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The Economic Roots of the Arab Spring

Speaker: Hernando de Soto, President, Institute for Liberty and Democracy
Presider: Isobel Coleman, Senior Fellow and Director, Civil Society, Markets and Democracy Initiative, Council on Foreign Relations
April 23, 2012, New York
Council on Foreign Relations

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ISOBEL COLEMAN: Good afternoon. Good afternoon, everyone. Thank you for joining us here this afternoon. I'm Isobel Coleman. I'm a senior fellow here at the Council on Foreign Relations and director of the Civil Society, Markets and Democracy Initiative. And it is with great pleasure that we welcome Hernando de Soto today to talk about, perhaps give a different angle on what is happening with the Arab uprisings and the Arab awakening, Arab Spring, whatever your terminology.

As many of you know, Hernando de Soto is the head of the Institute for Liberty and Democracy in Peru. He is also a best-selling author who has written a number of books, including "The Other Path: The Invisible Revolution in the Third World" and "The Mystery of Capitalism: Why Capitalism Triumphs in the West and Fails Everywhere Else" (sic). His books have been much-quoted by heads of state and others. And he has worked all around the world with different governments on reform initiatives. And you can read his longer bio in the program.

But today we're going to talk about -- primarily about the -- about the Middle East. And when we think about the Middle East, we generally think about it in political terms. This has been a mass uprising of people across the region demanding greater political freedom. But of course, there is an economic dimension to what is going on also. And we have with us someone who has been working in the region for many years and has his own take on what's going on from an economic -- a socio-economic theory of marginalization. So over to you.

HERNANDO DE SOTO: Well, let me try maybe and link together what we were doing in Latin America and how we got to the Middle East. The way we came to local fame was because at the time that we were having a war with a terrorist movement called the Shining Path, we wondered how they were so strong. We knew that the people that followed them, mainly the armed bands in the coca regions of Peru, hadn't read the 56 volumes of Marx. (Laughter.) So what made the Shining Path so strong? And we saw that essentially, what they did was protect the assets of the poor.

And so the whole strategy became, how do we give the poor of Peru who are growing coca, but elsewhere, who are supporting what the Shining Path has given them? Those are property rights. Those are political rights. Let's move in the hot areas first.

The result is this was probably the shortest guerrilla war that there ever was. We literally had a political victory over them. We just simply took away all the support that they had, and they had to move in the cities, and then they were caught.

But then, of course, the general idea becomes, well, isn't this interesting? You know, when the paper does count, when the rule of law does come into place and people's rights come into the system, when all of a sudden, with your house, you can get credit and you can start doing all sorts of things, people become part of what the Bastiat would've called le doux commerce, the sweet -- the sweet trade.

And Peru is now using the same reform that we started with; there's only been tweaks in the others. I think we're the highest-growth country in Latin America. Things have gone well. It doesn't mean that things are perfect, but we're doing all right.

We get a call somewhere around the end of the 1990s from different people -- Seif al-Islam Gadhafi; we get a call from the Mubaraks; keep on going -- could go down all the names. And the -- (inaudible) -- is always this: What you've seen in Latin America somehow or other rings true for our part of the world; come talk to us, give conferences, and then we'll hire you, which they did, to size up what you call the informal sector.

And the informal sector, to us, is basically all of those who are in business that have none of the rule of law behind them. That includes property rights; (that includes their ?) identity; that (removes the possibility ?) economies of scale, that it means the possibility to issue shares, to raise capital; you can convert your assets into collaterals or convert them into credit.

And we did that. That is, if you want to, the first decade, which is -- was presented in -- to governments in programs. Each program would take about 120 people, 200 people, because you can't get that information in books; you've got to go to the ground. And that, I would say, was the first experience that we had in the Middle East. That went from about the year 1997 till, say, about 2006, 2007.

COLEMAN: But a lot of these reforms really didn't go that far. They were in effect stymied by entrenched elites in these countries, and now we have a very different dynamic. We have this uprising that it is going on across the Arab world, and you've seen young people taking to the streets. You've done some interesting work on, say, Mohamed Bouazizi who set himself on fire in Tunisia and others. And looking at that, it almost gives a different angle on what's happened.

DE SOTO: Oh, it is a different angle. I would even say it's different depth.

We knew very well that when you draw up plans -- I mean, when you do anything in politics -- the forces of inertia are enormous. It -- something sort of happens, and then its time has come. Because you say, "entrenched elites" -- they're not even the prosperous people. It's an "entrenched elite" in the case of Peru. It was the notary publics that didn't want this part of red tape taken away, or it was somebody else that understood that a title was just about the (spot ?). It didn't have to bring (credit and other ?) stuff against it because that goes against best Latin morals or it goes against the Amazon traditions. I talk to the river, I listen to the mountains -- that's not for me.

So, we know that before change produces circumstances, (it got to Peru ?). So we were pretty patient about that; besides, it wasn't our own country that was not up to it.

But when, (in effect ?), on the 17th of December of 2010, Tarek Mohamed Bouazizi, in the city of Sidi Bouzid, population 38,000, lights up, we see something else. To us, all of this -- this is a person that we were actually writing about. These are -- these were the broad number(s), and we had talked of course to dozens of thousands of people like him.

But it's one thing talking to them when life is the way it is, and another thing when it gets very dramatic. We were very inspired by a German philosopher -- I mean, we knew it but he was the one who expressed it -- typical of the Germans -- there's the outside world, there's an "Umwelt," and the "Umwelt" is that -- essentially it's a Kantian concept, which says basically one thing is when you have a phenomenon, like we have the informal economy, we've got capital, we've got macroeconomics, we've got unemployment, employment; another thing is how this is perceived by one individual at a very dramatic moment. And that's when they express themselves and society around them expresses, and it's kind of cold to say, but that's when you get the story the way it is from the inside, and then you get to find out how many other insides are feeling the way they are.

