Undogmatic thinking

Q&A with economist Hernando de Soto Polar

It is not every day that a world-renowned economist touches down on Lebanese soil, but it should not surprise that such a formidable economist could deliver a presentation less than 24 hours after arriving in Beirut for the first time in his life. It might be expected that he would start with an exercise in affinity, by saying nice things about this country’s welcoming people and surprising allure. But, it was refreshing to meet an acclaimed economist who not only confesses to being no specialist on the local economy (only a fool would claim to understand the jungle that passes as Lebanon’s economy), but who has real expertise on the issues that matter in developing countries. Executive sat down with Peruvian economist Hernando de Soto Polar on the sidelines of an event organized by Banque BEMO at the Ecole Supérieure des Affaires.

E   What brings you to Beirut?

What brought me to Beirut was the invitation by Mr. [Riad] Obegi, and the fact that he told me, ‘Based on your kind of thinking, I’ve got a product that you’ve probably never heard of before, and that is my invention [see box page 56]. Why don’t you come and learn more about it, and at the same time, expose yourself [to the situation in Lebanon]?’ I said fine, and that’s what brought me here.

E  Lebanon is a very small country and there’s often a dichotomy between the local reality and the data and perspectives put forward by popular international economists, who only come for one or two short visits. I understand that you have done more than precursory research on Middle Eastern economies. Have you done any work on Lebanon?

Nothing.

E   So it’s virgin territory for you?

That’s one way of putting it. Total ignorance territory.

E   Knowing what one doesn’t know is a fortunate state of being. You have conducted extensive research  on the informal economy in developing countries, such as your native Peru. The informal economy in Lebanon is a very important part of the national equilibrium. How would it help to integrate into the formal economy a sector that’s barely recorded or taxed?

The advantage could be that you could do many things with your resources. You could work within a large-scale economy. Large-scale is [what was] behind the industrial revolution, and the advantage of this comes if you want to specialize and make combinations [such as products with multiple inputs or components]. Everything around us is the result of a combination, and if you’re in an economy where it’s clear what transactions can be made — because they are governed by laws — you can make much more complex products and fetch more surplus value. [People in the informal economy] aren’t taxed [on their incomes], but in my experience — in a measure that is confirmed in each country — they pay much more than the people who pay taxes.

E   How?

Many taxes are consumption taxes and not on income. Then, you have to pay direct bribes, and this is an irregular [cost] as opposed to a tax, which is set by law. The second thing is, of course, the humbling effect of a father telling his son, ‘We’ll go out and pay some little bribes. That’s the way life is, son.’ This is a very corrupting atmosphere. The other part is bribes that don’t look like bribes, like the amount of untruthful friendships that you keep up just to make sure that you are in touch with everybody. There are many ways of measuring this. For example, in a country like Peru, you have provincial industries, but 90 percent of the managers live in Lima, and not next to their factories, where they could help by supervising. This is true in practically every country that we have been to because it’s much more important to be close to [the] people in power, and make sure the law provides an advantage for you, than to actually supervise your factory. The idea about the formal economy is that it brings you all the advantages that you receive from the ability to have proof of your assets — to guarantee your credit or to pledge them against investments.

E    Financial inclusion and inequality are buzzwords of our time. What could banks contribute to achieving inclusion and overcoming inequality in a country with a very potent banking industry, like Lebanon?

They could do all sorts of things. The question is how many of them have the initiative of someone like Mr. Obegi and try to do something. In places like the United States, the banks haven’t done innovation. It’s been other forms of financing. I’m not sure that banks are in a position [to be innovative] because they tend to be conservative. If they do [participate in the financing of projects], they are in business, and if they don’t, they can be replaced, which is happening in many parts of the world.

E   In Lebanon, there is currently a debate over the validity of juxtaposing capital markets versus debt markets, because most of financing of the public sector and private sector economy is still done via banks and debt markets. Could an increase in capital market activity in a country be beneficial to the economy or would it make no difference?

What you mean by debt and capital markets is investments or loans that don’t come through banking. First of all, I believe in competition. I believe that taking initiatives [in new forms of finance] like Mr. Obegi’s is good, but if they don’t come from banking, they have to come from someplace else. If [this competition to banks] is not there, you have a huge black market with interest rates that go through the ceiling under the fictitious motive of getting to micro credit, which is extremely exploitative. I don’t believe in monopolies of any sort.

E   In one of your works, The Mystery Of Capital, you wrote that ‘The bell jar makes capitalism a private club open only to a privileged few and enrages the billions standing on the outside and looking in.’ Has your assessment changed in any way since you made this statement at the end of the last century?

Unfortunately, I don’t think so. The countries I’ve worked in may be a little more democratic, but [the development] has been too slow to stop terrorism and to stop feelings of inequality, frustration, learned helplessness, whatever you want to call it. My calculation is that people who are outside the bell jar make up 5 billion of the world’s 7.5 billion. When I talk of the 5 billion, I’m not talking about people like me, who can take whatever they want and combine it. The people who can combine things [into economic products] are only 2.5 billion. The other 5 billion are looking in from the outside and are angry like hell. To me, that was part of the [catalyst for] Arab Spring and all terrorist wars.

