A path for revitalizing Latin democracies. Amid Latin America's lively black markets, a prominent Peruvian finds hope for a whole continent. Hernando de Soto suggests ways countries can legitimize and benefit from this free-market enterprise.

Every morning here, like every morning in all Latin American cities, the black market comes alive. Fruit sellers stake out curbspace with blankets, patchwork shoe repairmen set up sewing machines at street corners, and black-market buses, which account for 90 percent of Lima's transit system, carry the urban poor to and from their black-market real estate - shantytowns built on invaded land.

In this chaotic, survival economy, Hernando de Soto finds hope for a continent.

The black market, or informal sector, is generally seen as a problem, a symbol of deteriorating governmental authority in the face of exploding urban poverty.

But Mr. de Soto sees the informal sector as a spontaneous free enterprise to be encouraged - and legitimized by good government and egalitarian law, which are not inherent in the region's new democracies, but must be cultivated.

His study of the informal sector - made famous in Latin America by his best-selling book, ``El Otro Sendero'' (The Other Path) - has become an economic tract in the current neo-conservative swing of Latin American thinkers toward free enterprise and Western-style democracy.

In a Monitor interview, de Soto balked at the conservative image he has developed through public praise from Ronald Reagan and an association with Peruvian novelist Mario Vargas Llosa in a campaign against President Alan Garc'ia P'erez's bank nationalization plan. He likes the bipartisan ``rightist Marxist'' label Mexican intellectuals have given him.

He explained that he thinks his economic theory can have a positive ripple effect on broad regional concerns.

Serious government reform to accommodate free enterprise, he says, would help consolidate fledgling democratic ethics, strengthen economies weakened by inefficiency and foreign debt burdens, and offer business incentives to keep the poor from joining communist insurgencies.

``The Other Path,'' is a play on the name of the Shining Path (Sendero Luminoso), Peru's violent Maoist guerrilla army which promotes a peasant-majority overthrow of the government.

The two ``paths'' symbolize the directions Latin America could take, de Soto says. The informal sector's growth, which he argues is a sign that the poor over time can create their own modest wealth and upward mobility, signals a popular sympathy with basic free enterprise.

De Soto's think-tank, the Institute for Liberty and Democracy, promotes government reforms aimed at recognizing and promoting the microenterprises of the informal sector. A tradition of bureaucratic red tape and elitism favoring the rich or the ruling classes forces free-enterprise underground, he says.

Yet de Soto says the informal sector arguably is more mainstream than the formal sector. It fills Lima thoroughfares with wares and services that amount to nearly 50 percent of the gross national product, he says. The institute's study involved trying to set up a typical microenterprise, a small garment factory. It took $1,000 and 289 days to complete just the bureaucratic process. One segment of the development field has recognized and encouraged the informal sector for more than a decade now. But de Soto's analysis and themes are recognized as the first to articulate the magnitude of the phenomenon and hold it up as the basis for government reform.

Some critics suggest his theory is impractical because it would take changes in the culture to change government tradition. Others say the black market would fold if legitimized, taxed, and regulated.

De Soto staunchly asserts that while reform is slow, he is sure it can work.

President Garc'ia has responded to one of the institute's proposal. He is currently considering giving the informal sector access to bank credit by using real estate insurance as collateral.

Good law and the will to obey it is the only key to change, de Soto asserts frequently. He says he promotes three types of government reform: simplification, deregulation, decentralization. ``I don't want just deregulation but simplification. Let's start not by firing [inefficient public officials] but by simplifying [the process],'' de Soto explains. ``Instead of bureaucrats waiting there to stamp [documents], make sure they implement the law instead by going out and inspecting.''

De Soto bases much of his theory of reform on the decisionmaking process in the United States. Presidents in Peru have unilaterally made almost all of the laws, he says, while in the US laws are made by legislators after the ``crossfire'' of the hearing process and budgetary analysis and industry input. And then laws are later refined through the judicial process.

``Maybe we should have fewer Margaret Meads going to Palm Islands and more people like us [Latin Americans] studying how the US got to be the way it is,'' he says. He adds that he has studied the economic boom times of the California Gold Rush and the Alaska oil pipeline and sees parallels to the urban boom of microenterprises across the Latin American region. The way US law was adjudicated in such eras, he says, are models Latin Americans could follow.

Broad social participation is key to the reforms de Soto promotes, as well as to the political balance between rich and poor necessary in democracy.

For example, de Soto has created an unheard of political pact between unions of humble informal sector workers and big business associations to lobby for reform.

De Soto, himself the son of an aristocrat diplomat, asserts that free enterprise promotion should not be left up to the wealthy class, which is traditionally seen as the guardian of capitalism.

The informal sector has created a certain level of wealth for the poor in Peru, he says, suggesting that it competes favorably against the lure of the communist guerrilla movement here.

Evidence of this, he says, lies in the fact that the small businessmen, considered big successes in rural villages, are often assassinated by guerrillas.

De Soto concludes it is an investment in peace to create laws legitimizing and even promoting microenterprise.