George K. Fahnbulleh

Ideas and Opinions...

Why Obamacare is Necessary

The 1986 Emergency Medical Treatement and Active Labor Act, makes medical care A RIGHT, as it mandates

"hospital Emergency Departments that accept payments from Medicare to provide an appropriate medical screening examination (MSE) to individuals seeking treatment for a medical condition, regardless of citizenship, legal status, or ability to pay. There are no reimbursement provisions. Participating hospitals may not transfer or discharge patients needing emergency treatment except with the informed consent or stabilization of the patient or when their condition requires transfer to a hospital better equipped to administer the treatment."

What does this actually mean? "There are no reimbursement provisions" means the hospitals and/or doctors bear the COST of treatment of an uninsured person requiring emergency care. How do you remedy this?

At the core of ObamaCare is something called the "individual mandate." The Individual Mandate requires every person to purchase health insurance. As with auto insurance, a portion of the coverage is for taking care of the owner of the vehicle; a portion also serves to INDEMNIFY the owner against the financial harm he/she would cause to others. In plain English, it ensures the damage you cause to someone else is covered.

The individual mandate is also at the core of Republican objections to ObamaCare: they claim the government should not "force" people to purchase health insurance. However, the individual mandate is not some socialist construct, dreamed up by a socialist Kenyan.

"The concept of the individual health insurance mandate is considered to have originated in 1989 at the conservative Heritage Foundation. In 1993, Republicans twice introduced health care bills that contained an individual health insurance mandate. Advocates for those bills included prominent Republicans who today oppose the mandate including Orrin Hatch (R-UT), Charles Grassley (R-IA), Robert Bennett (R-UT), and Christopher Bond (R-MO). In 2007, Democrats and Republicans introduced a bi-partisan bill containing the mandate. " ~ The History of the Individual Health Insurance Mandate 1988-2010

The second accomplishment of the individual mandate, is about how insurance functions. Insurance functions by the pooling of premiums to cover the actuarial risks. This means we all pay our premiums to cover the small percentage of us who would have catastrophic losses. While those risks can be mitigated, in the case of drivers, by regulations such has control of driver's licenses, it is not the same for healthcare. The older people get, the more likely they will have one or more catastrophic health and thus financial events.

So with the individual mandate, requiring every person to buy health insurance, THE POOL of younger, healthier people is greatly expanded, and allows for the coverage of the older persons, with greater risks of catastrophic illness.

The Fly in the Ointment

There is however, a fly in the ointment, private insurance companies.

The massive role of the insurance company in health care serves no purpose other than to transfer money from the health care providers to a group of people who provide no services, yet saddle practices with mountains of paperwork and regulations. Yet these are the very same "industry people" who consistently complain about "government regulations."

Private health insurance, is the sweetest business proposition in the history of business. They insure people just up to the actuarial age, where they are most likely to have a catastrophic health event, 65. After which the patient is turned over to "the government" Medicare.

Persons with expensive kidney failure, who have private insurance, are automatically turfed to the government Medicare system.

So this leaves us with a government run medical insurance program, which by definition, insures the sickest people.

The Remedy

The remedy of this is to lower the Medicare eligibility age, to bring healthier people into the pool.

Let me be clear, this is not "socialized medicine," it is a single payer system. The services provided to patients, insured by Medicare, are provided by physicians in private practice.

This contrasts with an actual socialized medicine program like the Veterans Administration, where the government owns and runs the entire system.

There are those who will argue that a government run system is inherently a bad system. My own experience tells me differently. My experience as a practice administrator, informs me Medicare is the most efficiently run insurance plan out there.

The administrative costs of dealing with private insurance can be as high as 14% of annual revenue. As a practice administrator, whose practice saw nearly 70% Medicare patients, and 30% private insured patients, we incurred a cost as high as 7% just to be able to submit our bills to these private insurance companies. Let me repeat, the 30% of our patients who are privately insured are in fact responsible for nearly 90% of our billing related expenses.

One study has shown the average administrative cost to practices to deal with insurance company pre-authorizations, referrals, and drug approvals is $80,000.

