De Soto has published two books about economic and political development: The Other Path: The economic answer to terrorism, and at the end of 2000, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. Both books have been international bestsellers, translated into some 30 languages.

The original Spanish-language title of The Other Path is El Otro Sendero, an allusion to countering Peru's "Shining Path" ("Sendero Luminoso") guerrillas. The Senderistas had in the past attempted to assassinate him.

De Soto argues that an important characteristic of capitalism is the functioning state protection of property rights in a formal property system where ownership and transactions are clearly recorded. This makes possible the following.

• greater independence for individuals from local community arrangements to protect their assets
• clear and provable protected ownership
• the standardization and integration of property rules and property information in the country as a whole
• increased trust arising from a greater certainty of punishment for cheating in economic transactions
• more formal and complex written statements of ownership that permit the easier assumption of shared risk and ownership in companies, and the insurance of risk
• greater availability of loans for new projects, since more things can be used as collateral for the loans
• easier access to and more reliable information regarding such things as credit history and the worth of assets
• increased fungibility, standardization and transferability of statements documenting the ownership of property, which paves the way for structures such as national markets for companies and the easy transportation of property through complex networks of individuals and other entities

All of these things enhance economic growth, according to a de Soto speech to the IMF.

Main thesis

Need for private ownership

The main tenet of de Soto's books is that people in developing countries lack such an integrated formal property system, leading to only informal ownership of land and goods. He argues that the fruition of economic success of American and Japanese capitalism relied on a clear system of property rights which was created during the times of the 'frontier' in America and in post-WWII Japan. The lack of such an integrated system of property rights in today's developing nations makes it impossible for the poor to leverage their now informal ownerships into capital (as collateral for credit), which de Soto claims would form the basis for entrepreneurship. Hence farmers in much of the developing world remain trapped in subsistence agriculture. As such, he argues that this informal ownership should be made formal, for example by giving squatters in shanty towns land titles to the land they now live on.

Thomas Sowell writes:

For the entire Third World and the former Communist countries, de Soto's calculation is that the total value of all the real estate held, but not legally owned, by the poor is more than 20 times all direct foreign investment in the Third World and more than 90 times all the foreign aid to all Third World countries over the past three decades. ...

The amount of wealth available within Third World countries themselves vastly exceeds anything that the prosperous countries have given them or are likely to give them.

Many American businesses were begun by someone who borrowed the money to get started, using his home as collateral.

Government bureaucracy stifles the economy

Conversely, de Soto argues that government bureaucracy greatly hinders the ability for people to hold private property, for example:

"In Haiti, one way an ordinary person can settle legally on government land is first to lease it from the government for five years and then buy it. Working with associates in Haiti, our researchers found that to obtain such a lease took 65 bureaucratic steps requiring, on average, a little more than two years. All for the privilege of merely leasing the land for five years."

"In Egypt, the person who wants to acquire and legally register a lot on state-owned desert land must wind his way through at least 77 bureaucratic procedures at 31 public and private agencies. This can take anywhere from 5 to 14 years. To build a legal dwelling on former agricultural land would require 6 to 11 years of bureaucratic wrangling."

Thus entrepreneurs are driven to form "underground" economies, but de Soto points out the serious disadvantages:

"Extra legal businesses are taxed by the lack of good property law and continually having to hide their operations from the authorities. Because they are not incorporated, extralegal entrepreneurs cannot lure investors by selling shares; they cannot get low interest formal credit because they do not even have legal addresses. They cannot reduce risks by declaring limited liability or obtaining insurance coverage. In fact, the only 'insurance' available to them is that provided by their neighbors and the protection that local bullies or mafia are willing to sell them. Moreover, because extralegal entrepreneurs live in constant fear of government detection and extortion from corrupt officials, they are forced to split and compartmentalize their production facilities between many locations, thereby rarely achieving important economies of scale. With one eye always on the lookout for police, underground entrepreneurs cannot openly advertise to build up their clientele or make less costly bulk deliveries to customers."

Sowell's review concludes:

The crucial theme of the book is that this vast amount of wealth cannot be used, as it is in the west, as investments to create still more wealth and rising standards of living. That is because real estate, businesses and other assets in the underground economies of the Third World cannot be used as collateral to raise capital to finance industrial and commercial expansion.

When bureaucracy and frustrating legal systems drive economic activities underground, the losers are not simply those engaged in these activities. The whole country loses when legal property rights are not readily available because investment is stifled.

This book should be required reading for those — including law professors — who seem to think that property rights are just privileges for the rich. The poor need them most of all, especially if they want to stop being poor.

Praise for de Soto’s Work

Time magazine chose de Soto as one of the five leading Latin American innovators of the century in its special May 1999 issue Leaders of the New Millennium, and included him among the 100 most influential people in the world in 2004. De Soto was also listed as one of the 15 innovators "who will reinvent your future" according to Forbes magazine’s 85th anniversary edition. In January 2000, Entwicklung und Zusammenarbeit, the German development magazine, described de Soto as one of the most important development theoreticians of the last millennium. In October 2005, over 20,000 readers of Prospect magazine of the UK and Foreign Policy magazine of the U.S. ranked him among the top 13 "public intellectuals" in the world from the magazines’ joint list of 100.

De Soto has been praised by U.S. presidents from both major parties, with Bill Clinton calling him "The world’s greatest living economist", George H. W. Bush saying that "De Soto’s prescription offers a clear and promising alternative to economic stagnation…" and Ronald Reagan saying "De Soto and his colleagues have examined the only ladder for upward mobility. The free market is the other path to development and the one true path. It is the people’s path… it leads somewhere. It works." He has also received praise from United Nations Secretaries-General Kofi Annan—"Hernando de Soto is absolutely right, that we need to rethink how we capture economic growth and development"—and Javier Perez de Cuellar—"A crucial contribution. A new proposal for change that is valid for the whole world."