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2006-07-04,9:58 AM

Most People Cannot Participate

Speech given by Hernando De Soto

Coming here to Belgium was for me a global experience, among other things, because I had to travel many hours to get from Lima to Brussels. In fact I travelled half way across the globe. By coming here, I saw once again what “global” really meant.

When I went through migrations in Brussels, they said: “Identify yourself” and I replied: “I’m glad you asked me to do that. I am the first son of Rosa Polar and Alberto De Soto who were born in the fair city of Arequipa”. He said “Enough, where is your passport?” So, I gave him my passport and in the process I understood that my identity, which in Peru is associated with my physical presence, in Belgium had been totally transferred to and represented in a uniform and standardised written document which provides the information and is based on rules which allow me to travel globally. I then proceeded to my hotel.

Arriving in the hotel Astoria, I was asked how I intended to pay. I immediately realised that they were concerned about my creditworthiness and therefore proceeded to calm their fears. I reminded them that Hergé and Tintin, both Belgians, had certified in “Le temple du soleil” that Peruvians are fair people and that they generally pay their debts. I also told them about my good relationships with the Belgian ambassador in Peru and pointed out that I had a former Belgian girlfriend who resided in Brussels that could vouch for me. He said “Enough. Will you please show me your credit card?” I did. And I realised at that point that by showing him my credit card, all my commercial credibility, my track record among neighbours and the small circle of acquaintances I have in Lima, was not valid in Brussels. What made me financially credible to the hotel was the representation of my status in a plastic card that allows me to prove to anyone around the globe that I pay my debts.

I hope by now you have noticed that I have an apple here on the desk. This apple is my apple. And it is so because I confirmed it with the Chairperson and all the other panellists early this morning. Susan George, Naomi Klein, Owens Wiwa and Christine Ockrent are all reputable people and they confirm it is my apple. Therefore, what makes this my apple is a consensus about its ownership. However, if we look closely at this apple, there is nothing on or in it that says it is mine. Nothing in the physical context of the apple gives us that information. A stolen apple and a legitimate apple both look the same. In other words, the property of the apple and the functions we can attribute to it are not contained in physicalobjects. Nothing in the apple says whether I can pledge it, lend it, deposit it as a guarantee, use it as collateral, or whether I can export or import it or cut it up among partners. In other words, the commercial and social life of my apple is not determined by the apple itself, but rather from the rules which we establish among ourselves to allow the apple to be traded and be attributed with commercial and financial functions that allow it to be globalised. That is, property and global transactions, whether commercial or financial, are possible not because we can make things travel physically, but because we can represent them in a manner acceptable to all and subject these transactions to rules we all recognise – in the same manner that my identity is represented in a passport, and is governed by international public law; and in the same manner that my creditworthiness is represented in my credit card and is ruled by international private law. Globalisation as we know it today is only possible through law that provides rules and through neatly organised standards that provide information.

Since Adam Smith and Karl Marx, we know that prosperity is the result of the division of labour in ever-expanding circles. Globalisation is about dividing labour at the largest possible scale so as to give the things we own greater value. Let me give you a recent example of that.

In Peru, in the early 90s, we began, along with the former Soviet Union and other developing nations, to follow the “Washington Consensus”. This consisted of basically carrying out 3 macroeconomic adjustments: stabilisation of currencies, the equilibrium of fiscal accounts, and the privatisation of assets held by government. Regarding privatisation, we in Peru have had similar results as other Latin American countries. One of the first things we did was privatise the Peruvian telephone company, which was then worth US$ 53 million on the stock market. Initially we found out, early on in 1990, that nobody abroad wanted to buy it. Though the local title to the company was acceptable on a local scale, it was not recognised globally.

We needed to convert the local title into a global title as easy to recognise as my credit card is in the Astoria Hotel. To do this we hired British Merchant bankers as well as American lawyers, which allowed us to structure the rules on the property of the telephone company in Peru in a manner that foreigners found acceptable. It took us about 3 years to be able to produce a property title over the Peruvian telephone company that was recognizable on a global scale.