So when this man lights up because, according to the paper, he gets slapped around and his dignity is slapped around -- that's the way it seemed -- at 10:30, and by 11:30, he has lit himself up in front of the governorate, we get very curious of what happened for somebody who's just been slapped around to commit suicide. And over dignity wasn't just enough, because we've seen people lose dignity all over the world without lighting up.

So we started taking research teams there, and we started following it. In the first 60 days, it isn't only Bouazizi who lights up, but 49 people light up in every Arab country. And they all light up for the same reasons, and they even choose the same sort of date. The 17th of December was Bouazizi. Monaem (ph) in Egypt was 17th of January next. So they did it on same dates.

And the interesting part of about all of them was, one, they were all businessmen, no politics, and -- I mean no politics -- and the second thing, it was on the day that they were expropriated, when their assets were taken away from them.

So we've interviewed -- you're going to say, how could; they're dead -- no, 60 percent of them didn't die. They were simply -- the flames were stifled, and those who died, of course, there was a family around them. And then we started saying, going all the way from pricing what they had on the crates -- bananas, pineapples, et cetera -- how much did Mohamed Bouazizi lose? And so the visible losses is $225, including his scale. But what nobody saw, but you can see once you just talk to (them ?) for three or four hours is that they told him, you're losing your fruit; you're losing your crate; you're losing your scales, which allow you to (talk ?) to people and become honest, but you're losing your right to sell on this spot, and you're losing your right to sell on that other spot, and by the way, we know that you got your wares on credit, informal credit; that goes away now. So he -- so he was bankrupt.

And we also know another thing, that at another level, he was trying to get his house properly titled so that he could buy a Mitsui truck so that he could actually start -- his dream was getting his wares directly from the countryside instead of having to get it from the middleman. And with that, of course, he wanted to have razedmel (ph), capital -- straightforward. And when he was asked just before what his wish was for the people of Sidi Bouzid, he says, I think the poor should also have the right to buy and sell. I mean, this guy was out of -- completely a businessman.

So when that happened, we saw that they were killing people's dreams, and the interesting thing is 49 lined up saying the same things, from Algeria to Egypt. And the next thing you know, our figures click in, which is the Arab world has got 200 million informals. Now, there's a lot of Twittering; there's a lot of Facebook. That gets the message across very fast. But who did the burning?

And so we think that what is actually happening is very similar to the Industrial Revolution. If you look at it again, in Europe and elsewhere, when essentially entrepreneurs who are discriminated rise against system. And they still haven't quite gelled as an underclass, but they have an economic agenda that we've seen -- I mean, I don't deny that there is a political agenda -- there is an economic agenda there, and we have to pay attention to it because that's the story.

So we've now been working a year. We're going to produce a book of the story of each of these people. And you'll see none of them, none of them talk religion, none of them talk politics; they basically talk about their right to do trade.

It also indicates another thing that to us is very important. I used to be very impressed, when I started in Peru, trying to say, well, why don't we have market economics? It works so well in the United States. There's a book you have to read, which is a book by Karl Polanyi, who explains how it is that capitalism destroys on its way all these old institutions, you know, these -- the elders, the small institutions, the tribes, the feudal authority, who, are the way -- that's the way you make peace, and you have society work from India to Peru. And capitalism does away with that, and it's terrible, right? Absolutely. "Avatar" sort of stuff -- this land is my land, the General Custer -- all that sort of comes together. (Laughter.)

Now, there's a sign -- but Bouazizi, when he was expropriated and his livelihood was taken away, why didn't he go find the local elders? Because there weren't any. Because that's what markets do. They wipe out. And once they wipe out, then you've got to have the rule of law, because that's what you did when you wiped out your tribes, when you ceased being Asterix and Obelix in the West; you put in other institutions. And they're not there, and I think that's the challenge.

COLEMAN: Let's talk a little bit about Egypt. You have been working in Egypt since the late 1990s, as you said. I think you were hired first by the Mubarak government, partially funded on -- by USAID, to come in and look at this informal economy. And some of your findings are really quite interesting. You say that in Egypt that it's -- the informal economy is the largest employer in the country and that you concluded that the informal economy is valued at 55 times of all foreign direct investment in Egypt since the time of Napoleon. So it greatly dwarfs any type of foreign direct investment/aid that has happened in centuries there.

The work you did, my -- by things I've read, my understanding is, it was understood by the Mubarak government, and there were some partial reforms that were made, but they didn't go fully forward. Why not? And what will it take to make those types of changes?

DE SOTO: Well, first of all, it's -- the phenomena of exclusion is a very sophisticated one. When we try and define it -- well, but you know, the idea is to basically get that dramatic moment where everything goes through in two seconds. Otherwise, explaining it takes a lot of time.

But for example, part of it has to do with land, but that wasn't the only asset that Egypt has. It's got talent. It's got businesses. Eighty-four percent of the enterprises of Egypt are informal. Ninety-two percent of their real estate is off the books, believe it or not. So it's a lot of stuff.

So the idea is, how do you bring them in? And you need a whole plan for it. You can't just go and (tackle ?) someone and say, you've got your land; let me give you a land title. And they'll take it. But to come into the system and keep on reporting it and updating it the way you would update a telephone book so that it's sustainable pieces of paper, you need to know what the deal on taxes is as well. You need to know if there is an enterprise inside the house.

So land titlers come in, title your land, and you say, how about my kite factory or how about my shoe repair industry, or how about my furniture industry at home? Oh, no, that's the other ministry. So you got little pieces (formalization ?) -- if you don't get the whole work, then you understand what your (liabilities ?) vis-a-vis the state or to other people, you don't come in. So that's what's sort of wrong with it on a first level.