Related to the above, every insurance company has its own set of rules. Every insurance company has its own set of tricks to delay and/or avoid payment to a physician for as long as they can. One such trick is the "we need your Tax ID number trick." This usually occurs at least once a year, from a company that has been sending the practice checks for the past 8 months. How is it, all of a sudden, they need the Tax ID before they can send out the next check? Did all the Tax ID's in their computer system get erased by the IT intern? I doubt it. Every doctor in private practice will tell you the same story: there is no greater threat to their existence than the Health Insurance Industry.

This systematic delay of payments is based on something financial people call "float." Imagine purchasing a Visa gift card as a Christmas gift today. The card is not actually used until after New Years. This allows Visa to hold and invest your money on the short term market. Companies can forecast the average number of days it takes a person to use some/all of these types of funds. The same concept it at work here.

Reimbursement to primary care physicians has not increased at all in the past 20 years; at the same time the cost of health insurance is up 131% over the last 10 years.

To get a grasp of the shocking amount of money sucked out of the health care marketplace by insurance companies one only has to look at the retirement package provided to former United Health care CEO "Dollar" Bill McGuire, who was walked away from his health insurance company with more than $2 billion in his retirement package. This same pattern is par for the course in private health insurance companies. The median CEO pay in 2010 was $10 million dollars.

Click to see list of Compensation Leaders for Healthcare

If one places this income inequality in the context of the recent CBO report, it is easy to see the stark contrast in the health care industry when you compare the income gap between the "providers of health care services" to that of the insurance company executives, with the providers being to do more and more for their patients, while the insurance executives compensation continues to escalate.

Hernando De Soto: Commanding Heights Interview

Hernando de Soto
Economist Hernando de Soto, author of "The Other Path" and "The Mystery of Capital," is the director of Peru's Institute for Liberty and Democracy and a champion of market economics and property rights.This Interview was conducted on PBS: Commanding Heights

Interview Contents

Capitalism and the Road to Prosperity
The Influence of Developed Nations on Developing Countries
The Roots of Poverty in the Developing World
The First World vs. the Third World
Assessing the Success of Capitalism
Property Law and Capitalism
Creating Property Law
Bureaucratic Barriers to Entrepreneurship
Legal System Reform
Capitalism as a "System of Representations"
The Challenges of Property Law Reform
Making Capitalism Work for the Poor
The Institute of Liberty and Democracy

 

    • Capitalism and the Road to Prosperity
      INTERVIEWER: Why does capitalism fail everywhere else and triumph in the West?

      HERNANDO DE SOTO: Because the West has a property rights system, and property rights systems seem to be about ownership. What we're discovering more and more is that it's really the system that undergirds the system of values called capitalism. In other words, you have property rights in the West. In developing nations we do, too, but they're not legal. Once you legalize them and you have recordkeeping systems and you have tracking systems and you've got contracts and you're able to get all the information about somebody's ownership over an asset, all of a sudden you obtain enormous amounts of data that you do not have in developing nations.

      In the West, that is captured in the property system. If you are somebody that is honorable and pays their debts, which is what somebody would be interested in, that's going to be captured in your records, and your records are linked to your property records. All of these are property rights, [but we don't have them] organized in a central system ... in Third World countries.

      INTERVIEWER: Is this a possible change in the Third World?

      HERNANDO DE SOTO: Yes, of course. ... You [The United States] were also a Third World country 150 years ago, and you transformed yourselves into a First World country. The same occurred for most countries throughout the world.

      INTERVIEWER: And how long will that take in the Third World?

      HERNANDO DE SOTO: If we don't do anything explicit about it and we follow your formula, which is to zigzag our way to prosperity, it could take 300, 500 years. From the prosperous Catholic city of Florence until [the time when] all of Italy started having a right to prosperity, not sometimes but all the time, it took 500 years. What we say in The Mystery of Capital is that there are shortcuts, and once we learn what you did, what was necessary, especially the importance of property rights beyond ownership, we should be able to get there very quickly. The Japanese did it, for example, under MacArthur's occupation. They converted from a feudal system to a property-ownership system.

    • The Influence of Developed Nations on Developing Countries

      INTERVIEWER: Why do you come here and go on American television? What are you hoping to achieve by this trip?

