Hernando de Soto and the Shining Path — a Maoist guerrilla group — were on a collision course in Peru.

When the Shining Path began a "People's War" in January 1980 by hanging dogs from lampposts and blowing up electrical towers, de Soto had been back in his home country for about a year.

Newspaper photos of the Shining Path's acts shocked him.

Like the Shining Path, de Soto had ideas to bring social change to Peru. He saw legal and property reform as the fix for Peru's poverty, not violence.

De Soto took on the Shining Path. In 1986, he threw down the gauntlet when he published a book called "The Other Path."

"The purpose of the book was to get them," de Soto said in a phone interview from his home in Lima, Peru. "I thought I had a message and the context was the war with the Shining Path. I was scared we were about to lose the country."

Despite some flaws, capitalism can work in poor countries such as Peru, de Soto says.

To unlock economic potential in Third World countries, governments must legitimize underground economies, de Soto says. That means making it easier for the poor to obtain property rights — titles to homes or businesses — as collateral for bank loans. Countries with more credit have less poverty, de Soto says.

With "The Other Path," de Soto hoped to reach Peru's government and policymakers. He also wanted to connect with potential Shining Path recruits — intellectuals, rural farmers and trade unions.

To de Soto's surprise, the book became widely read outside of Peru.

"Readers from Africa to Asia identified with it," de Soto said. "The huge extralegal sectors (of developing countries) are at the source of most headaches in the world today."

"De Soto is impressive because of the intellectual and practical content of his ideas," Madeleine Albright, former Secretary of State for the Clinton Administration, said in an e-mail interview. "The logic at work is that poor people can and should be a part of a legal economy. De Soto provides them with a voice."

Why is he effective as a persuader?

"Because of the force of his arguments, the force of his personality and because of the thoroughness of his research — grounded in history and his passion," she said.

De Soto has counseled governments in Mexico, Egypt, El Salvador, Ghana and the Philippines. His think tank, the Institute for Liberty and Democracy, has carried out programs in 30 countries.

Firsthand Information

Before making any kind of recommendation, de Soto gets firsthand data on how people live and work in developing countries. He goes to shantytowns and local black markets, focusing on cinder-block squatter homes and pushcart vendors.

In Cairo, Egypt, de Soto explored the bustling Khan el-Khalili market, says John Sullivan, executive director of the Center for International Private Enterprise, an affiliate of the U.S. Chamber of Commerce.

"The first thing Hernando does is go to the informal markets, like Khan el-Khalili," Sullivan said. "He engages people in the bazaars, in the souks. He sends his (research) team out for real information. You don't get that from flying in and meeting with (President Hosni) Mubarak."

De Soto sells his ideas with metaphors. He likes to tell a story of how in Indonesia he learned who owns which portion of rice fields by hearing different dogs bark.

Critics of de Soto say he touts a magic bullet. Economic reform is much more complex than he makes it seem, they say.

Yet University of California, San Diego, professor Christopher Woodruff, a detractor, gives de Soto credit for "tremendous insight. Does he get everything right, in all the details? I don't think so. But he focuses attention on the critical issues, like land titling."

When de Soto returned to Peru in 1979, he came back as an outsider. His father, a Peruvian diplomat, was exiled after a 1948 military coup in Lima. At 7, de Soto moved to Europe with his parents. Educated in Switzerland, de Soto worked as an economist and business executive, but he felt like a part of Peru.

His father insisted that his children stay in touch with their homeland. They often visited the country.

At 37, in midcareer, de Soto returned to Peru. In 1979, he co-founded a gold mining company. When he checked out the government-issued property, de Soto found 2,000 squatters panning for gold.

De Soto became interested in what kept people outside the legal system. He believed Peru needed legal reform to spur economic growth.

"People need the rule of law," he said. "That's why they migrate to the United States. They leave countries that are lawless. Everybody likes certainty; they like standards. People understand that's the only way you can find security."

De Soto founded his think tank, the ILD, in 1980 to get funding for research. He went to work immediately, setting up a garment workshop in a Lima shantytown as a test lab. He gathered data on how government regulators' red tape can stymie small businesses.

The Shining Path, meanwhile, revved up its guerrilla war in Peru's Andean highlands. It repressed or killed peasants who didn't join.

The group's brutal methods worked. The Shining Path grabbed a big swath of rural mountain areas. At one point, it had 80,000 armed insurgents. The organization threatened Lima, the capital, on the coast.

Fighting Fire With Fire

To beat the Shining Path at its own game, de Soto worked to understand its methods. He studied how the original communist, Karl Marx, used words to appeal to intellectuals, trade unionists and the masses.

As Marx used pamphlets, de Soto used TV and the tabloids to reach the people with his message. He also arranged for comic-strip versions of "The Other Path" to be published. He looks constantly for new solutions to long-standing problems. For instance, Peru's farmers were supplying Colombia's drug cartels with coca. The farmers belonged to federations.

De Soto and his team met with leaders and built a bridge between them and the government. He explained how they were better off working within Peru's legal system, getting title to land and producing fruits and vegetables instead of coca.

He also met with Peru's Drivers Federation, made up of 300,000 bus, truck and taxi drivers. De Soto explained how they'd fallen into a trap. They typically called themselves communists but were, in reality, entrepreneurs interested in turning a profit.

His actions were unpopular with the Shining Path. Guerrillas machine-gunned de Soto's car and crashed an explosives-laden vehicle into the ILD's Lima office, killing three.

De Soto didn't back down, and farmer militias and trade unions turned against the Shining Path. Its key leaders were slowly driven from the countryside into cities, where most were captured in 1992.

De Soto's quest to reform Peru isn't over. He's served as an adviser to Alan Garcia, Peru's president from 1985 to 1990, and to Alberto Fujimori, who was elected in 1990 but ousted in a coup two years later; and other leaders. In 2000, de Soto published a second book, "The Mystery of Capitalism: Why Capitalism Triumphs in the West and Fails Everywhere Else."
BY REINHARDT KRAUSE