MARGOLIS:Why does poverty remain so persistent?

DE SOTO: Supposedly in a democracy, if the majority of people are poor, then they set the criteria of what is right. Yet all those mechanisms that allow [society] to decide where the money goes–and that it is appropriately allocated–are not in place throughout the Third World. We take turns electing authoritarian governments. The country, therefore, is left to the [whims] of big-time interests, and whoever funded the elections or parties. We have no right of review or oversight. We have no way for the people’s voice to be heard, except for eight hours on election day.

So Latin America, for instance, has merely nominal democracies?

We have “electoral” democracies. For years, in many Asian countries, elections didn’t mean much. On the other hand, they had a lot of participatory mechanisms, governing based on contracts with the grass roots. In Latin America, there’s lots of politicking, which makes it look like we have democracy. But real participation of people doesn’t take place here the way it does in Asia, where regimes manage to appropriate their money much more intelligently and direct it to the right causes.

But Latin America has gone through sweeping political and economic reforms in the last decade. What happened?

Most entrepreneurs in Latin America are still informal or “extralegal.” That means that there are no corporations for them, no organizational vehicles outside their immediate family. Therefore, they do not have access to credit or bank accounts. They have no property rights or real ownership, which is only created through laws, in order to issue shares. So they have no way of capturing investment.

Do you see this changing?

About 18 years ago, when I first looked at Peruvian shantytowns, I thought I’d started the world revolution. I thought, hey, the poor are really richer than the rich, in aggregate terms. All you need is to get rid of all these ungodly barriers that keep them back. I soon found out it’s much more complicated than that. Lately, though, we’ve gotten calls from 20 heads of state. I’ve already visited 17 of them. Now I’m really getting excited.

Are the problems the same everywhere?

Egypt is not so different from Mexico or Peru. In all, you have large shantytowns and an informal sector, and there’s the same basic question of how to create a market economy and a real democracy. But in Afghanistan you are starting from a feudal base. In the former Soviet Union, you started from central planning that went wrong. The question in Africa is how to go from the tribe to the market. All roads are heading to Rome, but from different points of departure.

Going to Rome means what? Creating a system of property titles?

It’s much more than that. In Lima’s shantytowns we found, on average, 21 titles per home. There’s no lack of titles. What you have is bad titles. It’s like inflation. There’s no lack of money in Latin America. The problem is it’s worthless. The question is, what do you do to make property titles have value as collateral for credit or as a share, or equity for investment? This isn’t just giving someone in the favela a piece of paper. It’s about turning that piece of paper into a financial instrument, the capital basis on which you can take off.

Recently, Brazilian peasants have been invading farms, drawing hostile reaction from landlords and creating tensions in the countryside. Would distributing titles solve the problem?

No. It could only be a very short-term solution for three principal reasons. First, because it sends out the message that violence gets you property rights. This will give invaders weak titles that will be under constant threat of violent retaliation from previous owners and future competitors. Second, it misses the heart of the problem: the lack of a Brazilian social contract which guarantees democratically accessible property for everyone through viable peaceful and legal means. Third, because given the state of most land law in Brazil, the invading peasants would be getting a title that is a mere certificate of ownership, instead of a real property title plugged into a legal system that allows property to secure credit, investment and long-term deals.