      HERNANDO DE SOTO: A lot of the support we get for working in other Third World countries actually comes from the First World, from developed countries like the United States, so it's important to get our message out. It's important first for support [and] funding, and secondly to influence policy. So much foreign policy is mistaken as to where the challenges really are. We'd like to make sure that in developed countries, who have so much influence on what developing and former communist nations are, people realize what the real issues are about. So it's important to come here.

      INTERVIEWER: Does the developed world realize what the issues are?

      HERNANDO DE SOTO: I think that the developed world is beginning to realize the issues. A lot of things that have gotten in the way have to do with culture. Culture exists; it's important. I go to Paris because I want to [experience a different] culture. When I go to Paris, I know I'm in another culture. But I don't think culture has really very much to do with the fact that some people are desperately poor and others are wealthy. One has to get that out of the way. It's important for people in the United States to realize that they, too, were a Third World country one time, and regardless of the culture, they became as developed as Spain was once. We have to do the same thing. We have to let them understand that it's invisible things such as the law and institutions which have enormous amounts of things to do with prosperity, and it's not easy to get that message across. You get a tractor, you get a big machine, and say these guys have got it and these other guys don't, and therefore these guys [with the tractor] are more prosperous than the second guys. That's easy to illustrate. When we talk about law, when you talk about institutions, it's very hazy stuff, so you have to go back and sink it in one time after another. It's a lifetime's work, I'd say.

      INTERVIEWER: The idea that the U.S. was once an underdeveloped country is hard to conceive when you sit here in New York. This looks like it's been here forever.

      HERNANDO DE SOTO: That's right. If you look at New York, there's a feeling that all of these buildings have been here forever, but in fact they haven't been here for that long. They certainly weren't here 100 years ago, not the ones you are photographing now. Enormous amounts of things can be done in half a generation. It's incredible. And when you go and see the United States, Williamsburg, which used to be a capital of the United States, and compare it with the way Mexico City was 120 years ago [or] what Lima was, we probably had bigger cities than you did in the Unites States, and all of this [growth] has been recent. A lot of it has to do with the right laws, with the right kind of institutions.

      INTERVIEWER: When you come to New York and see the kind of wealth that's here and the kind of consumption that's here, how does that make you feel compared to the kind of people that you and your people work with day to day?

      HERNANDO DE SOTO: The difference between being in the U.S. and being in Peru is that a very small number of people in the U.S. are concerned with development for the very simple reason they're already developed, while development is what we're all about in the Third World. We've got a lot of the human touch; we've got a lot of the human dimensions. What we're missing is prosperity. So naturally when you go to Latin America and you talk about development, it's a big issue. Here in the United States it's an issue for the foreign-policy types. I think they call them foreign-policy wonks, some multinationals who have investment abroad, some internationally minded citizens, but they're not the majority of people. They're the minority, and that's what we deal with -- the minority, the ones who care.

      INTERVIEWER: How much does the policy in the developed world actually impact what you're trying to do in the developing world?

      HERNANDO DE SOTO: What happens in the developed world impacts what happens in the Third World and in former communist nations very much. First, because people from developed nations have got more money, so people on the left in the United States who want to press certain points of view can actually turn governments around. So can people on the right. The war for development is fought on both fronts, both in the Third World and in the First World. In the First World, if somebody thinks that a human rights issue is very important regarding terrorism and they actually can manage to sink that point in and make it a big issue internationally, it's all about whether you're getting funds or not. You can decide the cause of that war here in the First World because the funding for the weapons, the funding for the balance of payments stabilization, the funding for economic adjustment, it all comes from the First World. So when the First World blinks, the rest of us blink as well, and even harder. So the war is also here.

      Let me give you an idea: Aid agencies which are extremely helpful are mainly concerned about physical things. How do we help the poorest of the poor? They give a lot of weight to them and relatively little weight to the changing of institutions or the changing of legal systems. That's a definite impact, because they pour money to those people taking care of the physical infrastructure stuff -- that's also where the best brains in the Third World go to. And they don't go to changing a legal system. So what happens in the First World is very important to us.

      INTERVIEWER: Do you feel like you're making progress?

      HERNANDO DE SOTO: Oh, yes. I think we are definitely making progress. The press is the first indication. We've been out in the last few months and in a lot of the major magazines in the United States and in Europe and in the UK. It's catching on because we're also making sure that the way our arguments are structured is not only understandable by the right people in developing countries but also can be read by the right people in the First World nations. It's very important to make the argument relevant to everybody.

