The Power of the Poor
 
Bureaucracy and Corruption People in the developed West are familiar with bureaucracy—at least they think they are. But they have no idea just how stifling bureaucracy can be. By contrast, Third Worlders would find what we in the West experience as bureaucratic inefficiency as something tolerable and relatively well-organized. We in the West have little experience with the needless, mind-numbing procedures that smother most chances of economic advancement in the developing world. It’s on such bureaucracy that corruption is built.

In some countries, bureaucracy happens by accident. In others, it is designed to keep the unconnected out of the system — unable to compete.

An Impossible Tangle Of Bureaucracy

The poor aren’t breaking the laws, the laws are breaking them.
When Hernando de Soto began studying the possibility of giving the poor access to formal property in Peru during the 1980s, every major law firm he consulted assured him that setting up a formal business would only take a few days. De Soto figured that might be true for him and other people that had resources and connections, but he had a hunch it was not true for the majority of Peruvians.

As an experiment, he decided to set up a two-sewing machine shop in a Lima shantytown. He hired two young women and put them under the supervision of someone who knew what steps were needed. Then, they listed and timed each and every step it took for a typical entrepreneur to get through all of the red tape and paperwork. They included time spent on buses and waiting in lines.

They discovered that to legally set up this tiny business, it took more than 300 days working six hours a day. The cost was more than 32 times the minimum wage.1 In the US, it takes just a few weeks and can cost less than $1,000 in most states.

In every country in which de Soto and the Institute for Liberty and Democracy (ILD) work, they do a similar study of the bureaucratic steps, costs and time it takes the average person legally to open a small business or to get title to land. In country after country, the statistics are staggering.

Consider Tanzania: It takes an average of 379 days to start up a business. Moreover, it costs an average of $5,506, a figure many, many times the per capita income of $275.

Over the life of a Tanzanian business that lasts 50 years, this means that the owner will have to make cash payments of $91,000 and personally spend over four years in government offices petitioning for various licenses, permits, and approvals. During that time he could have earned another $9,350. Then, he has to wait another nine years to receive the permits and approvals he has petitioned for. Is it any wonder that 98 percent of all businesses in Tanzania choose to be extralegal?2 Or that the system is highly corrupt? How else could a business owner get things done in an efficient manner, but to grease the palms of underpaid functionaries?

No matter where you look, where you find more bureaucracy, you’ll find greater corruption. In Egypt, it takes 189 days to complete the 86 steps and costs $1,550—equal to a year’s pay. No wonder 82 percent of Egypt’s entrepreneurial class is extralegal.

The ILD has found similar figures and percentages in almost all of the countries it has studied—and Third World countries are not alone in this. Many post-Soviet nations are also hopelessly bogged down in red tape. In Albania, for instance, it takes 126 days to open a small restaurant in the capital city, Tirana. It costs $3,350—also a year’s pay. No wonder 93 percent of Albanian businesses are extralegal.

Consider what happens just south of the U.S. border in Mexico: It costs $7,536 to open a small bakery and takes 123 days. The average Mexican makes $9,400 a year. If you have a family to feed and were faced with these kinds of obstacles, wouldn’t you travel north?3

Highjacked Political Processes

It is no surprise that bureaucracy and corruption go hand in hand, and de Soto argues that this is not due to culture but rather to political structure. What de Soto has said about Peru holds for many developing world states:

There appears to be a tradition among our country’s lawmakers of using the law to redistribute wealth rather than to help create it... A state which does not realize that wealth and resources can grow and be promoted by an appropriate system of institutions, and that even the humblest members of the population can generate wealth, finds direct redistribution the only acceptable approach.4

The High Cost of Buying Real Estate in the Developing World

The ILD has quantified, in many countries, the costs and length of time to buy land, have it formalized, and get a building permit. Costs exclude cost of land. Figures in parentheses are for the cost as a function of per capita income in each country. Some examples:

  • In Guatemala, 4,307 days and $9,312, (4.3 years’ pay)
  • In Argentina, 3,974 days and $12,592 (4.3 years’ pay)
  • In Mexico, 779 days and $13,610 (2.2 years’ pay)
  • In Peru, 236 days and $3,923 (1.6 years’ pay)
  • In Albania, 225 days and $816, (three months’ pay)
  • In Egypt, 1,371 days, $5,070 (more than 3 years’ pay)
  • In Tanzania, 8 years and $ 2,252 (more than 3 years’ pay)*

* All stats are from the ILD and World Bank.
Instead of working to create wealth, many developing countries’ businesspeople instead spend great time and money jockeying for position with government leaders, so their businesses will be favored by laws and decrees that eliminate competition or give them government funds.

Businesses channel their natural competitive zeal into establishing close ties with the political and bureaucratic authorities, instead of into a contest to serve consumers better... A legal system whose sole purpose is redistribution benefits neither rich nor poor, but only those best organized to establish close ties wiIl ensure that the businesses that remain in the market are those which are most efficient politically, not economically.5

Laws in this world are based not on ethics or marketplace realities, but on who will benefit and how. Thus, many governments pass tens of thousands of laws every year, increasing bureaucracy and creating obstacles for those not close to political power. People in the West should be concerned, too. This phenomenon is not exclusive to the developing world. Many Western countries are also marching down this self-destructive path.

Of course, bureaucrats don’t want changes that will erode their influence. They want to maintain their positions so that those that can pay will circumvent the laws. From these “toll booths” they enrich themselves. Such is the essence of corruption.

In this state of affairs, people learn early in life that wealth comes not from labor, but from wheeling and dealing with those in power. In the struggle for transfers, favorable laws and deals from government, no means are spared. But prosperity is destroyed in the process. As corruption grows, the people suffer.

A Common Sense Way Out

But there is a way out: faced with the onslaught of the Shining Path and amid popular uproar and discontent, the Peruvian government, during the 1990s, agreed to institute many reforms to the legal and property systems. The reforms, developed and championed by the ILD, reduced both time and cost of titling property from six years on average (207 steps at 52 governmental offices) to 45 days (30 steps and four governmental offices). Costs to secure titles dropped from $2,156 to $62.6 Overall costs were cut by 99 percent.

On the business side, the new laws cut the cost of entering business from 300 days to just one day.

These reforms, along with change in the nation’s macroeconomic policy (also initiated by the ILD), gave Peru very high growth rates—including the world’s highest (12 percent) in 1994.7 But the battle is far from over. Old power-centers continually attempt to roll back reforms so as to reinstate their fiefdoms. Still, Peru is fortunate compared to its neighbors. Any reform is but a dream to citizens and entrepreneurs in most developing nations.
References:
1 de Soto, Hernando. The Mystery of Capital: Why Capitalism Triumphs In the West and Fails Everywhere Else, New York, NY: Basic Books, 2000. p190.
2 From the ILD’s Tanzania Executive Summary, graph p3.
3 All stats for length of time to open businesses are from ILD, especially from a presentation made in Cairo, Egypt, in October, 2006.
4 de Soto, Hernando. The Other Path: The Economic Answer to Terrorism, New York, NY: Basic Books, 1989. p189.
5 Ibid. p191.
6 de Althaus, Jaime. La Revolución Capitalista en el Perú, Fondo de Cultura Económica del Perú, Lima, Peru, 2007. p66.
7 de Soto, Hernando. op.cit. p xxvii.