Hernando De Soto: The Capitalist Cure for Terrorism

Now and again I've been asked whether our work was influenced by economist Hernado De Soto. It wasn't but we seem to be thinking along similar lines.

Wrting this month in WSJ De Soto describes The Capitalist Cure for Terrorism which reveals the truth behind the incident which sparked the Arab Spring in Tunisia. A man trying to do business and make a living aganst an overwhelming tide of corruption.

"Bouazizi’s plight as a small entrepreneur could stand in for the frustrations that millions of Arabs still face. The Tunisian wasn’t a simple laborer. He was a trader from age 12. By the time he was 19, he was keeping the books at the local market. At 26, he was selling fruits and vegetables from different carts and sites.

His mother told us that he was on his way to forming a company of his own and dreamed of buying a pickup truck to take produce to other retail outlets to expand his business. But to get a loan to buy the truck, he needed collateral—and since the assets he held weren’t legally recorded or had murky titles, he didn’t qualify.

Meanwhile, government inspectors made Bouazizi’s life miserable, shaking him down for bribes when he couldn’t produce licenses that were (by design) virtually unobtainable. He tired of the abuse. The day he killed himself, inspectors had come to seize his merchandise and his electronic scale for weighing goods. A tussle began. One municipal inspector, a woman, slapped Bouazizi across the face. That humiliation, along with the confiscation of just $225 worth of his wares, is said to have led the young man to take his own life."

 He goes on to describe how helping these would be entrepreneurs offers a way forward.

"As countries from China to Peru to Botswana have proved in recent years, poor people can adapt quickly when given a framework of modern rules for property and capital. The trick is to start. We must remember that, throughout history, capitalism has been created by those who were once poor.

I can tell you firsthand that terrorist leaders are very different from their recruits. The radical leaders whom I encountered in Peru were generally murderous, coldblooded, tactical planners with unwavering ambitions to seize control of the government. Most of their sympathizers and would-be recruits, by contrast, would rather have been legal economic agents, creating better lives for themselves and their families.

The best way to end terrorist violence is to make sure that the twisted calls of terrorist leaders fall on deaf ears."

When I wrote "Tackling Terrorism through Compassionate Economics" I was using extracts from a development proposal written by my late colleague for the Tatar community of Crimea. It described how thrrough transformational lending Tatar businesses could be empowered to deal with their own problems of exclusion at a far lower cost than through aid support.

The Crimea Proposal was posted online in 2003, the same year De Soto published his book on

In 2002 a meeting of world leaders in Monterey had agreed that poverty provides a seed bed for terrorism. In anticipation of those who will immediately respond with "poverty doesn't cause terrorism", this means what De Soto says, those in poverty are more likely to be influenced by the extremenists, particularly where external financial backing is involved.  The corruption issue is ubiquitous:

"If money piles up in the hands of a few people, this must come at the expense of others who will then have less, or nothing at all. There is no other possibility. This is the basic flaw and weakness of capitalism, and was the central point of the 1996 paper. The end result is uneven distribution of resources.

This same result will be the outcome in any community, village, city, or state: a few people will become very wealthy and have far more money than they need, while many people will be left with little or nothing. Thus, merely introducing capitalism and market economy into a community will bring limited benefit, mostly to a few people while many others are left in need of basic living requirements. This is an especially tough problem in Ukraine and Russia, where so-called mafia capitalism is not uncommon, and bloodshed is not unusual in the race to accumulate as many personal assets and as much money as possible. It is safe to say that most of the players in the mafia capitalism game are not working for the benefit of the community, but only for themselves and the smallest number of people possible with whom their winnings must be shared. This is the exact opposite of what is needed, and the results are very obvious throughout both countries in the form of widespread poverty and all that comes with poverty."

The empirical truth however, is that it's now even more difficult because development agencies and transnational corporations have made themselves part of the problem. I reported recently of how USAID and The British Council behaved in Ukraine.    

Where perhaps we dverge from De Soto is in the solution. For us, not capitalism but something better - business which uses its profits to stinulate the economy bottom up.  

 

"Creating an enterprise for community funding will work for enriching a community just as well as it will work for enriching a few people. The profit motive remains intact. The enterprise is sustainable as long as it makes a profit, just as with any other business. The main limitation is the time it will take to grow enough to provide the money needed by the community. A credit union or bank, by comparison, can make sufficient money for a community available more quickly. These can be funded immediately with sufficient money to service entrepreneurs in a community. In turn, businesses and jobs are created quickly, reducing the overall financial needs of the community. The limitation of a bank or credit union is making enough money in the process of lending money to sustain itself. This money is made by charging interest rates, which must be high for micro loans. It requires much more time, work and therefore cost to lend one million dollars among a thousand different people than lending the same amount to one person, for example. As a result, the interest rates for micro loans need to be high in order to cover the operating costs of making these loans. Even with high interest rates – up to 35% in the present case – it remains difficult to earn sufficient profits to be able to make loans across a wide region such as Crimea where potential borrowers are spread out in remote areas across the region. The cost of outreach, training and multiple visits in that process can exceed 35% interest ultimately earned on micro-loans to remote areas.

 

By combining a community-funding enterprise (CFE) with a micro-credit union, the limitations inherent in each one is greatly diminished. The CFE provides sufficient funding to ensure the operating costs of the credit union, reducing the risk that the credit union will have any need to use its capital to sustain itself. The credit union immediately makes available sufficient loan money to match the needs of the community, thereby eliminating the time needed for the CFE to generate the same amounts of money. Additionally, CFE profits over and above what is needed to help with the operating costs of the credit union can be put directly into the credit union. Over time, the amount of money used to originally fund the creation of the CFE is offset by CFE contributions to the credit union. The credit union is increased so that larger amounts of money become available either to make larger loans or to service more borrowers. Together, the CFE and credit union create an enterprise where the original funding not only remains but also increases with time. They complement and balance each other by addressing the economic goals both have in common and offsetting each other’s limitations."

Otherwise we are very much on the same page with how we see the role of government:

"In the emerging global war against terrorism, first response has necessarily been to target and destroy existing terrorist organizations. This is a case of global self-defense. Preventing terrorism is at least equally important. There is an emerging consensus that poverty provides the essential breeding ground for terrorism to emerge. People with nothing have nothing to lose and much to gain.

In efforts to deal with communities in or near poverty, it will be useful to target progressive, peace-oriented communities just as aggressively as has been done in targeting terrorist cells. Both types of communities are quite similar, but, one has attempted a peaceful path whereas the other has not. Toward this end, the most promising and deserving communities must be “hit” with equal force as is brought to terrorist cells – the difference being delivery of resources rather than ordinance. The point is to grow the best, most promising communities with the same focus and passion brought to destroying terrorists."