      INTERVIEWER: Recently we were in Mexico and we interviewed Vicente Fox. He talked about your ideas and said, "We're listening to what de Soto is saying. We're also going to Egypt and trying to really connect with top leaders in developing countries...."

      HERNANDO DE SOTO: What we're trying to do is talk to very important leaders in the Third World -- not all of them, [as] there are about 160 nations between the Third World and former communist nations. What we're trying to do is to talk to some of those that are very relevant for a variety of reasons, but I would say that the principal one is so that the argument doesn't build up that what we're doing is a Latin American issue, or what we're doing has to do with former Spanish colonies. We think what we're doing has to do with human nature and the way societies get organized. So it's very important for us to be able to talk to the Cabinet in Egypt, which we do, because here we are talking with Muslims with a 6,000-year-old civilization, and the problems they've got are very similar to ours. It's important for us to be talking to Fox as well, because he's basically saying some of the things that the Egyptians have begun to say and the same things that Gloria Arroyo is saying in the Philippines. It's important for us to be in each different culture to indicate that the problems we're facing are standard and they are policy issues that can be dealt with.

      INTERVIEWER: In Mexico, they've got a lot of optimism, but they've got a huge challenge. What do you think?

      HERNANDO DE SOTO: Personally, I think that Vicente Fox and his people are doing excellent stuff. One has to keep one's eye on them very much because they're breaking an old monopoly tradition in politics, and so they've got a lot of difficult challenges to face. They're very credible now; the important thing is for them to continue being credible. They're also moving a lot of funds at the same time. They've got a very difficult task ahead of them, but we wish them well and we're going to support them as much as we can.

    • The Roots of Poverty in the Devloping World

      INTERVIEWER: Let's talk a bit about your personal history. How did you get involved in these sorts of issues of capitalism, of poverty, and property rights?

      HERNANDO DE SOTO: The way my involvement in these issues began was when I realized, after living in Europe for a long time yet traveling constantly back and forth to my native Peru in Latin America, that Latin America, and Peru of course, were very poor. I hadn't quite realized that as a child. I thought that my Peruvian friends, my cousins, my interlocutors when I came to Peru were just as sophisticated, as clever, as skilled as my European friends when I was a child. It only dawned on me about the age of 17 that I actually came from a poor country. And then I wondered why, since the skills seemed to be the same, at least among elites. So I told myself there must be something that isn't obvious that accounts for the relative wealth of the European, the North American, the West versus the nations of the Third World. Since then I've been interested in finding out what that difference is. And since I couldn't pick it up in the books, I thought it had to do rather in observation, with getting involved in the grassroots. That's how I got involved in this. And about the age of 39 I had made enough money so as to survive, hopefully, for the rest of my life. I started getting more involved in these issues.

      INTERVIEWER: You're talking about grassroots, and we're now going to the town of Cajamarca [in Peru]. What message are you taking to Cajamarca?

      HERNANDO DE SOTO: The reason we were invited to Cajamarca, like to all the other places we've been in Peru, is because of the book that I wrote, which has become Peru's number one best seller of all time. We've sold about 300,000 copies. It's called The Mystery of Capital, and it tries to give an explanation for poverty at a time when everybody is somewhat disappointed in the fact that since the fall of the Berlin Wall we've entered another model which supposedly was going to bring prosperity, the market economy capitalism, and it hasn't. I happen to believe in the market economy, and I believe that capital is the source, or explains to a great degree the capacity to great additional wealth of the West. I've come up with an explanation that says with the figures that we are bringing out that, in fact, the poor have worked a lot; that we're a very enterprising lot; that what is missing is a legal system and an institutional framework that allows us to leverage wealth.

      The reason I'm going to Cajamarca now is because the universities, the association of Citizens Against Terrorism, and a few other organizations have invited us to talk about The Mystery of Capital. The curiosity stems from the fact that now, 12 years after the fall of the Berlin Wall, and 11 years after Peru adopted pro-market policies, their situation hasn't gotten that much better, and they want to know why. The Mystery of Capital offers an explanation. It says that the system per se works in the West, but that in our country, like in much of the Third World, it isn't functioning, not because it is not adaptable, but because we have missed some of the crucial elements that the Westerners had in the 18th and 19th century, like property rights, without with this system [the Third World] cannot function. I'm going there to explain to them that they shouldn't lose hope, that there are elements missing, but they require the active intervention of public opinion, and that's why I'm talking to them. And the need for politicians to overhaul the whole legal system so that they, too, can have property rights according to law over the assets they possess and be able to create capital.