Secondly, everybody is sort of thinking that property is in property law. But property is all over the place. So one of the reasons women don't get property and they complain about it from India all the way to Egypt is essentially because most people don't get married legally, and that then doesn't produce the link that you need to access the property. So what you've got to reform is civil law.

So it's a complex thing. It's not easy to understand. And when you develop -- and these kinds of things have happened in the West -- there's literally been a big political movement to (move ?) the whole thing. The thing is it's sort of clouded up in the West because it's taken away by other stories, and then you don't get to read about it. But these were huge revolutions.

For example, Napoleon beats the Prussians in 1806. The Prussians have to reply, and they can't because the farmers are not ready to be recruited as troops to go to war. And that's been the story for 500 years. That's how the -- where the movement of reform started with Luther. And so the kaiser understands at that time that to get them in, he's got to do something major. So he gets one person called Stein, another one called Hardenberg, and it's a huge movement to bring in all the -- all the little people of Germany into the system. And then he recruits the army, and then he beats back Napoleon. All right. This happens everywhere around Europe, but the history books talk about Napoleon. They talk about the Prussians, they talk about Bismarck, they talk about the Congress of Vienna, which is the interesting part, but they don't talk about how you actually put the system into place.

COLEMAN: Well, is this Egypt's Napoleonic moment? I mean, is this now a time where there is such a transformation going on potentially that these types of changes might happen, or not?

DE SOTO: I think so. But then again, I'm an optimist in my own -- in my own field. I think so because what we did is that everything we started finding out this time about the "Umwelt," what we saw are the martyrs, whom we call the economic martyrs, where we challenge our friends and say, you've told us that you're different realities, there's no way you can compare a Tuareg from Libya with an Egyptian; these are different realities altogether; so we're different countries, different folks, different folks.

Then we say, well, explain the Arab Spring. Explain the Arab Spring. It went right through, all that, same phenomenon. So there is a link, and we'll tell you where we think that link is. It's easier to understand if you're a Marxist or you're a Marxian (ph), but people who feel oppressed have a tendency to crystallize together. And when Bouazizi lit up, some people saw, in that economic abuse, what we weren't even able to gather, and that's why they light up and that's why it (runs ?). So that's one explanation.

Now, when we said that, the interesting thing has been the people who have started calling us in. So now we have, for example, a mandate of the Muslim Brotherhood to do what I'm talking to you about. They were the first to react. It's not that the other ones didn't react. They were the first.

Now, I can talk about that because I told them yesterday that I was coming to the Council on Foreign Relations, and I said, can I talk about the fact that you've given us the mandate to do what the guys before didn't do? And he said you can. I said, what else can I tell them? Just that. (Laughter.)

Now, the other places, it's not quite there, so I'm kind of optimistic. And it's not because I believe in them, because I've only just met them. It's because every time we say something or they say something and we put plans against the walls and we've got their technicians -- well, their higher-level officials going up there -- they talk the same language we do. So for example, we say -- where they say, where did you get that information about the fact that a mortgage relates to debt relates to prisons and how all these businessmen were in prison, I say, well, this is it; that's how we get these guys going to prison. And because of this law, then they are able to take the debt and take away their houses here. Well, that makes them spend three years of their total life defending this asset when they could have been doing this instead of doing that.

And this is what explains why they were not able to accumulate razalmel (ph), why this is really violent repression. And then they come back and say, that's right. When I first went to jail, says the Muslim Brotherhood, I actually got in that way. I was in business, and I did -- and as you go through the days and days, talking about it, you find out that -- I mean, we're kind of proud of ourselves -- we were asking the right questions to the right people, and these are the guys that went to jail.

COLEMAN: The usual characterization of the Muslim Brotherhood, with certain people in exception -- you know, Khairat al-Shater, of course, is a very successful businessman, but there are -- there are not that many economically experienced people in the Muslim Brotherhood. But what you're saying is that from your conversations with them, you've actually found them to be pretty economically sophisticated.

DE SOTO: I have indeed, but at two levels, of course. You know, there's -- you can be economically sophisticated in the sense that you know that if you overmonetize your economy, this happens, (that other ?) happen -- no. They're -- they -- they're not the only ones, of course, but they're especially sophisticated in knowing the economics of poor people that are lacking what it means to actually make it in a market economy. In other words, in terms of being enterprising, this is an old human tradition. It doesn't come from Western Europe. I mean, Arabs were -- invented the check 700 years ago. And you could draw a check on Beirut and cash it in Singapore 700 years ago. So that's been around.

We were conquered in Latin America. Well, we were -- my ancestors went in to conquer, and they were military, and they were called -- (in foreign language) -- entrepreneurial soldiers. In other words, you decided we're going to take over this piece of land; let's talk to Philip II. (What's ?) the deal, 30, 40 percent? We kill the Inca; we don't. There were all entrepreneurs. That's there.

The thing is, when does enterprise come with the rule of law, with property rights, with rules on how you get your assets and you control them? That's 19th century stuff. So that's where -- the Arabs -- and by the way, the rest of us -- have been left behind.

We don't all have a right to those different institutions. We don't have the paper that it takes to move inside the market. So what I'm talking about is the fact that -- not that they're going to -- they're going to -- you're going to invite them here, and they're going to quote Milton Friedman from the start. (Laughter.) It's just that what they're going to tell you is that they know what entrepreneurship is about, they know that something's missing, and they want to bring them in. AND what's important is they're competing in politics, and they've got to tune in. They have to -- got to tune in.

You have -- may I just do one little thing? I brought this little infogram. We learned to do these things from America; thank you.

