Americas Competitiveness Forum

Hernando de Soto Speech

June 11, 2007

Thank you very much Luis Alberto for also reminding us something that is very important and a goal we all share, which is how all that entrepreneurship that we see is available in Latin America like it would be in any other part of the world. The problem is that it is not as spread; it is not as enhanced as it should be. There are a lot of reasons for that and they are very good reasons and the one I would like to concentrate on for the next ten minutes which have been allotted to me has to do with information.

We all think in a way that the information issue is going to be settled because we are all the time getting bigger and better computers and software. But there is a lot more to information than simply computers and a lot of that happens to be missing in our part of the world, Latin America, as by the way, would be in Africa, in Asia, in the Middle East and the former Soviet Union.

The first time we really hear about information being a subject about development is already way back in the 18 th century when David Hume talks about it and says there is no way to coordinate, there is no way to communicate if we don’t have what he called at that time ‘common knowledge.’ By common knowledge, of course, he meant information. But he did not mean information just in any way. Because we all know that the world is brimming with information, it is full of information. The whole problem is about how you decide what kinds of information you need, what kinds of information you want and then bring it and package it in such a way that it is useful to people.

So, way before computers were in place, David Hume started talking about this. When the industrial revolution came into place, what the classics tell us, especially starting in 1850 and on, is that common knowledge is one of the biggest challenges and that to get common knowledge you have to get organized. By that they made a very important distinction between what some people call “mutual knowledge,” and what the classics and Hume called “common knowledge.” Mutual knowledge is for example if we all come in here and we all know that the next conference is within ten minutes. And each of us is being told this individually. That is mutual knowledge. Common knowledge is when we know that the other person knows. Because when that happens, a lot of interesting activities can take place.

For example, if I were to go shopping with Secretary Gutierrez and his wife and we all went to a department store in a mall and got lost. The question I would have immediately is, how do I find Sec Gutierrez again? Where do I go? But since I do not know Secretary Gutierrez for all that long, since I am not a part of his family, how am I going to decide what part of Atlanta airport I am going to find him in. In the case of Ms. Gutierrez, she has common knowledge. She knows he really likes a cappuccino. She knows he really wants to get another power tie. She knows that they have to take a flight back to Washington, DC. She has common knowledge with him. Because of that common knowledge, she can start coordinating and saying: the logical place is the tie shop. Or no, we just had dinner; the logical place is the cappuccino. In other words, he will be able to figure her out. But not only that, he will also be able to say: now she knows I will want the cappucciono, knows I want the power tie. But on the other hand, she was rather anxious about not getting lipstick before we get on the flight. So maybe it is the lipstick. At the end, he goes through various depths of knowledge, and those depths of knowledge allow him to coordinate.

That is a reason why, during the 19 th century, it was not enough to just simply say that the market was in it’s place; macroeconomic reforms had to go, you had to stabilize money, you had to free up trade, you also had to create companies. And before companies were things that needed an act of congress, you could not just go out and record a company. You had to ask the Congress of New York, you had to ask the Federal Congress. In the case of Britain, you had to get a charter from the King or the Queen. In the case of France, you also needed an act of Parliament. And it is only in the 19 th century that all of those things are taken away, and the objective is purely common knowledge. In other words, if people cluster together in bodies, where they are able to coordinate with each other and know, because they are working together, what each other wants, competitiveness or productivity will increase. Those were explicitly the arguments of the 19 th century reformers, and that is why, by the end of the 19 th century, anybody could form a company because it was important to get together. Later on, people like Ronald Coase start telling us, in modern day economics, that there is a limit to how much common knowledge you could actually put into one place where it is also important to be competitive and that is why you have to separate into different companies, otherwise a large monopoly in the World would be enough. And Michael Porter of Harvard has of course told us what are the secrets to clustering appropriately

Now, in other words, what common knowledge does is it organizes information in such a way that we can all graduate our expectation, in such a way that we can know what other people want, what other people need. Not only one’s own family, but also for business. Without there, there would be no possibility of being aware of possibility nor could we have higher expectations.

