Globalisation – why a majority cannot join

De Soto founded the Institute for Liberty and Democracy. uncommonknowledge.org

Why does globalisation seem to work for countries like Switzerland, but bring little benefit to the majority of the world’s population?

Award-winning economist Hernando de Soto, a key participant at this week’s meeting of the World Economic Forum in Davos, shares his thoughts on the issue.

De Soto says more than four billion people are not only deprived access to the global economy, but also “locked out” of their own national markets.

In an interview with swissinfo, he expresses sympathy for critics of globalisation, but says their demands are still largely irrelevant to the needs of people in developing countries.

De Soto, who was brought up in Geneva and worked there for several years before returning to his native Peru, is the founder of the Institute for Liberty and Democracy (ILD) – described by The Economist newspaper as one of the two most important think tanks worldwide.

swissinfo: Switzerland used to be a poor country, Peru still is. Why is that?

H.D.S.: I think a lot has to do with the legal system. When we started our research work in Peru, we found it took 289 days to register a sewing business. In Egypt, to open a bakery takes 549 days. If it took that long in Switzerland, you wouldn’t have bakeries.

In general terms, the cost of doing business in many developing countries – entering and exiting the market, selling and registering goods – is absolutely exorbitant. These systems also fail to offer basic legal security, including limited liability and good property laws. Don’t forget that most Europeans and Americans get their credit on the basis of where they live and what they own.

swissinfo: Is it really that simple – are there other reasons?

H.D.S.: I’m sure there are, but I’m thinking about those we can identify and remedy. Let’s take cultural differences. When I came to Switzerland, in 1949, I read Tintin’s aventures in The Blue Lotus, and it was all about the incapacity of Asians as businessmen – that has certainly changed!

I don’t believe that cultures change from one decade to the next. What changes are the legal systems of some countries, which become more friendly towards initiatives by the poor. Why did one million Japanese families emigrate to Peru and Brazil? Because we were richer than Japan at the time.

swissinfo: What about Western trade protectionism. Is that not a major cause of today’s differences?

H.D.S.: Yes, of course it is. Barriers should be as low for agriculture as for intellectual property – otherwise the system is not fair. However, even if the developed nations lowered all their barriers to trade, 70 per cent of the world population still could not enter the global economy.

There are six billion people in the world. At least four billion are still not “inserted” inside the law. They can’t even fill in a bill of lading to export their goods – they have no legal identity, no company, no official address. So, even if you brought down all your trade barriers, we still couldn’t “get out”.

swissinfo: If it’s that easy to improve things, why aren’t the governments of the world rushing to your doorstep?

H.D.S.: But they are. Well, not rushing, but walking. I now have working arrangements with 29 heads of state and I didn’t go looking for them. If you consider that we are not a large corporation, but a small non-profit organisation located in Peru, we’re doing OK. And don’t forget, real progress does take time.

swissinfo: What about differences at the political level – what role do they play?

H.D.S.: One obvious difference is that if I come to Switzerland to do business, the first question you ask is: how good is your business? If you come to Peru and you’re in, say, the energy business, the first question you ask is, who’s the energy minister? These differences have a lot to do with decentralisation and democracy, and that’s why I’m a fan of many aspects of the Swiss political system.

swissinfo: So is democracy crucial to economic success?

H.D.S.: Of course. But it’s not just a question of elections. We invited guests once from Hong Kong and were surprised to find that, while they didn’t have elections, it never occurred to them to put rules into place without some form of local participation. That’s the other aspect of democracy, and it’s something you find in very few developing countries.

swissinfo: The Peruvians tried once to “import” Zurich’s public transport system. What went wrong?

H.D.S.: Many years ago, statistics in Peru showed that road vehicles caused 11 times more deaths than in Germany and Switzerland. A parliamentary commission came to Zurich and observed that traffic was well organised – so they translated the laws into Spanish and put them into our system. But we carried on killing just as many people as before!

If laws could simply be copied from developed countries, we would all be developed countries. That’s why the Peruvian transport system still doesn’t work; nobody discussed it with the public, nobody asked the drivers what they thought.

swissinfo: Turning to Davos, what would be your main message to the participants there – and at the “rival” Porto Alegre forum?

H.D.S.: In Davos, I will repeat that the market economy in my part of the world is extremely restricted; that those with the chips to come into the poker game are a very small minority and that is not sustainable over time.

As for Porto Alegre, this may sound funny, but I don’t think it is relevant. I’ve never seen an anti-globalisation march in Lima or Caracas or Mexico City. The issue is that the poor can’t even get inside their own system, let alone yours. Most people in my part of the world are entrepreneurs and very much want to get international. But until they do so, and find out that multinationals are more powerful than them, they will not even start thinking about it.

swissinfo-interview: Chris Lewis

In brief

De Soto says four billion people have been “locked out” of the global economy.

Forced to operate outside the rule of law, with no legal identity, no credit and no capital, their position would not change even if all trade barriers disappeared overnight.

He says this absence of basic legal protection is the key cause of poverty worldwide.

Key facts

De Soto grew up in Geneva and held senior management posts there before returning to Peru, where he served as advisor to President Fujimori.
The founder of the internationally-acclaimed ILD, he was named by Time as one of the world’s 100 most influential people.
He has published two best-selling books, The Other Path and The Mystery of Capital.