(Inaudible) --

COLEMAN: This -- (inaudible) -- table. (Inaudible.)

DE SOTO: (At ?) the other table? It shows you here, for example, that there is in that informal world -- we haven't found any in Algeria, in Libya, one home, one debt, one credit, that isn't documented. You find a document.

Now when you go inside, you say now, is that signed by the Central Reserve Bank of Egypt? Is it signed by the housing authority of Egypt? No, it's signed by mullah; it's signed by somebody else.

So when you look at the Middle East, you look at one strata of society and then another one. What the authorities did in paper, the other guys did. So there's evidence that that system is working.

Why don't you just take the system then, photocopy it, take it up and make it the official system? Because it's a little bit like the United States in the 19th century, one thing where the guys who had the rights in the gold rush, California, 800 -- I mean, 2 million and a half, 3 million Americans moved to California, former Mexican territory and there you go and set up 800 mining claims.

Each one of them had their own titling system, Little Miami River had nothing to do with that. Arkansas had nothing to do with that. And over 50 years, you standardized it and you had a language for property together. That's what they haven't done. But they're there. They're the pioneers. They want to do things right.

But they've got to get it under the rule of law. And rule of law means standard. My Visa card here that's going to pay the hotel tomorrow is standard. Otherwise, it wouldn't be accepted. They have got hundreds of little systems that are begging to come together.

COLEMAN: As I mentioned in your introduction, your books have been bestsellers. They've been quoted liberally by heads of state.

And yet, they've also -- the ideas that by coming up with this consistent titling and consistent property rights, it unleashes economic growth, that notion has been criticized as being oversimplified, that it's been tried in various places with only mixed results, that the issue isn't even really titling in many places.

It's much more difficult -- land reform, that the property is owned with a title by someone, just not the person living on it, that even when you do manage to get titling in place, the credit that you need to unlock that economic potential for collateral for a mortgage on the property or whatever, that that isn't there and that doesn't come along. And so you have not seen the tremendous results that you would expect from this work. What is your response to that?

DE SOTO: Well, it's at two levels. One is where we responsible for it, like, for example, in Peru. If you look at the -- I think we should have -- (inaudible) -- in about eight months. But if you look at the trajectory of gold, if you put your money into gold in 1998 or if you put it in a medium Wall Street firm, you -- I think in gold you would have gone up about 98 percent and in Wall Street you would have done about 120 (percent). And if you put it in a Peruvian slum today, your money would be 400 times more.

So we'll talk about that when our numbers come in. Now, we don't control all the processes because titling isn't just about titling. It's about how it's -- you see, it's not really about the land. It's the land is a point -- a reference point. And it's a long time ago that these land people took over the word property and it's been rather difficult for the rest of the world. That isn't the way it started.

You see, the whole idea is it's like your passport there's a physical object -- say here, the land. You have the passport. There's your photograph. There's your -- I see it as I come from the States as your fingerprint. And then you go through the passport and there's a thousand filaments that link you to all sorts of other things. The general idea is to locate you so that you can be made accountable. You're responsible and everything is verified and certified and everything that's in there can be tested for the truth. It's a very complex process.

In most of the rest of the world, titling is a little bit like when you walk into one of these restaurants. You hand your coat and you get your coat checked. You get a little piece of paper and your coat's in there. Or when I get my bag, I put it in in Lima and I pick it up in New York. And that's a little property right that will last 24 hours or so or maybe if you get it lost, they'll find it in Japan and come back with it.

To make it last longer is a process that few people actually do because even among your expert advice that you send from the States to developing countries, that's what you think it does and that's as far as it should go. That wasn't the kind of things that Tom Jefferson was talking about when he said if you give pieces of paper that don't actually lock the thing in in such a way that it's respected and locked into other parts of society, you're going to be creating fictitious capital.

And when you have fictitious capitals, he said, 1819 -- he'd already been president -- you will have recessions like the one we're having today. That's what he said. Now, here is another argument. If you're not careful about the continual validity of that piece of paper, like my credit card, you can trust it because it's got all sorts of things that -- when you can't trust it anymore, it goes out of fashion.

Then it doesn't matter how developed you are. The system stops working. So for example, all of these poor people in the United States that you gave subprime mortgages to, then they took that little piece of paper and took it one generation further and then securitized it and put together a credit-debt obligation, did a little bit more of that. Sixteen generations later, it's in somewhere in the derivative system.

Your secretary of the Treasury, Hank Paulson, goes out and says, I'm going to get it. September 2008, I'm going to get this stuff out because it's toxic. He gets on his hands and knees in front of Nancy Pelosi and says, give me $780 billion because the guys who are holding the debt in Wall Street on those pieces of land all over the United States of poor people, we've got to get it out because they're toxic. You see, it's the lack of credit ability that spreads out. We've got to pull it out surgically.

She gives him $780 billion. I'm in, I don't know, Ethiopia. I'm watching this. And I said, it sounds reasonable to me. Gee, what's this thing about derivatives? Look it up. Then, three weeks later, he said, well you know what, we decided we're not going to do that. What we decided is we're going to support the banks. Gordon Brown said it's much simpler than this, that or the other.

Now, I say when someone can't find something, that's my racket which is about property rights and paper being somehow or another representative not of the land but of all the obligations tied to it. So I went in and started really researching this with a whole bunch of American associates and started finding out that the reason he withdrew was because he couldn't find the toxic assets.

So all of a sudden you Americans now are starting to find out what it means when the paper -- I could come back to you and say, you know, titling doesn't work in your case either. It depends how it's done. But not only have you not been able to find out where it's at and refuse to be because you could produce probably the biggest run on banks that the world history has ever seen. And you don't know where Greece is at fault because you don't know how much of this paper it's got. Or I know there's various types of derivatives.

