The Other Path

"The Other Path is not a book on the Peruvian economy: it’s a book on Third World economies. I should mention that I haven’t met Simon and I haven’t met Friedman but I know most of the people on this list personally and Hernando de Soto is probably the one I know best and admire hugely. In this book, he does an experiment. His team’s mission was to start a small textile factory with a dozen workers and their job was to get the permits for this factory and to do so completely legally. They were not to pay any bribes, unless not doing so put an end to the experiment – so if they got a flat demand saying, ‘You can’t proceed without paying the bribe,’ they would pay the bribe in order to keep going. But they would in no way use bribery to accelerate the process. They did this in the US, they did this in Germany, and then they did it in Peru. I don’t remember exactly how long it took but in the US it took about a day and a half, in Germany it took three and a half days and in Peru it took a year. His point was that what is crushing economic activity in the Third World are these weak, huge but spreading governments they have. He also thinks we should conceptualise these Third World countries, and especially Latin America, as dual societies. There is a European elite at the top who participate in one economy, a formal economy, and then there is an indigenous or non-European group underneath, who have an informal economy. Not a black market – these are people engaging in normal activities. He argued that they are not doing anything wrong, they are not illegal – but they are outside the law and that has tremendously negative consequences for them. He doesn’t romanticise this informal economy either. But that is the great problem of underdevelopment, especially in Latin America. In another book, he did another fascinating experiment. He sent teams into four Third World cities including Port Au Prince and Cairo. What they did was go into a slum, find a shanty, and find out how much this shanty was worth. If I wanted to buy it, what’s it worth? $300? OK. Then they would take an aerial survey of one square kilometre of this slum and count the number of shanties that were there and then do an aerial survey of the whole city and find out the square kilometres of shantytowns that were there and then determine the capital value of this housing stock. While the individual houses were worthless, the aggregate value of their worth was colossal. But nobody could monetise it. You couldn’t get a loan against it, you couldn’t use it as capital to support a business, and what was even more startling was that because you didn’t have title, you couldn’t rent it to anybody outside your family. If your cousin comes in from the countryside, you can rent it out to him, but you can’t rent it to a stranger because you have no confidence that when the lease is up the stranger will relinquish it – because you don’t have clear ownership. Poor people are trapped in a face-to-face economy, whereas the achievement of the modern world is to emancipate most of us to participate in an impersonal economy spanning half the planet. These ideas have very profound implications. I think because one of the concessions that liberalism began to make after the Reagan/Thatcher era. Back in the Depression days, people who advocated a controlled economy said, ‘We know we’re right because we know how to make people more affluent. You conservatives with your free market ideas don’t know how to do that.’ After the 1970s people who advocated a more controlled economy said, ‘OK, OK, you people who are in favour of free markets know how to create wealth for the already wealthy, but the problem of poverty, that’s our problem – you don’t have answers to how to deal with that.’ Hernando de Soto, and in a way Wilson and Murray, showed that actually we have answers for that. We have explanations and policy solutions that apply not only for making the already wealthy rich but also solutions to the problem of poverty. What a country like Peru needs is to extend the market and legal principles that govern the lives of its top ten per cent to find ways to bring those down to touch everybody. All the books have positive points but they all have debunking points. They are all written from a minority and contrarian point of view. I think they all take for granted that the other side of the argument holds the upper hand. The impact of this book is suddenly to transform and upend what was the conventional wisdom and create a new consensus in place of the old consensus. I would say in the past ten years, while there has been conservative intellectual productivity and there have certainly been good books written, it has not been as fertile as when these books were written. There are a lot of reasons that this is so. For one, these are icon-busting books, these are books that turned things upside down. So when the conservative side is on the ascendancy, as it really intellectually has been, there are fewer such books. In fact, the books that have tended to turn stuff upside down have tended to be liberal books. And the areas where books can have this impact have become smaller and smaller. That’s another problem we now have. One of the reasons these books have the philosophy and force they did was because they were arguing with people who are constrained by a whole series of taboos, clichés, slogans, and compulsory beliefs. Once conservatives have built a similar structure of taboos or an opposite structure of taboos for themselves, it becomes harder. Once you have your own gatekeepers, and certain lines of research can’t be pursued, then you are in danger. We also have, as the conservative world has grown, a lot more people in it, we have a lot more friendships, a lot more relationships – and people understandably become less ruthless in their criticism of less than perfect work."