Critics Are Wary of Peru's 'Informal President'

EPITHETS such as "the Rasputin of Lima," "the power behind the throne," and "the informal president" are among those applied in recent weeks to Hernando de Soto by Peru's press and politicians. Many of these Peruvians distrust the influence that Mr. De Soto and his think tank, the Institute of Freedom and Democracy (ILD), have wielded ever since political unknown Alberto Fujimori won the Peruvian presidency in July 1990.

The simmering distrust recently broke out into verbal warfare. De Soto has been obliged to emerge from the shadows to answer often aggressive questions about his role and influence.

A rupture with Mr. Fujimori himself seemed inevitable when a key De Soto/ILD project on "the democratization of government decision-making" was radically altered by the Cabinet and officially published in weakened language. De Soto conditioned his continued presidential advisory role on the eventual approval of the original project.

It is hard to overestimate the importance of the ILD and De Soto in present-day improvised, often chaotic Peru. "The ILD is all that Peru has in terms of medium to long-term planning - there simply is nothing else," says a Western diplomat in Lima.

Good contacts

De Soto has been the president's chief negotiator in Peru's rapidly improved relations with the United States. His personal contacts are excellent: His brother works with United Nations Secretary General Javier Perez de Cuellar, while InterAmerican Bank President Enrique Iglesias and the US Treasury Department's David Mulford are close friends.

The ILD is a nonprofit organization funded by foreign foundations, mainly in the US and Europe, with a large slice coming from the US Agency for International Development. It started quietly in research and investigation, but De Soto burst onto the international scene with his 1986 best-seller "The Other Path," which is still the ILD bible.

In "The Other Path," De Soto argues that Peru's informal, underground, or "black" economy is good, more a solution to poverty than a problem.

The informals - street sellers, unlicensed taxi and bus drivers, shopkeepers, and owners of small illicit workshops - are forced to ply their trade illegally because of government regulations and bureaucracy. They survive through ingenuity and a basic entrepreneurial spirit. This could be harnessed for the national good if such legal essentials as land titles, the right to set up businesses, and access to credit were supplied.

Renewed US ties

De Soto has been quick to appreciate the need to link bilateral negotiations, including the reestablishment of Peru's relations with the international financial community, to the US's number one domestic problem, drugs.

The "Fujimori Doctrine," soon to be enshrined in a new bilateral agreement with the US, is almost pure De Soto.

It proposes crop substitution rather than jail terms for coca growers, along with providing land titles and the conditions for a real market economy. And De Soto personally recommended to the president two North American advisers, Ann Wroblewski and Edward Luttwak "to avoid future misunderstandings over development and interdiction," according to De Soto.

New Minister of the Economy Carlos Bolona and recently appointed Peruvian Ambassador to Washington Roberto MacLean are both ILD advisers. They use the language of ILD, emphasizing the need for "structural reforms," a favorite ILD theme.

Fujimori's political rise was nothing short of meteoric. But when he snatched second place behind Mario Vargas Llosa in last April's round of the presidential elections, he had no program beyond the slogan, "honesty, hard work, technology."

With De Soto's advice, Fujimori found enough material in ILD ideology to concoct a program between the April elections and the June runoff.

Despite its nominal think tank status, ILD is actively involved in institutional reform, from draft law stage through promotion, education, and implementation. It invites popular participation and holds public debates.

"Administrative Simplification" - a series of measures cutting through Peru's notorious red tape - was the first major ILD-prepared law. Peru's Congress passed it unanimously. Legal registration of a business now takes one day instead of 300. Complex documentation requirements have been dramatically simplified, often substituted with a straightforward sworn declaration.

Peru-styled free market

The concept of a market economy is basic to De Soto's philosophy. But this means a market economy "made to measure for the people who live in that country ... not a model which looks ideal to foreign investors but which does not encourage popular participation because it was designed in New York," De Soto says. As evidence, he cites the failure of "the Bolivian model."

Educated in Canada, the US, and Switzerland, De Soto often prefers speaking English to Spanish or French. He first worked as managing director of a Swiss engineering consultancy. Returning to his native Peru in 1979 to run an old mine, he founded the ILD in 1980, the year Peru returned to democracy after more than a decade of military rule.

Although he has been intimately involved in negotiations with the International Monetary Fund and other multilateral organizations on debt and new financing, De Soto believes that most of the reforms Peru needs are internal and structural. Peruvians wrongly tend to blame outside causes for their hardships, he says.

De Soto, unlike his critics, has no problem with the ILD's influential but informal position.

"One characteristic of all modern states is that power is not concentrated in ministries," he says.

He believes in specialist "supra-ministerial" bodies such as the proposed Autonomous Alternative Development Authority to coordinate the anti-drugs initiative, and a Hong Kong-style Committee Against Corruption.

De Soto has several times refused formally to participate in government. "Those who do perform a great service, but 95 percent of their time is spent putting out fires. They have no chance to create new things as the ILD does."