But you don't know, nor Italy, which, my God, is it France, is it Spain, is it Italy? What's going to go? You don't know because it's not there. But now you're also finding out that to be able to liquefy all those assets, the subprime stuff, you started putting it through machines.

And all of a sudden you've gone there to collect on these debts, you have used a system called MERS, a certain type of software, and your courts have stopped you. And by paper, by law, you actually don't know who the banks nor the owners are of 60 percent of all your properties that's been put into hock to get credit. Now, if you Americans can't learn that, what have you taught the Egyptians? Those are my critics.

If you do it right -- (laughter) -- if you do it right, if you get a piece of paper that tells the truth for which there are processes that were learned in the 19th century, when capitalism faltered, and lots of people who didn't write books came in and said, how do you get a piece of paper to represent reality because I'm going to go global, and I'm not going to be able to meet everybody. That's when you did your major revolution. It's undocumented. Your history books are poor. You still don't know why you won the war against Japan, but it is essentially because you totalled the place and because the Chinese followed up. Until you figure that one out, it's going to be hard to start criticizing us, really very hard.

COLEMAN: I'm going to turn your questions now. (Laughter.) We'll start here -- (inaudible)?

QUESTIONER: (Off mic) -- so it seems to me -- thank you -- what you're talking about requires action on the ground where the informal documents are, and engagement throughout the system. It has to reach the top as well -- presumably, in the executive branch, in the legislative branch, in the judicial. Yes?

DE SOTO: Right.

QUESTIONER: And so I'm interested in how that happened in Peru as well as how you see it in Egypt and how you see it in the United States. That engagement, it seems to me, is rare. How did it happen?

DE SOTO: Well, obviously, you've got sell it. OK. And you've got to sell it to the politicians. And the politicians realize that it's not just property you're talking about, the civil code -- it's credit, because it's all about how the economy is tied up.

In other words, to me, property isn't real estate. To me, property is really basically the law that allows you to see who's in control. That's how you're going to make a deal. Who's in control? Who owes who to what? That's what allows you to bring down risk.

So to get all of that happening together, you've got to tweak the system here, tweak the system there. But essentially, what you've got to do is calculate how long it takes to go from here to there, which is, for example, what we do in Egypt.

In Egypt, we went in and did very basic stuff. I'll just give you one, otherwise we'll use up all the time here.

How long does it take if you want to put a bakery in operation in Tanta, Egypt? And we have got it -- with a photograph for each day what somebody did, who's now in jail at that time but he became legal before he went to jail. What he had to do to get a permit to operate a bakery. And it takes working eight hours a day, 548 days to do so.

And if you want to build a house way away from the Pyramids, way away from Gezira in Cairo, and you're in a sand dune and you want to get the permit to build the house, it takes 17 years working eight hours a day. And if you want to do it in Manila, it takes 25 years. In Lima, it took 21 years.

All of that, once you follow one track, allows you to say, the blockage is here, the blockage is here, the blockage is there. And then you simply clean it up. Then you go one stage before that, and you start saying how does this not happen again.

And then you find out, for example, in the case of Peru, well, let's see; the laws that get in the way of this come from every side. I mean, you can do a law to help children here, and somebody blocks property there. So how do we make sure that we have a cost-benefit analysis of law to see what laws do?

Well, how many laws do we Peruvians make? And then we find out we do 28,000 a year. That's 106 a day. How do we filter that so that it doesn't get here and we find out, oh, my God, what the Americans have got that we don't have is that there are congressmen who dictate that some of those laws actually have to get re-elected every two years. And they don't come in a party list; they have to be re-elected in the 38th District of New Jersey, et cetera.

So we start finding out that our whole political system looks like it's yours but, in fact, our politicians are not at all controlled by the citizens themselves. And the feedback mechanisms are in the way.

But, you know, it's like bad plumbing. After you figure it out -- it's in place -- what you've got to do is understand that it's of supreme importance. Ergo, for example, my admiration for General MacArthur. One of the things we had to do answering as we started, you know, meeting these people that give you these -- these criticisms, but never challenges to a debate was that, in Peru, everybody asked about Japan. We have a very large Japanese population.

And a lot of our Japanese population came, like to Brazil, in the '30s and '40s because Peru had two times the GNP per capita than Japan at that time, in spite of its large army. And then, of course, time passed, and all of a sudden, the Japanese were 11 times richer than we were. How do you explain that?

So you start looking at papers of the government of the United States, when it occupied Japan -- they're declassified, but they've got all the these black smudges, it's hard to read. And then you go to Japan, and Japanese don't like to write about that part of their history. They were flattened out.

So you say, now, this is a research job. So we've got a million bucks from Switzerland. We made a deal with the International House of Japan. I'm going to get to your question, but it's fundamental because you see you've done it before and successfully. And if the United States does something successfully, the world can become a better place as opposed to if Peru does something successfully.

So here what -- here's what happened. General MacArthur believed in land to the tiller, and he believed strongly in the rule of law. He had made a proposal that was in Japan to help General Kizon undo the guerillas by exchanging 15 acres for one rifle, which Kizon didn't allow them to do it. So Japan was the second shot.

So he puts a man called Wifland (ph) Dijinski (ph) into an office in Honolulu for three years before we win the war. What do we have to do? Analysis.

The reason they are on the warpath -- these Japanese -- that's his point of view -- is because there has been 57 great peasant rebellions in Japan. And the peasants are complaining that the major restoration didn't really give them property; it just simply affirmed the rights of the feudal lords. Now, how do we stop these rebellions from growing? All these -- (inaudible) -- coming up, ready to burn, ready to lose something. How do we stop it? They said it's not our problem, really. It's that we don't have enough land. Let's go get some more.

