On Developing Nations and Inflation

Economist De Soto Warns of ‘Huge Problems Coming’ in Property Crisis

 

Peruvian economist Hernando de Soto…talked recently with Michael Casey about the impact that the global crisis has had on the world’s poor. Excerpts from that interview follow.

 

How has the global crisis and the policy response to it played out among the poor of the developing world?

 

De Soto: Well, in Peru, for example, the stimulus effort has meant that we have managed to get enough credit to the cities such that they are doing all right. But in the poorest and most populous parts of the Peruvian jungle, from January to June, exports have gone down by 57% and production has gone down by 25% to 27%. The effect has been huge.  In these kinds of places around the world, which includes marginalized areas of cities, or anywhere where you’ve got an informal economy, where credit can’t go because there are no addresses, no guarantees and no collateral, the stimulus programs can only trickle down. They can’t get in directly because the people have no way to identify themselves vis-à-vis the benefits that have come in.

 

What are the political implications of this widening gap between those who have property titles and those who don’t?

 

De Soto: What it means is that we’ve got huge problems coming. What happened to us in the Amazon area of Peru [where 22 police were killed in clashes with protesting indigenous residents] is something that is only now beginning. It could explode. All of a sudden, everywhere, we’ll see mines being taken over, negotiations with trade unions breaking down, and [leftist leaders like] Hugo Chavez and Evo Morales on the move. Social cleavage – or a class cleavage if you want to use the Marixst term – is on the rise.

 

…The stimulus means we have twice as many dollars and twice as much of any currency in the system as a year ago. The question is: When are those dollars, those euros or those renmimbi going to hit the market? A lot of people are banking on central banks doing the easiest thing and letting inflation go. So there is a rush for commodities. And what does that mean? That there’s a mad land grab going. As we speak, whether it’s the Chinese or big agro-industrial companies, they are all buying up land in Africa, in Latin America…if it’s all untitled property that belongs to tribes or to individuals from tribes and there is no recognition of that, we are heading into another huge class cleavage situation.

 

…And if you have a majority of the world that is still not titled in those assets that are in greatest demand, and with twice as much money out there, we are heading for one big storm.

 

Michael Casey

Wall Street Journal, October 8, 2009

http://blogs.wsj.com/economics/2009/10/08/qa-economist-de-soto-warns-of-huge-problems-coming-in-property-crisis/