      INTERVIEWER: Is Cajamarca like any other poor town in the rest of the world?

      HERNANDO DE SOTO: Cajamarca, yes, is a very typical Peruvian village, mainly of rural characteristics, probably the 20th in size of Peruvian urban conglomerations. So it's very small, and it's pretty representative of a lot of what we call Latin America -- that is to say, Latin America from Mexico down to Bolivia, that part of America where we are mostly a mixture between old Indian indigenous civilizations and the Europeans that migrated.

    • The First World vs. the Third World

      INTERVIEWER: Why should the First World care about the Third World?

      HERNANDO DE SOTO: I don't think the First World needs to care about the Third World. As a matter of fact, I generally believe that most of the problems that need to be resolved in the Third World and in former communist nations cannot be resolved from outside. In other words, I don't think there's much Westerners can do about it. Therefore, the fact that most First Worlders don't care about Third Worlders doesn't actually depress me, because I think the solutions are a local affair.

      Why would it be interesting for the First World to pay attention? Because we're a globalized economy. You depend very much on foreign oil. If you start working down to the crucial ingredient of your economy, you'll see that it's all interwoven. So in spite of the fact that you're not indispensable for the development of the Third World, the fact is that it is useful for us Third Worlders to be in close contact with you, and [to] be able to use mainly your technical advice when needed. But there is no reason that I can think of why I should try to convince a First Worlder to be interested in the Third World, other from the fact that we're all part of the same family.

      INTERVIEWER: You fly to a lot places. Where do you like to go? What sort of towns do you get more insight from?

      HERNANDO DE SOTO: I have found out as we've been called to work in different parts of the world that every place brings something new. I was very interested, for example, when we were contracted to start helping redesign Egyptian legislation regarding property rights for the poor. I always thought that traveling to a different culture would make a great difference. It makes a difference, but not a great difference, and that's also interesting. What's interesting is to find out that we Third Worlders have much more in common than we have in differences. The cultural differences that would make for an interesting program on the Discovery Channel or an article in National Geographic Magazine are cute, are interesting, but that's not where the basics are. The basics are that all of us Third Worlders have in common a very underdeveloped property rights system, a very underdeveloped legal apparatus, and that's what keeps you ahead of us. That's the part I look at. The fact that I'm able to find it in different cultures is first of all important to us because it indicates that there are basic principles that account for development, that there are general theories that one can bring together and that, therefore, there are solutions that one can devise on the basis of this information. But it's not the differences that make it interesting for me to go into any particular part of the Third World; it's the fact that we're so similar in spite of the fact that this might be manifested in different cultural forms.

    • Assessing the Success of Capitalism

      INTERVIEWER: You make a pretty amazing and sweeping statement: The moment of capitalism's greatest triumph is the moment of its greatest crisis. Why?

      HERNANDO DE SOTO: The reason why this is not capitalism's best moment. I wrote the book two years ago, before it actually got published and started being circulated in Spanish, because it hasn't really worked for the majority of the people in former communist nations and developing countries. We people from the Third World and from former communist nations are five-sixths of the world's population. There are about six billion human beings in total, and five billion are in developing and former communist nations. At the time of the fall of the Berlin Wall, we all decided to take the capitalist route. Right now it's quite obvious that about 80 percent of the people in developing and former communist nations have not benefited from the system. The fact that there's no alternative around for the moment doesn't mean that one cannot be created. It's obvious that people are trying to find other ways.

      So the test is there. The test is, can the system actually work for the majority of the people? So this is capitalism's testing moment. This has happened before. It's not that this hasn't occurred before. In Latin America, we found that in at least five opportunities, all our countries put together since the 1820s, when we found our freedom from Spain, [have] actually tried to follow the U.S. model or the Western model. We've privatized railways and we have lowered our tariffs to zero and we've opened ourselves up to foreign investment, and five times we've had to go back because it made sense for a very small [group] among of people at the top of the pyramid, but for the majority it didn't work.