This is in very simple terms. That's where I get my reputation of making things too simple.

So they say, how do we go out and get that -- go out and get that land? Well, the other thing is if you militarize everybody, then now you've got then in uniform and you can control them. So, says MacArthur, what we've got to do is, once we get in, we're going to title everybody. We're going to give everybody a taste of property and control.

Now, how did we get to find this out? It wasn't written in the book. We made a deal with International House of Japan. And we said, MacArthur was smart enough not to do it himself. He simply -- he was the emperor of Japan. He simply said, this is something you can do it. And there were enough liberals in the Europeans and the world within Japanese intellectual society to pick it up. And they did it. And they were -- and of these, there were -- it took us a year to find the seven octogenarians who had survived the process. And we documented the whole thing.

And they're doing exactly what we proposed to Egypt, exactly how you'd take an informal piece of paper and you convert it on a formal one. And they did it in six years and turned Japan and the two colonies -- Formosa, now Taiwan, and South Korea. And even MacArthur wrote at a certain moment: Once this done we'll get China, because China can't tolerate three prosperous countries. It was brilliant.

Now, I'm fascinated by that, and I always wonder why you're always throwing wreaths at the guys who were fighting your war in Europe. And I think the war -- or the guys that were the real geniuses were in the Pacific.

The question, of course, is to me, as you say -- you know, if you'll be writing about all these things all this time and yet all these results? Well, how about you? You won in Japan. You actually moved China towards some form of capitalism. And then you went into Vietnam and you forgot about the whole thing.

Ho Chi Minh out-titled you. He really did. He went really fast out there. And you went into Iraq and you forgot about it. And you went into Afghanistan, and there is all these landlords and these guys who don't have the piece of paper, and you got out-titled again.

So, you see, people forget.

COLEMAN: Professor Hekel (ph)?
QUESTIONER: I'm -- (inaudible). I want to ask a question about oil and the resource curse problem, as you see it unfolding in the Middle East.

And it's not just the oil of the Saudis and of the Gulf but also the remittances that come back with labor and what that does to these economies. Perhaps you can draw on the Venezuelan example, as well.

DE SOTO: Yeah. One of the reasons I've dealt very little with the oil curse, of course, is because just getting rid of the -- getting hold of, understanding the other side of equation is pretty tough.

In other words, what happens, what you're saying, is in a country where, like, for example -- this would be the case of Libyal; all this oil coming in. I mean, nothing else looks like worth fighting for. If you can just get a control of that, you can just about do everything.

So, effectively, you've got to try and do what the Norwegians have done about it. You've got to have a government and a rule of law sufficiently -- and a state -- a government sufficiently strong to put all of that in a back burner and say we're going to live off other things and we'll see how this finances infrastructure. And it's true. It's uphill.

I can conceive of -- it's easier for me to start thinking of any small Central American country probably doing better than one that's got the oil curse for the simple reason that they've got to go out, they've got to make sure their titles work, they've got to make sure their people are empowered. Credit comes from credibility. They've got make sure that you have got a trust paper.

And so you focus everything that you've got on creating the real sources of wealth, absolutely. That is a problem. That is a problem. But it's a problem that's going to be -- but that's another -- that's another subject.

But it gets more complicated, you see, because this is what we're talking about today -- and we're talking about Egypt, and we're talking about the Arab spring, and we're talking about 200 million people on the streets that haven't yet been identified as a class.

I mean, we people who believe that capitalist system has enormous advantages of anybody who's a Marxist -- the only advantage they have on us is that they understand much better the notion of collective action, which is what happens when people get together and identify. And then you can reach out to them, right? To see -- well, these -- you know, these guys lining up -- (inaudible) -- information. You can aim much better. You can do something about it -- which you can't if you just simply say they're poor or you say they're unemployed. I mean, in Tunisia, they say they're unemployed.

When we went out there and said, Bouazizi, what was he? He was unemployed. What do you mean he was unemployed? He worked 10 hours a day. So what does it take to be unemployed? Well, if two days during every month you actually work a little bit, you're considered employed by the statistic. Forget that. Unemployment has nothing to do with it.

OK. So that is -- when you're going to deal with the informal sector, you're going to find that some people say that's very interesting what you said there, Isabel (ph), but I'm really mainly concerned about unemployment. The reply to unemployment is the following one.

First of all, I doubt that anybody who's poor in the Middle East is unemployed. If you're poor and you're unemployed, you die of starvation. So it's not possible. It's not possible.

And if your old institutions of solidarity have been broken down, it's not -- well, maybe in 1 (percent) or 2 percent of the population.

So that's -- so the issue here is one very much of focusing, what we were talking about before: How do you use this revolution to focus on the real issue, which is what you Westerners understood, it's the division of labor; it's the ability to specialize, with economies of scale, because your contracts are clear, your property is right, you know who owes what -- that allows people to collaborate.

And so to get them focusing on that, I think that this -- sorry to come back on this, but I think it's -- the issue is focus. If we can only get everybody now to focus on it, because the abstract argument is too hard to swallow. But if you can just get your eyes on what's easy and -- (inaudible) -- you're going to be able to preserve, you're going to be able to bring it together.

COLEMAN: Pat.

QUESTIONER: Pat Rosenfield, Rockefeller Archive Center.

I so agree with you about rule of law, especially if one looks at the Asian financial crisis of '97. Rule of law is determinant on so -- (inaudible) -- of the economic problems that we face.

But I wanted to just address the issue of collectivity -- the collective that you just mentioned -- now. And there's another kind of collective, and that is the -- and we heard a wonderful meeting here recently from the Arab Millennial Journalists. These are journalists between the ages of 25 and 35 who feel quite connected across the region, and they're connecting all the time with Tweets, and blogs and whatnot. And we tried to raise the issue of economics, and it's totally political -- it's human rights, it's political rights. And I'm just wondering, how are you communicating?