The government finally sold the company in 1993 to Telefonica of Spain for US$ 2 billion: 37 times the value of the company in the Lima Stock Exchange only 3 yearsbefore. And we raised its value without even giving the physical installations of the company a new coat of paint; we didn’t even fix the windows or put out a welcome mat. All we did was change the property law and standardise it in terms that the global market could understand so that the title could travel around the world accomplishing multiple functions. We connected it with a larger market, with the larger global division of labour, and made it easier for people to identify it, assess it, settle disputes on it, issue shares and bonds against it, until its value increased 37 times. That is what globalisation can do for a country’s assets. If properly represented and ruled by international law, property can be divided among a large number of people, that through organised information and appropriate laws can discover hidden values that could not be detected previously.

The moral of this story, is that though all 6 billion people of the world are brothers and sisters, there are so many of us that we can only recognise each other and deal among ourselves through representations and rules. It is not possible to identify ourselves physically and determine and assess our reputations by getting acquainted with each other. There are far too many of us. We have to do it through the intermediation of representations and the acceptance of globally crafted rules. That is what makes globalisation possible. So the crucial question we must ask ourselves is the following: are all of our assets represented and ruled in such a way that we can all participate in the international global economy? The reply is, No.

Over the last 6 years, my organisation, the Institute for Liberty and Democracy, ILD, has travelled all over the world, working directly with Heads of State, to determine how many of their citizens’ assets can travel globally. Let me give you the example of Egypt which my Egyptian partners have allowed me to reveal.

After many years we determined that the poor in Egypt had accumulated an enormous amount of assets. In real estate alone they owned over US$ 241 billion in land and buildings. US$ 241 billion is more than 55 times the value of all foreign investment in Egypt over the last 200 years, it is 30 times the value of the Stock Exchange of Cairo, and it is 70 times the value of all foreign aid received by Egypt since the times of Napoleon, including the cost of the Suez Canal and the Aswan Dam. But none of it is titled in such a way that it can secure a loan, enforce a mortgage, and permit the sale of any of these assets on a global or even a national scale. Which means that most of the assets that the poor in Egypt own, even though they exceed the value of private foreign investment and public foreign aid, cannot reach the levels required to produce real wealth and be assessed globally.

The case of Egypt is the same as that of other developing countries. On average over 80 percent of the assets that the poor own in developing and former Soviet countries cannot enter the market through legally governed representations. So the first challenge globalisation faces is how to include the overwhelming majority of citizens of the world who cannot participate in the global economy, and who are therefore at a tremendous disadvantage.

To answer then the question of Prime Minister Verhofstadt “How can the poor benefit from globalisation?” the reply is through property law. The problem in the world is that there is a huge legal lag. We have forgotten that the capitalist economy is essentially a legal construct. Capitalism and globalisation is nothing else than a legal framework which through representations and rules allows us to interconnect. And over 4 billion people in the world have no way to interconnect because the law does not apply to them.

We have not recorded in history with precision what it is that Germany did through the Stein-Hardenberg Reforms to give all Germans a way to represent themselves in the national and global economy. We have not recorded how the Swiss, at the time of Ugen Hubert at the beginning of the 20th century, were able to do the same for the majority of their citizens. We have not seen with sufficient lucidity what it is that 19th century North America had to do to give all the citizens the legal rights to be represented in the market economy. This legal revolution is the one that is still missing in developing and former Soviet Union nations and is the cause for this inequality in the participation in the global economy.

And if we do not do something about this – as capitalism has always been able to do by continually including the marginalised and therefore beating the contradictions of capitalism which basically boil down to the accumulation of wealth by only a few – we will find that the resistance to globalisation will increase as the majority will continue to complain and rebel against the system that only allows a few to prosper and get ahead

Thank you.

Hernando De Soto
President, Institute for Liberty and Democracy
Peru

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