      So our thesis is, basically, the reason it doesn't work for the majority is because the system can only work with property rights. Markets and capitalism are about trading property rights. It's about building capital or loans on property rights. What we've forgotten, because we've never examined the poor, we've sort of thought that the poor were a cultural problem, is that the poor don't have property rights. They have things, but not the rights.

      And when you don't have the rights, you don't have a piece of paper with which to go to market. You don't have a legal system that undergirds that piece of paper and allows it to circulate in the market. The question now is whether we're going to follow the Western route -- let's say that capitalism started 500 years ago -- and go through one revolution after another, tremendous wars, social wars and then finally, four centuries, five centuries later the system comes together, or we're going to be able to learn from you and get it over with in the next five, 10 years.

      But that requires for capitalism to understand that looking at the poor is not the task of the First Lady of the republic. It's the task of the president. It's not a question of just doing macroeconomic stability, getting your accounts right, stabilizing money. It's about finding out why the poor can't use the legal system and revamping it. It's major surgery. That's why we're at a time where capitalism is going to be tested. Will it be able to cater to the poor, or will it continually be seen in places like Latin America as something that essentially relates to libertarian clubs and to people who are wealthy, in many cases who don't necessarily believe in capitalism. They just believe in helping their own wealth. Or are we going to make it inclusive and start breaking the monopoly of the left on the poor and showing that the system can be geared to them as well?

      INTERVIEWER: You have alluded to it a bit, but I want to know if capitalism is really in trouble.

      HERNANDO DE SOTO: Capitalism of course is in trouble, because as usual it is only catching on among the top 20, 10 percent of the population of Latin American countries that have got their property rights paperized in a way that they can enter the market. It's in trouble in the sense that it isn't working for the majority. I insist that capitalism doesn't work without property rights, so it only works among the Westernized elites of our country. You may have noticed that in all developing countries and even former communist nations there are always some people who have been to Harvard, that have taught at Yale, that are in touch. Elites all throughout these hundreds of years have always been in touch. Kings and queens from different countries have always been in touch. So the fact that the system works for an elite doesn't mean it's successful. We've always taken it as successful. We've always actually thought that the poor didn't [appear] for cultural reasons. We've always thought that the poor needed to be educated. That's why they didn't come in. And what The Mystery of Capital tries to tell you is that there are huge legal obstacles for the poor to come in. It isn't that they culturally don't want to come in. They're continually proving that they do want to come in because they're continually migrating to countries like the United States and Canada and western Europe, so they do want to come in. The problem in our countries, in Latin America, is we're not letting them in, and it's because we haven't gone around to finding out what is the cost of getting in it. We're starting to find out it's a very high cost.

      INTERVIEWER: The elites are to blame?

      HERNANDO DE SOTO: I always thought, at least in the case of Latin America, that elites have not accomplished their role. At the end, to create a revolution where the legal system and the market benefits everybody is a heroic task. We realize this the more we look into history and see what the foreign elites did back at the time, for example, of the American independence. They had a vision. And they had the courage to rebel against a status quo. What happens in many Latin American countries and Third World countries is that the elites don't do this, and [they] try to explain the economic backwardness of a large amount of the population -- 80, 90 percent of the country -- as a cultural problem. "We need education," [they say,] instead of seeing it as essentially a problem of [invisible] obstacles that are put in their way ... and they're so set in their ways of thinking that the lower classes are inferior that they're actually acting a lot more like Russian elites in 1914, 1917, than American elites back at the end of the 18th century and beginning of the 19th century, who were open-minded. Many times, of course, [impoverished] Latin Americans become confused by looking at them, because they're able to talk about Hayek and they're able to talk about Milton Friedman. But it's not that they really believe in them; it's sort of like a shield. It's a shield they use. They use libertarianism and conservative ideas the same way communists used to use socialism to hide their real intentions. You have to always be careful about that, because undertaking a revolution in terms of liberty is a very revolutionary task. It requires lots of guts, and it requires going against a status quo. Nobody who really gets along with the status quo can be absolutely trusted to change these countries around from their backwardness to a prosperous society.

      INTERVIEWER: We've been told for 50 years now that free markets bring freedom. Do you believe that?

