Hernando de Soto.(granting proper land titles and business permits may help lessen poverty in developing countries)(Interview)

Developing countries have long viewed poverty as their most daunting problem. Hernando de Soto sees it as an opportunity. The 62-year-old Peruvian economist argues that, instead of throwing money at inefficient aid and welfare programs, governments should give priority to granting proper land titles and business permits to free up the untold human capital trapped in the world's shantytowns and slums. The word seems to be spreading. Some 20 heads of state, from Russia's Vladimir Putin to Mexico's Vicente Fox, have called on de Soto for advice. From his home in Lima, Peru, de Soto recently spoke with NEWSWEEK's Mac Margolis by phone. Excerpts:

MARGOLIS:Why does poverty remain so persistent?

DE SOTO: Supposedly in a democracy, if the majority of people are poor, then they set the criteria of what is right. Yet all those mechanisms that allow [society] to decide where the money goes--and that it is appropriately allocated--are not in place throughout the Third World. We take turns electing authoritarian governments. The country, therefore, is left to the [whims] of big-time interests, and whoever funded the elections or parties. We have no right of review or oversight. We have no way for the people's voice to be heard, except for eight hours on election day.

So Latin America, for instance, has merely nominal democracies?

We have "electoral" democracies. For years, in many Asian countries, elections didn't mean much. On the other hand, they had a lot of participatory mechanisms, governing based on contracts with the grass roots. In Latin America, there's lots of politicking, which makes it look like we have democracy. But real participation of people doesn't take place here the way it does in Asia, where regimes manage to appropriate their money much more intelligently and direct it to the right causes.

But Latin America has gone through sweeping political and economic reforms in the last decade. What happened?

Most entrepreneurs in Latin America are still informal or "extralegal." That means that there are no corporations for them, no organizational vehicles outside their immediate family. Therefore, they do not have access to credit or bank accounts. They have no property rights or real ownership, which is only created through laws, in order to issue shares. So they have no way of capturing investment.