In 1980, ILD's founder Hernando de Soto, then 38, returned to his native Peru after living in Europe since the age of seven. De Soto, whose father worked in an international organization, was educated in Switzerland and had run one of the largest engineering firms in Europe. As soon as he began doing business in Peru, he realized that it took a kind of persistence, ingenuity, and bureaucratic savvy unheard of in Europe and the US. Wondering why this was so, he hired two recent law graduates to count the number of laws and regulations enacted in Peru since World War II. The results were astonishing: Peruvian governments had passed about 28,000 laws and regulations per year regarding how citizens produced and distributed wealth more than 100 laws each working day. Even more disconcerting was that further research indicated that this huge and ever-growing legal morass did not seem to address even remotely the needs of most of the nation's people. To confirm this disconnection between the law and the poor, De Soto decided to set up a two-sewing-machine garment factory in a Lima shantytown, and attempt to get it licensed. With the help of five university students who spent several hours a day wending their way through Peruvian bureaucracy, he discovered that to obtain a legal license to operate even such a small business took 289 days and cost 31 times the average monthly minimum wage. Here was incontrovertible evidence that the nation's laws were divorced from reality, generating more costs than benefits. Laws were difficult to understand and expensive to follow. Not surprisingly, Peru's majority opted for extralegality.
Peru, in fact, had become two nations: One where the legal system bestowed privileges on a select few, and another where the majority of the Peruvian people lived and worked outside the law, according to their own local arrangements. How large was this extralegal sector? No one in the government seemed to have a precise idea. Once again, De Soto decided to find out for himself. From 1981 to 1984, he and a small group of associates (the original ILD research team) began walking the streets and shantytowns of Peru during late afternoons and weekends, talking to all sorts of people about their work and counting their businesses and enterprises. De Soto and his team discovered a new set of statistics about life in Peru, and their data were astounding: 90 percent of all small industrial enterprises, 85 percent of urban transport, 60 percent of Peru's fishing fleet (one of the biggest in the world), and 60 percent of the distribution of groceries emerged from the city's extralegal sector. Far from being the pests that the government and elites saw them as, Lima's poor, in fact, were carrying the economy on their backs. The more people the ILD researchers talked to in the shantytowns and rural byways of Peru, the more they realized that it was not so much that the poor were breaking the law as that the law was breaking them. Even those who had tried to get into the system by applying for titles for their houses and other real estate or licenses to legalize their businesses complained that it was impossible to succeed; wending their way through the bureaucratic obstacles simply took too much time and cost too much money.
The results of ILD fieldwork created a major stir in Peru. Packaging the new data and interpreting the statistics, the Institute worked with the nation's top news magazine and highest-rated television channel. The result was a 14-page cover story and a one-hour TV documentary about the new way to look at "the Peruvian reality." The rest of the press followed with a flurry of articles, and by January 1984, politicians across the ideological spectrum were picking up their phones.
The most important call to the ILD came from President Fernando Belaúnde Terry, who assured the Institute that its work had "got under the nation's skin" (agarró carne). What should the next step be? The ILD advised that the most important thing the President and the government could do was to try to get the nation's law in line with how people actually lived and worked. That could be accomplished, De Soto argued, not by articles, TV programs, or books, but by projects and plans to change the law and put the results into motion. Belaúnde agreed. After discussions with De Soto, they decided that the ILD's first project would be reforming decision-making procedures at the level of the executive branch so that the feedback on their effects on the poor could be quickly obtained. From that moment on the ILD's future was set: It was about to become an unusual "think-tank," one that developed and ran projects.
The ILD proceeded to structure itself into an organization that specialized in identifying the bottlenecks in the legal and governmental system as well as those places where facilitative law was clearly missing. ILD staffers also began casting around for methods which local governments in Peru's hinterland and in other countries had used and continued to use to keep their laws and administrative practices in sync with the reality in the streets and create a widespread national consensus for their policies and reforms. With that information in hand and a measure of imagination, the ILD began trying to reform the Peruvian situation. Working with the President's office, legislators, and local authorities, regional as well as municipal, the ILD began an all-out effort to draft proposals for building institutions that brought the law closer to the needs of people and the creation of a widespread market economy. To make sure the laws were enacted, they used a set of strategies to target different audiences and to lobby for change. And once the new laws were in place, the ILD began designing and running projects that allowed government to find out what people really wanted and needed, and then started creating the institutions that would integrate them into the legal mainstream and thus make them more productive. Because the projects were overseen by politicians, the ILD found itself immersed in a non-partisan way in the public life of Peru.
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