      HERNANDO DE SOTO: I believe that markets do help absolutely to bring freedom. I don't think that's enough, but I certainly do think that helps, because at the end good markets work with information. You need information, and that necessarily brings pressures on the political system to make people accountable, to provide the right kind of information, to provide the right kind of enforcement. They feed on each other. But it is also important to emphasize democracy as such. I am not necessarily a great friend of some Asian systems which went towards free markets but disregarded the democratic side. That may have worked in certain cultural circumstances and may not work in others. In the case of Latin America, where there is such a cult to the idea of democracy, you also have to add an effort in terms of political freedoms as well as economic freedoms.

      INTERVIEWER: There has been a battle of ideas that that the world has undertaken between communism and capitalism. What's next? Where are we swinging?

      HERNANDO DE SOTO: Capitalism definitely won the battle against communism, but a lot of the main ideas or concerns behind the early communists and socialists are still around. They had to do with an equality. They had to do with inclusiveness. They had to do with fairness. These ideas will get back into the game, and I think it depends very much on the elite in developing countries to make sure that these are also incorporated into the capitalist or free-market argumentation. It's not enough to say that these are the leftist kind of things, human rights kind of things. We've got to bring them in. If we don't bring them in, the traditional leftist will come back. The traditional Latin American leftist is very different from the American liberal who respects democracy. I'm thinking about Latin American leftists who have no problem of carrying out reforms with no democracy whatsoever. If we don't incorporate all of these humanitarian values, all these humanistic values, all of these democratic principles within the capitalist agenda, it'll be born again in some other form that may not be the traditional communist one but will bring with it the same, and many, dangers that communism came with, which is a total disregard for the basic principles of economics that produce wealth and that at the end up solving material problems.

      INTERVIEWER: It seems that globalization is the trend. Won't that make it worse for poor people?

      HERNANDO DE SOTO: No, globalization is where we've been heading for ages. Look at me with the beard and no hair on my head. I'm a product of globalization. Latin American Indians, Peruvian Indians aren't bald, and they can't grow hair on their face. I am a product of globalization. I am the result of Spanish migrants having come to Latin America and probably mixed with some Indians, but not enough so as I can't grow my beard. So globalization has been going on. What we're finding out now is what the early economists, the classical economists told us, from Adam Smith to Marx, which is that the more we learn to divide work among ourselves, the more productive we get. The idea was not only to go for larger markets in larger cities, but go for larger national markets and now larger international markets. And it's obvious that these are going to bring prosperity.

      What we've just got to make sure of is that globalization also includes the underclasses. They have a lot to gain from it as well. But if I go with you through the obstacles that somebody that's poor has to go through to get an export license, or an import license, or be able to put together the kind of paper that'll allow you to globalize, you'll find out that it's a pretty exclusive club, those who can globalize. It's a club made of those people and places like where I come from, Lima, that know how to deal with the law firms, that know how to lobby for legislation that helps some, but doesn't help somebody else. In other words, a system of capitalism for only a few, because there's a legal apartheid that blocks the majority from coming in. Everybody wants to globalize.

      And if somebody tells me no, the poor of Peru don't want to be globalized, the logical question that comes is then why have a million of them traveled to the United States over the last 12 years, not to mention those who have migrated to Mexico or migrated to Spain or other parts in Europe? The reason is because they want to globalize.

      We are now in Cajamarca, and you have seen many people that still keep their old traditional Indian costumes and their ponchos and their big hats. Here we are really in rural bliss in Peru. But I'm sure that when you've been to Lima -- not only Lima but most of the towns of Peru -- you don't see that anymore. People have got sneakers, and they have trainers, and they've got Nikes and other things. They're already globalizing. There is no cultural resistance to getting in on the same wavelength. The problem is that they can't globalize in economic terms. They're not allowed to get into the international market except for touristic projects and for artisanry.

    • Property Law and Capitalism

      INTERVIEWER: You are trying to do something unusual, which is to get a message out to the people. What exactly are you trying to achieve by holding these symposiums?

      HERNANDO DE SOTO: There's a message in my book which is the result of the research and the conclusions my colleagues and I came to as a result of very practical empirical experience in many developing countries throughout the world. The general idea is that there doesn't seem to be a better system in the world than the capitalist system, and it's a very subtle one, too. It's much more sophisticated than what people think. What it has is the ability to pick up the value of people's work. It has the ability to be put on paper, to accumulate, to represent value, and to use it to further additional production.

