and then internationally. In September 2006, President Alan Garcia appointed de Soto as his “personal representative” for the Free Trade Agreement, and the ILD President’s proposal for “Internal Free Trade” for all Peruvian entrepreneurs was embraced by the media. Almost two years later, with ratification of the U.S.-Peru Free Trade likely, the ILD’s approach to helping the poor of Peru continued to have wide support.
Going Global
Prevented, in effect, from initiating more reforms in their own country and with a growing list of invitations from other countries, in 1996, the ILD team realized that that they might actually be onto something --a universal solution, in fact, to persistent poverty and exclusion.
Haiti was on the line, and the ILD decided that if it were going to have a Second Act, it would have to take its show on the road. Nevertheless even though the ILD was no longer in a position to work in Peru, its influence could still be felt over the next decade, particularly in the universities and among other reform-minded people who believed that Peru would never create the kind of market economy it want never mind take its rightful place in the global marketplace so long as the majority of its entrepreneurs --and their assets-- were languishing in the extralegal economy unable to make potentially lucrative or secure transactions with fellow Peruvians never mind with foreign buyers or investors.
Haiti
In 1996 the President of Haiti Rene Preval contacted ILD for help in determining the extent --and economic potential-- of the informal real estate sector in his country, the poorest in the hemisphere. Between 1998 and May 2002, under the Governments of Presidents Rene Preval and Jean-Bertrande Aristide, the ILD --with the support of the Inter-American Development Bank (IDB)-- conducted extensive research of Haiti’s extralegal sector and designed reforms that would assist small businesses struggling in the informal economy; the ILD presented in a comprehensive “Draft Law for the Creation of the National Program for the Capitalization of Assets” (Le Programme National de Capitalisation des Actif en Haiti). The reforms, however, were never implemented, stalled by political instability. But the new Government of Rene Preval has revisited the issue, and in March 2007 the ILD signed an agreement with IDB to re-start the program, update the reform proposals, if necessary, and then move toward implementation.
Egypt
In 1997, the Egyptian Center of Economic Studies (ECES), a Cairo-based think tank, invited the ILD to investigate the practices, extent, and the dollar value of Egypt’s real estate sector, rural as well as urban. The ILD financed its work with funds from USAID, and later that year ILD President Hernando de Soto presented the findings in a lecture to ECES --“Dead Capital and the Poor in Egypt”. After extensive research in Greater Cairo and visits to Alexandria and other cities, as well as canvassing rural areas, the ILD team exposed a huge extralegal real estate sector, comprising more than 90% of Egypt’s urban real estate and more than 80% of the nation’s rural sector --more than 70% of it belonging to the poor. The ILD estimated that the value of Egypt’s extralegal assets was about US$ 245 billion --all dead capital. (At the request of Egyptian President Hosni Mubarak, the ILD would begin an even more ambitious project in 2003, under the auspices of Egyptian’s Minister of Finance.)
The Philippines
An ILD team arrived in Manila in late 1998 at the invitation of President Joseph Estrada to diagnose the nation’s extralegal real estate sector. The final report revealed that 65% of the Filipinos lived and worked outside the legal economy where they had accumulated assets worth about US$ 132 billion, all dead capital. In the midst of a corruption scandal and street protests in January 2001, Estrada was forced to resign from office and was replaced by Vice President Gloria Macapagal Arroyo, an advocate of ILD-style reforms, particularly in the area of urban and rural property reform and financing housing for the poor.
President Macapagal Arroyo soon met with Hernando de Soto in Manila and invited the ILD to continue its work in the Philippines. ILD teams returned in 2003 to update its research on the real estate sector, and in 2004 also analyzed the extralegal business sector, revealing that almost all of the businesses in the Philippines were extralegal.
Mexico
During his candidacy for the Presidency in September of 1999, Vicente Fox asked ILD to conduct a preliminary study to determine the basis for development in rural communities and draw up proposals for housing programs. An ILD team spent a year working on the issue, issuing its report in 2000. In 2005, President Fox invited the ILD back to Mexico to execute a full-scale study of the country’s extralegal sector; and the ILD is currently negotiating with the new government of President Felipe Calderon to design a series of legal reforms based on that work.
The Mystery of Capital
In 2000, Hernando de Soto published his second book, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, which became a best-seller around the world and has been published in 20 languages.
Advancing his take on the economic effects of informality as discussed in The Other Path, de Soto argues that the economic success of the advanced nations rested on how they gradually integrated the majority of their own populations into the legal economy. According to de Soto, every developed nation traveled the difficult road from a predominantly informal --or what he calls an “extralegal”-- economy to one under a single rule of law capable of generating capital and thus economic progress. The solution to the “mystery” of how capital is created, de Soto argues, can be found inside the legal property systems of the West where ordinary people can gain a stake in the market and leverage their assets (mainly houses and small businesses) into wealth. “Formal property records and titles thus represent our shared concept of what is economically meaningful about any asset,” he writes. “They capture and organize all the relevant information required to conceptualize the potential value of an asset and so allow us to control it.