Hernando de Soto

The Other Path

The romanticism of the left wing makes it generally praise and even venerate ordinary people, provided that they confine themselves to a strictly dependent role and possess neither ideas nor the ability to organize with others. It sees such people as passive objects in need of assistance programs similar to those required by the disabled and unemployed. It is as though left-wingers appreciate workers only when they lack the ability to get ahead on their own. This attitude is little different from the paternalism of right-wingers, who also sympathize with people of popular extraction as long as they confine their activities to loyal servitude, handicrafts, or folklore, but reject them as soon as they open their own businesses and charge for their services, negotiating their prices according to the dictates of the market. Then, the reaction is to say that their prices are 'exorbitant' and that the enterprising worker is a 'thief' or 'rascal.' Both right- and left-wingers acknowledge the right of mestizos from the high plateaus to live among us only as long as they need us to organize or employ them.

Competitive business people, whether formal or informal, are in fact a new breed. They have rejected the dependence proposed by the politicians. They may be neither likable nor polite—remember what many people say about minibus drivers and street vendors—but they provide a sounder basis for development than skeptical bureaucracies and traffickers in privileges. They have demonstrated their initiative by migrating, breaking with the past without any prospect of a secure future, they have learned how to identify and satisfy others' needs, and their confidence in their abilities is greater than their fear of competition. When they start something, they know there is always a risk of failure. Every day they face dilemmas: what and how are they going to produce? What are they going to make it with? At what prices will they buy and sell? Will they manage to find long-term customers? Behind every product offered or manufactured, behind all the apparent disorder or relative illegality, are their sophisticated calculations and difficult decisions.

This ability to take risks and calculate is important because it means that a broad entrepreneurial base is already being created. In Peru, informality has turned a large number of people into entrepreneurs, into people who know how to seize opportunities by managing available resources, including their own labor, relatively efficiently. This is the foundation of development, for wealth is simply the product of combining interchangeable resources and productive labor. Wealth is achieved essentially by one's own efforts. It is earned, little by little, in an active market where goods, services, and ideas are exchanged and people are constantly learning and adjusting to others' needs. Wealth comes from knowing how to use resources, not from owning them.

This new business class is a very valuable resource: it is the human capital essential for economic takeoff. It has meant survival for those who had nothing and has served as a safety valve for societal tensions. It has given mobility and productive flexibility to the wave of migrants, and is in fact doing what the state could never have done: bring large numbers of outsiders into the country's money economy. The benefits which this new business class offers Peru far outweigh the damage done it by terrorists and mercantilists. The overwhelming majority of the population has one goal in common, to overcome poverty and succeed.

We face two challenges: what can we do to prevent informal energies from being kept in check by a punitive legal system and how can we transfer the vitality, persistence, and hopes of the emerging business class to the rest of the country? The answer is to change our legal institutions in order to lower the cost of producing and obtaining wealth, and to give people access to the system so they can join in economic and social activity and compete on an equal footing, the ultimate goal being a modern market economy which, so far, is the only known way to achieve development based on widespread business activity.

A country's entrepreneurial reserves do not automatically function properly, they do so only if prevailing institutions allow them to. We have only to look at all those Peruvians condemned to poverty and mediocrity in their own land who, on emigrating to other countries, become successful because they are finally able to operate with the protection of proper institutions. What determines a society's economic system is the way its legal institutions operate. If business activity is restricted to a select group, the economic system will be a mercantilist one. If it is restricted to a state technocracy, it will be state capitalism, a collectivist system. But if every citizen, regardless of his or her origin, color, sex, occupation, or political orientation, can in practice be in business, then we shall have a genuinely democratic economy, a market economy.

Where we place business initiative in our society is therefore extremely important. If it is placed at the disposal of all Peruvians, we will be able to tap the vast entrepreneurial reserves that are developing throughout the country. The more people are able to participate in the economy and detect opportunities, the greater the potential development. The great strength of a market economy is that it relies on the people's ingenuity and capacity for work, instead of on the limited contribution of an arbitrarily chosen elite. What is needed is to make the transition from a system in which individuals are subordinated to the aims of the state, to one in which the state is at the service of individuals and the community.