      What we think is that the reason it isn't working in the developing world and the reason it isn't working in former communist nations is not because people are anticapitalist or people are antientrepreneurial, but that the infrastructure of laws that make the carrying of capital possible are simply not in place.

      The message here is don't despair; it's worked for the West; it can work for us. We know nothing better. But it's going to involve radical changes, and you being entrepreneurs are going to be the first ones interested in making sure that these changes occur, and they have to do with the legal system. Here's what we have to say about how the existing legal system in the Third World conspires against you, how it doesn't allow you to come in. Be conscious that that's the source of the problems, that it's not the capitalist system, it's not the free markets system, it's not your capacity as an entrepreneur; it's essentially a legal system that doesn't allow you to accumulate capital, to organize value, and to be able to transfer it.

      INTERVIEWER: So the system is rigged against poor people?

      HERNANDO DE SOTO: What happens is that over the last 11, 12 years, the recipes available in the international market were at the macroeconomic level. Look, free-market entrepreneurialism is possible everywhere. It's a question of having stable money. It's a question of having fiscal equilibrium -- government doesn't spend more than what it gets. And it's a question of making sure that the government isn't the manager of enterprise, so you have to privatize things.

      That and a few other adjustments called "structural adjustment." But what we're seeing now is that that's important, but it certainly isn't enough. It isn't even the beginning of the story. Of course you need stable money, and of course to have stable money you need a government that doesn't overspend, and of course you also need a government that isn't involved in enterprise. But you also need, more important than other things, a rule of law that makes a market economy, the interdependence between millions of producers, possible through good contracts, through good administration of justice and through representations in paper that are capable of capturing value, so as to use that value to further additional production, i.e. capital.

      The general idea here is that we haven't properly yet understood the capitalist system. It's much more profound, it's much more subtle than we all expected, and it has only partly to do with macroeconomic equilibrium. Most of it has to do with the rule of law, putting in place a system that allows all of us to prosper.

      INTERVIEWER: And so far the system hasn't prospered. Why? Why doesn't it work?

      HERNANDO DE SOTO: The system hasn't prospered so far because we've dedicated ourselves only to doing the macroeconomic side of the formula: stable money, fiscal equilibrium, and privatization. The majority of the capitalist system the way I understand it is essentially a legal property system. And in most developing countries and former communist nations you do not have a legal property system that can provide a framework for the majority of entrepreneurs. I'm talking about 80 to 90 percent of all the entrepreneurs that exist. As a result of it, you cannot produce wealth.

      One of the things that always scares me is that secret little argument, not even intellectual argument, that little prejudice that is not only in the minds of Westerners, but is also in the minds of elites of developing countries and people that take decisions, that the reason the capitalist system doesn't work is because culturally we're not ready for it, whatever the word "culture" means. It may even have racist implications. What we're saying is well, maybe it's true. Maybe the capitalist system does work much better with Protestants and whites. Maybe. But before that, let's take away all these enormous legal obstacles that poor people have to face. Let's take away all the ignorance around law and let's put good law into place and then we'll just see whether it works or it doesn't. We're absolutely convinced it does work because people are actively [conducting] enterprise all over the world. The thing is, they can't make long-term contracts, and because they can't make contracts, they can't obtain credit, and they have no way of constituting a company that can issue shares, therefore they have nothing to sell against investment. That's the reason it doesn't work. I don't think it's cultural at all.

      INTERVIEWER: So education isn't going to solve anybody's problem?

      HERNANDO DE SOTO: Education is important. Education is important; health is important; religion, beliefs are important; a civil society is important; a good democratic system is important. But there are many developing countries where you do have some kind of a democratic system. There are many of these countries where you've got education. You could even say that in terms of the indigenous needs of the Peruvian nation we've over-invested in education. Why? Because most of the people that we've educated have emigrated to the United States.

      So I'm not saying that education is not important, but if you don't have a capital infrastructure that is capable of creating job opportunities and entrepreneurial opportunities as a first source, all that education doesn't help. What we're saying is we've tried education, and it's good that we continue. Health is also extremely impor