Beyond Bullets But Within Reach

Yesterday, I had the pleasure of attending the final chapter in the New America Foundation's look at America's policy on counterterrorism, called Beyond Bullets: Economic Strategies In the Fight Against Terrorism . The theme of the event was looking beyond military solutions to terrorism and draining the swamp. The big news coming out of that event was actually from the last speaker, Hernando de Soto.

De Soto is the director of the Institute for Liberty and Democracy  in Peru, which is now expanding operations into 30 developing countries. That growth is due to de Soto's remarkable, yet simple, thesis: Capitalism is failing the developing world because the people there are excluded from the formal system of property rights, business organization and identity that the modern economy requires. For those of you who want to read more, his book, The Mystery Of Capital , has been out for a few years now.

Without access to these basic tools, a developing economy limits people to interact with the no more than 2,500 people that their social networks can certify as trustworthy, limits people to family-size businesses, and pretty much excludes people from getting any really useful form of credit.

De Soto estimates that only one billion people live in countries with fully functional property rights systems. Of the five billion people outside that "global economy," somewhere around 500 million are elites whose families enjoy property rights and have structured or supported the system to exclude the other 4.5 billion people.

And it's that 4.5 billion people who, with no chance for ever improving their lot, become the audience for extremist messages, whether from Osama bin Laden or the Shining Path.

I'll write more later. But think about this: If 4.5 billion people do not have a legal address, title to their home, or the ability to set up a company, how can development spending result in progress? Clearly, free trade will only serve the interests of those 500 million elites and increase inequality. Macroeconomic restructuring is meaningless.

De Soto is onto one of the biggest revolutions in, well, history. But, of course there is a dark side. I'll get to that this afternoon.

Views expressed on this page are those of the authors and not necessarily those of Campaign for America's Future or Institute for America's Future