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Hernando de Soto's wealth-creation roadmap has won praise from both Putin and Bush. Now Pridnestrovie is implementing his ideas

TIRASPOL (Tiraspol Times) - A new law aimed at bringing private property into the hands of the poor is seen by its backers as a way to give a boost to grassroots wealth-creation in Pridnestrovie.

The key man behind the new rural property registration law [1] is MP Mikhail Burla, a Tiraspol-based economist and second-in-command of the opposition party Renewal which is currently in control of parliament. It follows a wealth-creation roadmap by Hernando de Soto, the former head of Peru's Central Bank.

" - Since the fall of the Berlin Wall in 1989, most developing and former Soviet nations have tried to move towards some form of market economy. There has been little success," says Hernando de Soto.

" - This widespread failure has created bitter disappointment amongst the poor and has provided an opening for opponents of reform, globalization, and free enterprise who charge that market economic systems bred widespread corruption, a rise in crime, a new class of 'haves', and disrespect for the law."

Western thinkers have blamed this on everything from these countries' lack of sellable assets to their inherently non-entrepreneurial "mindset." However, the real problem is that such countries have yet to establish and normalize the invisible network of laws that turns assets from "dead" into "liquid" capital, believes Hernando de Soto, whose ideas have influenced one of the latest laws from Pridnestrovie's parliament.

Praise from both Putin and Bush

In the West, standardized laws are in place to mortgage a house to raise money for a new venture, permit the worth of a company to be broken up into so many publicly tradable stocks, and make it possible to govern and appraise property with agreed-upon rules that hold across neighborhoods, towns, or regions. This invisible infrastructure of "asset management" is the missing ingredient to success with capitalism, insists de Soto. But even though that link is primarily a legal one, he argues that the process of making it a normalized component of a society is more a political - or attitude-changing - challenge than anything else.

Hernando de Soto's proposal is to register poor peoples' assets, even if it's no more than a tarpaper shack in a slum. Giving even the smallest title to property gives people a leg up and something to propose as collateral for small loans. His analysis of poverty says that when people have no title deeds to land or to other properties that they possess, they have no access to credits or to markets.

Praise for his proposal has come from across the political spectrum — from both Vladimir Putin and George H. W. Bush.

Ronald Coase, winner of the Nobel Prize in economics, has called Hernando de Soto's work "powerful and completely convincing" and de Soto has been awarded with both the Milton Friedman Prize and with the Templeton Freedom Prize.
In December of last year, The Economist gave him its Innovation Award for the promotion of property rights and economic development. Although The Economist has failed to report accurately on both Pridnestrovie and a number of other emerging countries, the magazine (which claims to be a newspaper) is widely renowned for its clearheaded financial and economic coverage.

One of the world's two most influential think tanks

Hernando de Soto, who used to run Peru's Central Bank, is an economist whose specialty is the informal economy: The economy which is unregistered and nominally outside government control. He is the president of Peru's Institute for Liberty and Democracy (ILD), considered by The Economist as one of the two most important think tanks in the world. Son of a Peruvian diplomat, he was educated in Switzerland where he did post-graduate work at the Institut Universitaire de Hautes Etudes Internationales in Geneva.

Two magazines, Time and Forbes, have both chosen Hernando de Soto as one of the leading innovators in the world, and more than 20,000 readers of Prospect and Foreign Policy ranked him as one of the world’s top 13 “public intellectuals”.

Along with former U.S. Secretary of State Madeleine Albright, Hernando de Soto is co-chair of the Commission on Legal Empowerment of the Poor which works under the auspices of the United Nations Development Programme (UNDP).

His institute provides heads of state with a straightforward and non-ideological explanation for why even the most well-intentioned market reforms will fail: their nations lack a property law that is accessible to the poor and that allows both physical and intellectual assets to be converted into capital.

" - People go hungry because they haven't enough money to buy food but also because their capacity to grow it has been drastically reduced," says U.S. political scientist Susan George of the Helsinki Process on Globalisation and Democracy, which is run by the Ministry for Foreign Affairs of Finland to bring in different stakeholders to promote development.

As an unrecognized country, Pridnestrovie is not the recipient of large-scale foreign aid. Although technically considered part of Moldova by donor nations, aid which is donated to Moldova does not reach Pridnestrovie and Moldova discourages cross-border sharing of cash disbursement, technical assistance and humanitarian aid shipments. Since March of 2006, Moldova has engaged in what locals in Pridnestrovie consider an economic blockade. The blockade is aimed at forcing locals to give up their quest for international recognized independent statehood and it caused an estimated $500 million in lost revenue in the first year alone. Now, Pridnestrovie's parliament is trying to make up for this lost wealth through an ambitious reform program which is aimed at liberalizing the economy and making it competive by increasing economic freedom in the new and emerging state.

Link between economic freedom and wealth creation

The crucial role of these economic liberties for overall freedom – as well as the wealth of nations – was recognized long ago by John Locke, David Hume, and Adam Smith. Poor protection of economic freedom causes stagnation and poverty.

Economic freedom is especially important to the young, the new entrepreneurs, and the economically and politically weak. Secure property titles and their expedient and unbiased enforcement protect the weak, who rely on low transaction costs to make use of their assets. Hernando de Soto has shown in numerous case studies that the poor in the post-Soviet countries own much wealth. At the same time, they cannot use their assets effectively until the government formalises and protects their titles.

" - If political interference with economic freedom is widely tolerated, it will not only produce injustice, economic stagnation, political instability and social conflict. It will also destroy popular support for both democratic government and capitalism," says Wolfgang Kasper, a longtime Professor of Economics at the Australian Defence Force Academy.

Based on the comments from top economists, Pridnestrovie is on the right track by implementing the legal framework laid out by Hernando de Soto.

" - For the entire Third World and the former Communist countries, de Soto's calculation is that the total value of all the real estate held, but not legally owned, by the poor is more than 20 times all direct foreign investment and more than 90 times all the foreign aid," says Thomas Sowell, a senior fellow at the Hoover Institution in the United States.

" - The amount of wealth available within Third World countries themselves vastly exceeds anything that the prosperous countries have given them or are likely to give them," says Sowell, adding that this is a way to jumpstart grassroots capitalism because "many American businesses were begun by someone who borrowed the money to get started, using his home as collateral."

Pridnestrovie, which faces a choice between formally joining Moldova or seeking international recognized independence, is now prepared to "go it alone". In a September 2006 referendum, more than 9 out of 10 voters rejected unification with Europe's poorest country, Moldova. Rather than teaming up with a failed state and its Communist leader, the former Soviet General Vladimir Voronin, Pridnestrovie's half-million population prefers political and economic freedom. With its parliament now adopting the thinking of Hernando de Soto, locals are optimistic about their future.

See also:
» Transdniestria law boosts private homeownership, gives legal title to the poor [2]
» After freedom and reform, Pridnestrovie says it is no longer Communist [3]

On the web:
» U.N.'s Commission on Legal Empowerment of the Poor [4]
» Institute for Liberty and Democracy [5]