In an interview on Failed States

This take us to markets, doesn’t it? The idea of a perfect relationship between state and citizen, in which the citizen does not feel constrained, but only liberated by the law, is the dream of perfect government. But in practice it is the market that challenges the state. It is the market that enables citizens to determine their own future?

So my third book choice is The Mystery Of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. Hernando de Soto is a Peruvian economist and one of his earliest books was The Other Path, as opposed to the Shining Path, which documents his attempts, along with the government of Peru, to engage with the Shining Path. And his basic thesis in that book is that many so-called insurgents don’t actually want to bring the system down. Instead they are excluded from the system, resent their exclusion, and want in. So they want in, not out. Their bitterness is the result of frustration and so the solution is not necessarily to go after them but instead to find ways to empower and enfranchise them and to give them legal status.

But how would you do that?

Well they did it in Peru by hiring a bunch of ex-policemen, who worked with the police force and went around the peasantry who were the main recruiting ground for the Shining Path and gave them legal title to their land—the land that they were on.

Emancipating the serfs?

Yes. So this solution – the provision of legal title to the peasants – is credited with bringing an end to the instability which the Shining Path brought to Peru. Of course the provision of legal rights depend on there being a system to enforce those legal rights and de Soto’s The Mystery Of Capital spends a lot of time examining this and documenting how it is that people can effectively be given legal possession not only of their land but of their houses and businesses. He tracks how long it takes in different parts of the world to register a business or piece of land. In some countries it can take up to 15 years. So he’s arguing for radical simplification in the rules of the game – the processes of the state. And what’s interesting is that he sees the state as an impediment to recognising the legal status that would provide the stability that in turn allows for individual enterprise and economic growth.

So this is an instance of the market informing the state?

Yes, the needs of the market, the needs of people to have predictability and ownership and so forth…. Dewey would say that the state is a mechanism. The state is a set of rules by which you play the game. The game is the market. The Mystery Of Capital documents the amount of dead or useless capital in the world. There’s all this value in terms of assets around the world, but because it’s not recognised by law or given legal status, we don’t count it. As James Scott’s Seeing Like A State points out, the state only sees what it can count. As de Soto points out, if the land is not owned by its tenants because they are living on it in slums or as feudal peasants, then you can’t count the land. Now in terms of a failing state this becomes an issue because the question is whether aid should go through the state, or whether you should encourage local investors. And this is of crucial significance in post-conflict environments, in terms of replacing jobs and local businesses, in which the population of that country has a stake. And in all the countries that Ashraf Ghani and I discuss in Fixing Failed States, the ones that developed successfully created an environment for a domestic set of firms to emerge. Because you don’t just want workers, you want owners who have a stake in the legitimate system and therefore a reason in seeing the rules of the game upheld. So you need the jobs, but you also – as in Spain after Franco – need the middle managers and the owners.