I have actually a two-part question: How are you communicating with that particular group of connected individuals who feel that they also played a major role in bringing about the Arab Awakening, and they don't grasp the economics; they don't think -- they think it comes after the political, and that whole debate?

And the second part that's related to this, though, is, because it's so connected, what about harmonization across the region -- that what one country does has to be harmonized with what another country (does), in order to ensure that the -- that the rule of law is a commonality, as opposed to distinctive, across the region, in order to have collective -- to improve the situation collectively?

COLEMAN: And can I ask -- because we're running out of time, short answers would be great?

DE SOTO: Sorry. This is a cultural handicap. (Laughter.) It's called spiraling indigenization. Sorry. (Laughter.)

Human rights. Everybody forgets that Article 17 of the Declaration of Human Rights says we all have a right to property. It's just that the human rights types don't generally look at that.

We set up a commission at the United Nations that I co-chair with Madeleine Albright that's called the Commission of the Legal Empowerment of the Poor, the purpose of which is to reinforce that -- reinforce that article, so that everybody can understand that the economic part is an important part of a human right. I mean, all of these people burning in the spring -- (inaudible) -- indicate that economics is a very important part of human misery, because -- if it doesn't work; and of human happiness, if it does work. At least part of your life works in that -- (off mic).

The next thing is that the -- you see, this is typical, to me, of the, also Latin American stuff. We started looking at integration in the '50s, in the '60s. And we did have a system of integration. I mean, we've got all -- Latin Americans have got all sorts of integration agencies. And we have integrated among elites. You watch us Latins work anywhere; we know each other.

And the thing is, really, how you do it not only among integrating elites; you've got to go down. You've got to go down. And downstairs it's a fight every day to just survive. So we've got to get those two agendas together. I think it's important. And, to me, the Arab Spring, the economic martyrs, I hope it's a symbol that allows us to connect. It's an important symbol that allows us to connect.

Politicians -- you know that when we were approached by the Muslim Brotherhood, what was great about it is that when politicians recognize -- (inaudible) -- that's very important, because it's a market study. So hopefully that will lead a lot of the research, and a lot of the -- a lot of the activity of these fine people in a direction they haven't gone in before.

COLEMAN: Yeah.

QUESTIONER: The missing term -- the missing term in our discussion is power. That is to say, we were talking about the informal economy and the formal economy. You're talking about informal property and providing title as if law and title were themselves the equivalent of power. But the reality is that those are as subject to power -- And power and manipulation in the elites, we know in our own Supreme Court; it's not as if it's just other countries where that happens.

And the question is whether creating a formal economy through title, and making the reality of ownership and employment part of the legal reality, doesn't actually subject people to greater exploitation, greater manipulation, greater expropriation? A squatter, by definition, can't be removed. If he's given the right to be a renter, he can be thrown out. If you don't own the property, but you're just using it, is one thing; when you have a title to it, and then don't pay your mortgage, you can be expropriated. There are 4 million Americans today who had perfectly good title to their properties, and those titles were the basis for expropriating them and creating the economic crisis, bottom up, that we have.

So the question is, isn't that how issues of democracy, transparency and political power become relevant? Because if you do this, if you realize the informal economy and make it real, in the absence of genuinely democratic power and the recognition of the democratic rights of those people, the elites will simply use the legalization and the law to find new forms of expropriation that will probably work better; in other words, realizing the economy --

COLEMAN: (I think, sir, if we could stop ?) the question, if you could just -- if you could wrap up.

QUESTIONER: -- realizing -- is it not the case -- I'll put it in very simple terms. Is it not the case that the elites may benefit more from formalizing the economy than those who are at the bottom?

COLEMAN: Thank you.

DE SOTO: Thank you. Well, it's a very -- it's a very good point. Obviously if you go out and title everybody and you get that first generation, Daniel Boone gets a title. Chief Sitting Bull gets a title. Everybody gets a title. Everybody's much better off.

But then come all sorts of other problems. And that's why property law keeps on evolving, because different problems and different ways of stealing as you go along. You know, your own derivatives crisis is an illustration that it never stops. You've got to adjust.

Now, we're at the stage we're at. So as -- (inaudible) -- said, we're in the 19th century. Let's look at the 19th century. Get that, and then we'll get to your sort of problem.

Let me tell you how it happens on my side of the world. My side of the world is illustrated to you by a film, for example. You may have seen "Avatar," OK -- these blue people getting exploited by these white former Marines that go to planet "Pandora." Did you see "Avatar?"

COLEMAN: Yeah.

DE SOTO: That's a great film. So they steal. And that, of course, is the view. Here you are -- here you are giving titles to people to take minerals out of places like Brazil, Peru, et cetera -- and look what they're doing to these poor people. And so the result of that has been practically non-action in our part of the world.

But then what has occurred? As you go into a recession, as you start producing in the West asset-less paper, and we down south have paperless assets, and the money starts coming down, and -- uh-uh, we're not going to give our indigenous people title because of the reasons that you were talking about. But we're going to let the white folks -- get together with the white folks back home. They can go to the jungle and have gold mines and petrol and all of that kind of thing, and gas. So they get their nice title.

Then, when they're got their nice title, which is a concession, they insert it in something called a BIT, a bilateral investment treaty, that we have with the United States, like every developing country has with states in Europe. That means that we're going to give that title even more security; not just Peruvian security. It's -- (inaudible) -- but this is a super title, because it's also got an American guarantee. And that bilateral investment treaty also says that if Peruvian parliament tries to ever infer in such a title, they've broken the treaty. So it really looks good.