E   Proponents of contemporary capitalism say that to have 2.5 out of 7.5 billion included in the capitalist model is better than 1,500 or even 150 years ago, when only one out of every 100 people was included. As British economist Joan Robinson famously said in the 1960s, ‘The only thing worse than being exploited by capitalism is not being exploited by capitalism.’

I agree. I absolutely agree. Everything seems to indicate that between the time of Jesus Christ and just after the end of WWII we grew less than between the 1950s and today. The question is what’s politically viable, and we suddenly find that people voted in the United States either for Donald Trump or Bernie Sanders, who both said they want to stop globalization. I’m not criticizing the 2.5 billion. What I’m saying is that maybe we’ve arrived at a moment where the system might not hold unless you give some kind of outlook to the 5 billion who aren’t seeing the light. They’re starting to act up all over the place and go to the right or left [extreme] to topple the system. If that can be done is another story; the fact is that people are genuinely unhappy. The fact is that there is a rising mood on the left and the right against globalization. Let’s call it de-globalization. [In facing this trend], I think it’s a good idea to make the system much more inclusive.

E   We’ve just seen the renewed assertion of an alliance during President Trump’s visit to Saudi Arabia, which resulted in very large bilateral agreements. Do such collaborations between a key country in the Islamic realm and the United States, under a president considered by many to be anti-Islamic, mean that globalization is back on track, and we don’t need to worry anymore about anti-globalization politics in the US? 

I don’t have a view on what the significance of Mr. Trump’s visit is, among other things because we still have yet to find out if it will be a consistent [policy] over time. He seems to be a man who’s finding out that the world isn’t exactly the way he thought, as a result of which he’s improvising solutions at the moment. Some people would say what a practical politician he is, but I don’t think that we can actually see what’s really going to be the outcome of the new proposal because there is nothing in the background of Mr. Trump that you could’ve said would lead to this trip to Saudi Arabia. Obviously his government, or he himself, is still in the learning process, and we don’t have enough evidence to say whether this will look consistent and good. What is obvious is that he’s changing the game, and if his [previous] idea was to isolate the United States, he’s now getting the United States involved in a new war.

E   Are we heading into dangerous times in the global economic and political situation, or are we still proceeding in moderately risky scenarios as we have over the past few years?

In terms of dangers, I think the dangers started way before. I think that we’ve been in dangerous times since the West decided to intervene in Afghanistan [in 2001] in the way it did, since we went into Iraq [in 2003], and since [the financial crisis in] 2008.

E   This recalls sentiments voiced by other economists, who have been warning for some years now that we aren’t in a stable situation.

Yes, we’re off the charts now. That’s quite clear.

E    Do you see yourself in any specific school as an economist, such as behavioral economics, development economics, post-Keynesianism, or what have been called the saltwater (coastal) and freshwater (Chicago) schools in the United States? Do you identify with any of those?

No. At a certain moment of course in Peru, when I saw that people were working in the market, and the law was against the market, my position became very pro-market [with regards to] the countries I worked in. But, if I were a European or an American citizen, I wouldn’t necessarily take that view. [On the other hand], I can’t subscribe to the views of those who classify themselves as liberal in the European sense, or libertarian in the American sense. They assume in everything they talk about — on how to do markets, how you deal with bilateral trade, etc. — that the institutional revolution which occurred in Europe and in North America has also taken place in my part of the world. That’s a wrong perception. If they were [proposing] a system that is built on law and good contracts, copyrights and respect etc., why do they not think of those measures when it comes to a developing country? I don’t agree. I understand the compassion that the left has very strongly, but I don’t like their idea that the solution isn’t the market but the government. I think this is completely off-track. I find it difficult to fall into any specific classification.

E   Would you agree then to be called an undogmatic economist? You’re being hailed as a global influencer in economic thinking, so would that be an undogmatic version of economics? 

I like the word and am flattered. I’m flattered because I just haven’t found one place where to find the whole thing. If you look at The Mystery of Capital, my last chapter is called ‘The Ghost of Marx’ because I don’t think he’s exhausted.

E   In the philosophical or the economic sense?

In the philosophical sense, first of all because he has something over libertarians. By tendency, libertarians ignore the class phenomenon, and I don’t think you can see the big picture without classes. And the classes vary. The philosophical thinking of a great philosopher is helpful, but you have to avoid being captured by the last book you read. And you have to do what happens in revolutionary moments, which was said by the man who invented modern medicine in Britain, Thomas Sydenham, that ‘there is a moment when you have to close your books and open your eyes.’

Thomas Schellen

Thomas Schellen is Executive's editor-at-large. He has been reporting on Middle Eastern business and economy for over 20 years.

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