Why do young people become terrorists? The think tanks have published dozens of monographs trying to psychoanalyze the minds of people in other lands. But Hernando de Soto, in this provocative piece from the Wall Street Journal, has a simpler explanation: people become terrorists because they’re blocked from more useful trades by Third World regimes that practice cronyism and lack the rule of law.
“Economic hope is the only way to win the battle for the constituencies on which terrorist groups lead,” de Soto writes.
De Soto is best known for his work on how hard it was to start and maintain a business in Peru. In the late 1980s, the Sendoro Luminoso, or "Shining Path," a Marxist insurgency that appeared to be unbeatable, menaced Peru. But de Soto notes that a lot of the people who were formally considered to be unemployed were in effect working in the black-market, informal economy. Part of the reason they were working off-the-books jobs was that these tiny enterprises couldn’t get the licenses and paperwork to be established—and, as off-the books enterprises, couldn’t establish contracts or get contracts enforced if they made them.
With de Soto’s assistance, the Peruvians in the late 1980s and early made dramatic reforms. Red tape was reduced by 75 percent and the government set about to make the informal enterprises, which accounted for 24 percent of Peruvian GDP and owned $70 billion in real estate, into on the books, taxpaying successes. Just one bill, according to de Soto, legitimated 380,000 informal businesses that, between 1990-94, created 500,000 jobs and added $8 billion in taxes to the Peruvian treasury.
De Soto also says that his pro-entrepreneurial activities attracted the attention of Vice President Dan Quayle, who persuaded President George H. W. Bush that promoting entrepreneurs would fight Marxism. “This led to a treaty with the U.S. that encouraged Peru to mount a popular armed defense against Shining Path while also committing the U.S. to support economic reform as an alternative to the terrorist group’s agenda.”
De Soto doesn’t say what the U.S. government did to promote capitalistic activity, but the American efforts, combined with a larger Peruvian army, caused Shining Path’s defeat.
According to de Soto, the abuse government bureaucrats inflicted on Peruvians is also inflicted on countless Arabs who want to start businesses that can sustain families. He notes that Mohammed Bouazizi, the Tunisian whose death by self-immolation sparked the Arab Spring revolt of 2011, decided to set himself on fire because of his frustration in getting enough capital to start a business. At every turn, government inspectors took bribes because aspiring entrepreneurs didn’t have licenses, which were impossible to obtain. Bouazizi’s mother said that her son wanted to buy a truck to expand his business of selling fruits and vegetables, but couldn’t get collateral for a loan because he couldn’t prove he legally owned the assets he had. The day before he died, a female government inspector slapped Bouazizi across the face and seized $225 of his products—a humiliation to which Bouazizi responded by setting himself on fire.
According to Bouazizi’s brother, Salem Bouazizi, his brother’s legacy was “that the poor have the right to buy and sell.”
Lacking the rule of law, poor people in the Arab world have assets that often consist of “dead capital”—land and other assets they can’t prove they legally own because of murky titles not enforced in corrupt courts. A survey de Soto’s organization, the Institute for Liberty and Democracy, conducted in Egypt in 2013 found that 24 million Egyptian workers owned $360 billion in “dead capital”—“that is, capital that couldn’t be used effectively because it exists in the shadows, beyond legal recognition.”
“For the poor in many Arab states,” de Soto writes, “it can take years to do something as simple as validating a title to real estate.”
It should be noted that American diplomats do recognize that entrepreneurs matter. Last month was Global Entrepreneurship Week, and Washington Post reporter J. D. Harrison, covering a conference in Washington, found that there are many groups who fly entrepreneurs to Washington to meet with government officials. NASA, for example, has a program where people from around the world come to NASA to come up with new ideas, like innovative stoves. Others Harrison spoke to talked about the necessity of nascent enterprises in the Third World to gain access to venture capital.
But these schemes don’t address the problem de Soto has defined so eloquently: how to establish the rule of law so that businesses in the Third World can build assets and get loans.
Donors in the West, de Soto writes, “prefer well-intended charity projects like providing mosquito nets and nutritional supplements” to the harder task of changing the rules that small businesses in the Third World can get started and grow without being crushed by money-hungry inspectors.
The foundations funding overseas development should ask themselves: what are we doing to help entrepreneurs in the Third World succeed?