Then it goes over to the United States and it gets a second seal from OPIC that says this is a really -- not super title; it's a super-duper title. Then it goes to the World Bank and then it goes through another thing, which says 178 nations of the world say this is the title and we guarantee. And if the Peruvian government ever intervenes in there, we're going to get serious about all these things.

Then the owner of that title turns around and goes to Toronto, to London -- the London financial markets -- and says, have I got a baby for you. I mean, this is better than having a title in the United States. Through eminent domain, Obama can take it away. This, nobody can take away. I think it's worth $3 billion.

Three billion dollars here -- Bernanke doesn't know about it, but he will issue, because that's his job, to get as much liquidity as necessary to make transactions. He will issue $3 billion. Then it comes back to Peru. And then that Indian, which was here, compared to that white guy who was there, this happens. That's a lot worse. It's a lot worse.

I agree with you that title will bring all sorts of problems, but at least they wouldn't -- won't liquidate. What happens now? We've gone to the Amazon. We haven't found one Amazonian village where -- inside the village, when we come to a house, we say, well, this belongs to the community. Oh, no, it belongs to Sanchez. And the dog? Oh, it belongs to so and so. And that piece of land? Oh, no, it belongs to so and so. And how about the forest? That is a common good. Oh, no, that mahogany is his; this mahogany is theirs. And what are you? We're a wonderful community.

It's the languages that are being used. But, in fact, the Amazonian people and these people have already, from what we have seen, most of them, crossed the threshold at that. And it's not being recognized, because it's the territory of, in our case, certain Peruvian scientists who don't like it.

So what I'm trying to say is we'll always have problems. But unless, at this time -- let's put it this way -- you have got today that we have a food shortage in the world today. You don't notice it so much in the States, but we're starting to notice it. And we know that the bread baskets of the world are basically you guys, but we know that two thirds -- two times more agricultural, potentially agricultural land, is available in the world, 80 percent of which is between Africa and Latin America. And therefore, all your asset-less paper is coming down and buying a lot of the land in our place. There is a huge land grab, started off by the Chinese.

If we start saying, look, we're not going to empower indigenous people; we're just going to let you come and take over, the Bouazizis will multiply and multiply. So we've got to find out a way of not being stolen that way, but it can't come through disempowerment. It's got to come through empowerment of these people who are already rising in different countries against foreign investment.

COLEMAN: I think we only have time for two last questions, if we take them together, Oda (sp) and right here.

QUESTIONER: Oda Braden (sp). I'd just like to move to Argentinia (sic) and the nationalization of Repsol, what impact will have that on the rule of law.

COLEMAN: OK. And then the other question here.

QUESTIONER: Hi. I am Bernadette Atuahene, from Princeton's program in law and public affairs.

I'm interested in your -- you made a big claim that informality has caused the Arab Spring. In order for that -- that argument went in four steps. First, informality. Because people were informal, property was expropriated. Because of expropriation, it led to immolations. The immolations led to the Arab Spring, right? Those are the four pieces, as I understood you.

The only problem with that is -- yes, we know in Tunisia immolations are really important as a galvanizing moment in that situation. The immolations were not necessarily the, you know, the true factor behind what happened as the Arab spring progressed. So, you know, the evidence that you're providing -- you said your book is providing evidence of how these immolations are all connected to informality.

But I don't think you can make the causal link to then say, you know, these -- that then caused the Arab spring. We have things like high unemployment from Arab youth, repressive regimes, high inequality -- right? These are other intervening variables that your argument's not taking account of. While I like the kind of bold, big claim, I'm wondering if you can empirically substantiate that claim.

DE SOTO: Sure. In fact, it's the other way around. Everybody that's analyzing the Arab Spring is saying what you're saying, that it's political, that it's unemployment. That's the running argument. Find an article that doesn't say that.

All I'm trying to say -- the big, bold claim is stick economics into it. It's missing. That's all I'm saying. I'm not saying it's everything. I'm just saying -- stick economics. And we've interviewed the people, the survivors who are immolating. It's taken us a year. And not alone -- in each case we had people that are local. And they're witnesses. We've been on television with them and we've asked them what it is that motivated them. And of course there was a little bit of this and a little bit of that, but it was fundamentally economics.

So what we're saying is not a big, bold claim in terms of saying it's all economics. We're just saying now that everybody associates it only with politics, interestingly enough, most of these so-called unemployed people, as I said before, are not necessarily employed. The guys who burned up were essentially small entrepreneurs -- in statistics classified as unemployed, but in reality, because they were expropriated, that was an important part of it.

And I agree with you. At the end, it's a little bit like when you go to the doctor: Doctor, my heart isn't working, and every time I sit, I got these two parts of my column that don't stick together. And he says, look, why don't we start off by you going on a diet? So it's always various things that come together. All I'm saying is, don't lose the diet. There is an economic part there that's very important. It's not a big, bold claim. The West has come with a big, bold claim. It's about dignity and democracy. I'm making a small one, which is how about putting a little bit of economics in there?

COLEMAN: And one minute on Repsol.

DE SOTO: On Repsol, I know very little about -- I've stopped following Argentina. I'm so sorry. (Laughter.) I'm not following Argentina. It's not that I have anything in Argentina. It's because -- it's because, interestingly enough -- of course, Argentina, Chile and Uruguay are the occidental part of -- they have big -- I mean, we all look alike in the sense that, you know, whether you're Honduran or you're Argentine, you've got bad politics.

But in terms of how the societies are articulated, these are Western-type societies. And I've segmented in looking -- I'm looking very much at Third World and former communist countries, so I have nothing interesting to say. I'm so sorry. (Laughter.)

COLEMAN: Thank you. Thank you for joining us.

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