The Capitalist Cure for Terrorism: Entrepreneurship

This is a post I did in October 2014.

By Hernando de Soto. From yesterday's WSJ. See also a similar post from 2011 based on a New Yorker article The Problem In The Middle East Might Be The State Preventing Entrepreneurship. The idea is that governments make it very difficult to start a legal business. Excerpts:

"Fashionable opinion held that the people [in Peru] rebelling were the impoverished or underemployed wage slaves of Latin America, that capitalism couldn’t work outside the West and that Latin cultures didn’t really understand market economics.

The conventional wisdom proved to be wrong, however. Reforms in Peru gave indigenous entrepreneurs and farmers control over their assets and a new, more accessible legal framework in which to run businesses, make contracts and borrow—spurring an unprecedented rise in living standards. 

Between 1980 and 1993, Peru won the only victory against a terrorist movement since the fall of communism without the intervention of foreign troops or significant outside financial support for its military. Over the next two decades, Peru’s gross national product per capita grew twice as fast as the average in the rest of Latin America, with its middle class growing four times faster."

"Just as Shining Path was beaten in Peru, so can terrorists be defeated by reforms that create an unstoppable constituency for rising living standards in the Middle East and North Africa."

"To make this agenda a reality, the only requirements are a little imagination, a hefty dose of capital (injected from the bottom up) and government leadership to build, streamline and fortify the laws and structures that let capitalism flourish."

"the poor in Peru weren’t unemployed or underemployed laborers or farmers, as the conventional wisdom held at the time. Instead, most of them were small entrepreneurs, operating off the books in Peru’s “informal” economy. They accounted for 62% of Peru’s population and generated 34% of its gross domestic product—and they had accumulated some $70 billion worth of real-estate assets."

"Peru reduced by 75% the red tape blocking access to economic activity, provided ombudsmen and mechanisms for filing complaints against government agencies and recognized the property rights of the majority. One legislative package alone gave official recognition to 380,000 informal businesses, thus bringing above board, from 1990 to 1994, some 500,000 jobs and $8 billion in tax revenue."

"As Mr. Guzmán wrote at the time in a document published by Peru’s Communist Party, “We have been displaced by a plan designed and implemented by de Soto and Yankee imperialism.”"

"what was crucial to this effort was our success in persuading U.S. leaders and policy makers, as well as key figures at the United Nations, to see Peru’s countryside differently: as a breeding ground not for Marxist revolution but for a new, modern capitalist economy."

"These suicides [that fueled the Arab Spring], we found, weren’t pleas for political or religious rights or for higher wage subsidies, as some have argued. Bouazizi and the others who burned themselves were extralegal entrepreneurs: builders, contractors, caterers, small vendors and the like. In their dying statements, none referred to religion or politics."

"Their great objective was “ras el mel” (Arabic for “capital”), and their despair and indignation sprang from the arbitrary expropriation of what little capital they had."

"Tunisia’s system of cronyism, which demanded payoffs for official protection at every turn, had withdrawn its support from Bouazizi and ruined him. He could no longer generate profits or repay the loans he had taken to buy the confiscated merchandise."

"“He believed the poor had the right to buy and sell.”"

"The people of the “Arab street” want to find a place in the modern capitalist economy. But hundreds of millions of them have been unable to do so because of legal constraints to which both local leaders and Western elites are often blind. They have ended up as economic refugees in their own countries."

"If ordinary people in the Middle East and North Africa cannot play the game legally—despite their heroic sacrifices—they will be far less able to resist a terrorist offensive"

"the poor in Egypt get as much income from returns on capital as they do from salaries."

"Arab states even now have laws allowing assets to be leveraged or converted into capital that can be invested and saved. But the procedures for doing so are impenetrably cumbersome, especially for those who lack education and connections. For the poor in many Arab states, it can take years to do something as simple as validating a title to real estate."

"Washington should support Arab leaders who not only resist the extremism of the jihadists but also heed the call of Bouazizi and all the others who gave their lives to protest the theft of their capital."

"Economic aspirations trump the overhyped “cultural gaps” so often invoked to rationalize inaction."

"poor people can adapt quickly when given a framework of modern rules for property and capital."

"throughout history, capitalism has been created by those who were once poor."

"The radical leaders whom I encountered in Peru were generally murderous, coldblooded, tactical planners with unwavering ambitions to seize control of the government."