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Spotlight: An Economist Fights Terrorism

Bill Clinton's favorite economist believes that growth companies are the answer to terrorism.
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Spotlight

Who: Hernando de Soto, age 61, economist.

How he made his fortune: As co-CEO of Universal Engineering Corp., a Swiss business.

His mission: The "capitalist revolutionary" wants poor people everywhere to be able to start businesses, build them up, and join the mainstream. If they are denied free enterprise, says de Soto, they'll search out anticapitalist ideologies -- or just try to bring the whole thing down through terror.

His critics: De Soto titled his first book The Other Path as a deliberate counterpoint to Peru's Shining Path. (The book, reissued this fall, is now subtitled The Economic Answer to Terrorism.) After it was first published, guerrillas machine-gunned de Soto's car. When that didn't kill him, they crashed an explosives-laden vehicle into his offices. The bomb killed 3, wounded 19 -- and spared de Soto, who dived for cover when he heard gunfire just before the blast.


"De Soto is doing some of the most important work in the world today," asserts Bill Clinton.

The big idea: To start a business, you might refinance your house or get a personal loan from a bank. For the world's poor, those aren't options. They don't have title to their homes or access to credit. And they face a dizzying array of regulatory obstacles. De Soto's researchers opened a garment workshop in Peru, trying to follow the letter of the law. The process took 289 days and cost $1,231 -- 31 times the Peruvian monthly minimum wage.

A question of legitimacy: Of course, poor people everywhere start businesses all the time -- shops, service enterprises, tiny manufacturing operations, and so on. But the businesses are outside the regular economy and hence outside the law's protection. All the cornerstones of capitalism -- including property rights, contracts, credit, and capital -- are missing, so the businesses remain tiny.

A CEO's epiphany: In 1979, de Soto started a company to exploit alluvial gold deposits in Peru. When he went to check out his government-issued claims, he found people working the land. Wait, he said, they have no right to be here. Right, he was told, they're illegal, but there are more of them than there are of us. Thus began his fascination with the extralegal economy -- and the possibility that it could be a powerful engine of development. --John Case


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