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by Hernando de Soto

The New York Times | October 15, 2001

LIMA, Peru - Newspaper headlines and television anchors across the United States ask, "Who are these people who hate us so much?" We who live in the Third World and the former Soviet nations know terrorism well. The 21st century terrorists we confront are ruthless politicians with domestic ambitions. Killing innocents is but a means to an end: taking control of political power in their own countries.

But these terrorist politicians have a common problem. They are small minorities in their own countries. To take power, they need to swell their ranks, and in the developing world, the overwhelming majority of people are poor. The difficulty is that for the past 30 years the poor in most places have been more interested in becoming entrepreneurs than revolutionaries. To improve their lives, they have migrated by the millions to the cities. You can see these migrants in the streets of the Middle East or Asia, selling what they manufacture in their shanties, from carpets and books to tools and engines.

They have worked harder than most people in the West realize. In Mexico alone, according to our research, the poor today own assets worth $315 billion, seven times the value of Pemex, the nation's oil monopoly. In Egypt, the poor control some $245 billion of goods — 55 times the total foreign investment made in Egypt over the last 150 years. All over the developing world, the poor are inching toward a market society.

What is a terrorist to do to divert the poor from economics to politics? He must try to create an irresistible emotional shock that focuses people on their differences with the West rather than their aspirations to resemble it.

To polarize people in this way, you do something as atrocious as possible and hope that the enemy will retaliate even more violently and indiscriminately, killing more innocent people and creating legions of refugees. The terrorist politicians hope then to sit back and wait for the poor, and those whose hearts go out to the poor, to rally around their leadership.

The recent attacks on New York and Washington are a gigantic political trap. They were intended to be a shock that would polarize the world's hundreds of millions of Muslims. But by hitting such symbols of American wealth and power, the attacks may also be perceived as attacks on a political-economic system and an attempt to polarize the poor against the bastions of democratic capitalism. If terrorist politicians are to find any significant constituency, it will have to be by appealing to material rather than spiritual needs. That is where the battle will be fought, and now, sadly, the world is ripe for such conflicts.

After the fall of the Berlin Wall 12 years ago, most enthusiasts for the free market, including the international financial institutions, assumed that the benefits would trickle down to the working poor. Instead, small entrepreneurs outside the West have experienced mainly economic suffering, tumbling incomes and high anxiety. Those who favor the market had forgotten that the only way capitalism can help the poor prosper is by bringing them into the capitalist system. But that has not happened. The poor often do not have clear legal title to their assets; buildings and land cannot be used to guarantee credit. The poor in the vast majority of nations cannot yet take advantage of legal structures that are central to the production of wealth.

Yet Americans in the past century proved that they know how to counteract polarization. After World War II, General Douglas MacArthur and the new Japanese government — inspired by the writings of Wolf Ladejinsky, who was associated with the United States Department of Agriculture, and by Japanese technocrats — deprived the feudal-military establishment of its constituents by replacing a feudal legal system with a property-based law that protected individuals, including the poor. That change was instrumental in making Japan's phenomenal economic growth possible. America likewise helped Taiwan create a new prosperity through the Joint Commission on Rural Reconstruction and acted similarly in South Korea.

In my native Peru, we helped undermine the Shining Path terrorist movement in the 1990's by reforming laws to make it easier for the poor to gain legal title to their homes and small businesses. In my experience, the Shining Path and similar groups elsewhere have protected peasant land claims as part of their politics — and once the state itself protects those claims through granting clear title, the terrorists lose their political hold. This strategy was actually first used by the Prussians to rally their farmers to defeat Napoleon in the early 19th century.

To divert the poor from the siren call of terrorists, America and its allies must appeal to their entrepreneurial interests. It is not enough to appeal to the stomachs of the poor. One must appeal to their aspirations. This is, in a way, what the terrorists do. But their path leads only to destruction.

Up to now, the West's policies and economic incentives have concentrated on encouraging the rest of the world to follow good macroeconomics: to stabilize currencies, balance budgets and privatize public enterprises. The influence, power and glamour of the West are still so great that most countries have followed these prescriptions. The West did not get involved in the details; its beneficiaries have progressed (or failed) on the strength of their own imaginations and programs. It is now time for the West to create new policies that inspire governments to harness the entrepreneurial energy that is already humming among the poor and focus on development at a micro level, encouraging capitalism from below.

The long-term fight against terrorism needs to offer millions of potential warriors a formal stake in the economic system they are striving to join. Any campaign that does not drive a political and economic wedge between terrorists and the poor is likely to be short-lived.

Hernando de Soto is the author of "The Mystery of Capital" and founder of the Institute for Liberty and Democracy in Lima, Peru.

Copyright 2001 The New York Times Company

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