Cottage Capitalism : THE OTHER PATH : The Invisible Revolution in the Third World <i> by Hernando de Soto (Harper & Row: $22.95; 256 pp., illustrated; 0-06-016020-9)</i>

The Peruvian novelist, Mario Vargas Llosa, tells us in his introduction to Hernando de Soto’s book that “economists occasionally tell better stories than novelists.” He was being kind about De Soto’s style, if not his content. “The Other Path,” as most such works, makes for pretty dense reading, although at least it forsakes the higher flights of theoretical economics for solid, research-based analysis. But it is by any standards an important book.

De Soto and his team from Lima’s Instituto Libertad y Democracia had the novel idea of studying the black market--the “informal” sector of his country’s economy. This is a vast enterprise. About 60% of Peru’s economy is probably outside the legal economy. In Lima alone, the black market employs nearly half a million people; of the 331 markets in the capital, 274 have been built by black marketeers. More remarkable still, 95% of public transport in Lima is operated by “informals,” while between 1960 and 1984, more than $8 billion worth of housing was built illegally, while only $173 million was built by the state.

What is the explanation of this hive of subterranean activity? In Lima’s case, the immediate cause is the city’s fivefold increase in population over 40 years. Indeed, “All over Latin America, the poor have fled from the countryside to the cities. When these poor people, driven off the land by drought, flood, overpopulation and the decline of agriculture, reached the city, they found that the system had already closed its doors to them. They had no money and no technical training. They had no hope of getting credit, no chance to obtain insurance, and could expect no protection from the police or the judicial system. They knew their business would always be threatened from all sides. All they had was their will, their imagination, and their desire to work.”

What they ran up against is what De Soto defines as the “mercantilist state”--the bureaucratic concept left behind by the old Spanish empire, and still largely unreformed. De Soto’s inquiry establishes just how difficult it is for a marginalized person to become a legitimate citizen. His institute tried to set up its own small clothing factory: It took nine months to cut through the red tape involved. To obtain planning permission for a block of flats would, according to his calculations, take seven years and require spending about $2,000 per family.

From this awesome social problem, De Soto extracts an intriguing political message. He argues, in effect, that these black marketeers represent the huddled masses of Latin America, much more than do those richer workers who subscribe to Marxist doctrine. The main aspiration of the informals is to private property--to the legitimization of the small businesses they run and ownership of the houses they have built--while their main enemy is the bureaucratic state. In Peru’s case, the bureaucratic state has been run by an elite, sometimes under democratic control, more often under army control.

It requires no great effort of the imagination to see that, while the existing structure is deeply discouraging for the underclass, Marxist-Leninist control of the means of production would be disastrous. The logical conclusion of De Soto’s argument is that nothing could be more hostile to the interests of those on the lowest rung of the ladder than Marxism--a middle-class credo that seeks to take control of the existing elitist bureaucratic state, nominally in the interests of the poor, and transform it into a source of absolute authority. One does not need to look to Latin America to see the force of De Soto’s argument; the flourishing black economies in Eastern Europe and China, only now beginning to gain legal recognition, are a case in point.

De Soto’s book delves deeper into the complex social structures of Third-World society than simple-minded revolutionaries would prefer. The research work presented here is important, and his conclusions break dramatic new ground. All the same, students of Latin America should not underestimate the extent to which the marginals’ yearning for official recognition, when frustrated, can transform itself into a hatred for the system and for the moneyed class. Peru, after all, not only has the largest Marxist-left movement in Latin America (supported by around a third of the electorate), but is run by an avowedly left-of-center president, and possesses the continent’s biggest and most savage far-left guerrilla movement, Shining Path (to which the title of this study presumably refers). The informals may be budding capitalists, and Marxism their most dangerous enemy, but it seems that a lot of them are not aware of it yet.