So how does all of this get organized? Well, if any of you looks at your computers you will see that there is no such thing as a suction mechanism behind it, as something that a vacuum pulls things in. Information is not sucked out of the air. Information comes in because it has already been organized. And the enormous advantage of developed countries has been that all throughout the 19 th and 20 th centuries, it got organized. It got written up, it got put into documents, it was rationalized, so that by the time the information technology revolution came to your country up North, and even in the North Atlantic countries of Western Europe, you then were able to digitalize what was already “paperized”. And so what I will tell that one of the challenges that we have in Latin America is that we are not yet “paperized”. And to that extent, a large part of our development problems of development come. There are a few of us who are obviously branched in. In all of Latin America there is a good 10 or 20% who are westernized Latin Americans. We are aware of what is happening with the Sopranos closing down, we know your political problems, we know how the Democrats are now debating each other, the Republicans are debating each other, we understand 70% of the jokes on “Saturday Night Live.” There are lots of westernized types. The issue is, where are the other 80%? And what I am trying to tell you is those other 80% are outside the information system.

One of the very interesting things we have actually done together with Luis Alberto Moreno at the Inter-American Development Bank is we have gone out -we were commissioned by him, because we were very interested in finding out where problems are at the bottom of the pyramid, where problems are among the poorest- is to find out how many people actually had the tools, how many business people in Latin America actually had the tools to bring together not mutual knowledge, common knowledge; that common knowledge that will allow us to find quicker solutions than anybody who just has mutual knowledge. So we started creating an inventory and went to 12 countries. In this inventory, first of all, we started saying part of the strength of the west, part of the strength of North America, is obviously the fact that they have public memory. Everything you do in the United States is recorded. You buy a bicycle, that is recorded, you form a company, that is recorded, you make a deal –its not like a warm handshake in Latin America which is called a speech act: “Hombre, que gusto. Nos fiamos.” It is documents. You also have every home recorded. You have people’s addresses. Try and imagine what it means working in a country where you know where everybody lives. You know: “Down the street, a la izquierda, frente al teatro, y detras de la casa del Dr. Moscoso.” It is a very different proposition than “3 rd Avenue, with 78 th street, apartment 28A. So property rights, and records, actually allow you to pinpoint people. They also allow you to make records of transactions. They also allow you to identify people by something else than us. Back in Latin America, in the smaller villages, we say, you know: “He is obviously a Bustamante. Why? The eyebrows, the big nose. He has his hair always combed back. They age quickly, the Bustamantes, but are very nice fellows. You know who is and what it is: a series of certain personal, physical details.

In the United States, you go anywhere and you are identified because you have a document: social security, you have a driver’s license, and it has redundant information: they know your address; they know where you have been, they have your criminal record, they know your military record, everything is in place. It is a hidden infrastructure you have had way before computers for about 150 years, and it allows you to know who your business partners are, and evaluate their track record. You also have things like limited liability, which allows you, when you deal with another company, to do something very important: what is their liability? If they break, how much can I get them for if they have broken a contract with me? Limited liability, you have it in partnerships, you have it in corporations, you have it in companies; it gives you an idea of the risks you have to take. You have records about assets, you have records about addresses, you have records about identity, and you have records about who has what amount of capital. You also have such vehicles as asset shielding. You know that if you make a deal with a company, they cannot just stick there bankrupt and go away. There is asset shielding; those assets are going to be put apart. You are going to be able to get something on them, your risks are limited and you know how to calculate those different risks. You also have perpetual succession, which means that you have created a separate system of life apart from personal life. The Wong industry –Mr. Wong dies, so what? Wong industry keeps going. In most parts of Latin America, Mr. Wong dies and, “pobre viejo,” he died and there is no more business. Because perpetual succession is not really in the book since the majority of companies in Latin America are not recorded. So the study that we did with the Inter-American Development Bank, which is a very, very important study, not really well published yet, will be published and you will see how revolutionary that will be, is that 90% of all enterprises in all Latin America from Mexico all the way down to Bolivia have none of the things I mentioned before. You do not have common knowledge, and they do not have the tools to have common knowledge, which is of course is one of the reasons why globalization concentrates on the more westernized parts of Latin America. And if we are going to bring it down, we are going to have to bring it down to a lot a people and we are going to really have to do it to a great degree with your support, but on our own. Because the people who did this in the US were your great, great granddaddies a long time ago and they are dead and it is very hard to talk to dead people.

But the genesis of information and the genesis of modern enterprise is not in the 21 st century, it is in the 19 th century and it is the biggest challenge we have because that also not only the case why it it is not functioning in Latin America; it will also indicate why it is not functioning in the Middle East, and why it is not functioning in Africa. Because basically there is a legal infrastructure that is actually not in place and that is not compatible with modernity. And until that happens, productivity and competitiveness will be a very unequal place. But I am so glad that we are starting at least to get the basic facts, working with the Inter-American Development Bank, and I hope that allows us to see that the challenges that we face ahead are really very important ones, but are identified.