Tuesday, March 20, 2012

Book Review: The Other Path by Hernando de Soto

In The Other Path, Hernando de Soto makes the populist argument for capitalism and property rights in the 3rd world.

The social and economic environment of many 3rd world nations resembles feudalism, with entrenched economic privileges and near-overt ethnic discrimination. The privileges of the elite are protected by law, which creates economic stagnation for the poor - if they follow the law, which, out of the need for survival, they don't!

So, an informal economy springs up, with noisy microbuses and illegal markets. For the majority of the people, this is where market clearing prices exist. People live as squatters, oftentimes in rather nice houses.

Trouble is, you are outside the law and you do not have formal title to property or legal protection.

De Soto argues that the fait accompli of these markets and businesses should be recognized formally and given protection of the law. This action unlocks capital (via loans), reduces crime, and brings people psychologically into the community.

At the time, Peru was fighting a Maoist insurgency in The Shining Path (hence the title of this book), but De Soto's work stands as an interesting contribution toward our understanding of the black market.

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