Sunday, October 18, 2009

Why We Are Where We Are - Bureaucracy

When Peru's military-socialist rulers announced in 1979 that they would restore constitutional processes after 12 years of dictatorship, Hernando de Soto decided to come home. He held a graduate degree in economic and at the age of 38, he was a managing director of Switzerland's largest consulting engineering firm. Now, he would run a mining venture and help to to chart his country's return to democracy.

After a year returning to Peru, he stood by Rimac River and pondered communities on either side. Each covered almost 3 acres and contained homes of about 500 people but there were startling differences between them.

In community called Daniel Alcides Carrion, most of the houses were crude huts made of mud bricks or cardboard and plywood. Yet, these were not destitute people as their shacks sprouted TV antennas and refrigerators and other modern appliances were visible through open doorways.

Across the river stood Masrical Castilla. It had 3- and 4- story brick homes with neat gardens and paved sidewalks. Many merchants lived above their businesses - a pharmacy, grocery, tire store and shoe shop.

Curious, de Soto talked to residents, police and government officials in the 2 neighbourhoods. What he discovered was tantalising: both were founded at the same time, by the people from the same village. He even found brothers living across the river from each other. So, why do some people prospered while others do not? Why are some nations poor, others rich? De Soto was perplexed.

The crucial difference between Mariscal Castilla and its impoverished sister village was the former's elected leader had hammered on Lima's politicians and bureaucrats for six longs years until they granted land titles to the residents. Thus secured eviction, the homeowners did the rest by borrowing, by saving from meagre earnings and by sheer sweat. In 10 short years, they had improved their homes to a stunning value of 41 times that of the untitled dwellings in Daniel Alcides Carrion.

In Daniel Alcides Carrion, the residents were still squatters, who could not sell their land, add and rent rooms or borrow money to set up businesses. They invested chiefly in appliances, and pickup trucks to move them if they were evicted.

De Soto deems that "the legal protection of the fruits of a man's labour's and creativity, what we call property rights, turns out to be a crucial liberator of enterprise".

In 1981, de Soto established Institute for Liberty and Democracy ("ILB") to study economic and political problems and advance ideas for their solutions. It soon grew to 38 full-time workers and hundreds of consultants and volunteers.

Amongst his first studies was to find out what the little guy who wants to start his own enterprises runs up against. He assigned a lawyer and 4 volunteer university students to set up a 2-sewing machine garment factory. With stopwatches and notebooks, they set out to get all the government certifications required to operate legally. "Don't pay any bribes unless you absolutely have to", he instructed.

The team visited government offices, waited in lines and filled out forms. They received 10 bribe solicitations and were compelled to pay twice. The total cost in outlays and lost income was $1,231, or 32 months' pay at the legal minimum wages and an individual would have to spend 289 days, 6-hours a day, to become certified.

He then sent a researcher to Tampa, Florida to rerun the experiment. He got complete legal certification in 3.5 hours.

Many of Lima's poorer citizens, de Soto found, have simply left the formal legal systems. Though they still pursue legal ends - building houses, manufacturing and selling goods - they do so without meeting government-mandated regulations. dD Soto called them the informal sector. Astoundingly, informal sector contributed to 52% of the country's manufacturing companies and employ a third of its industrial workers, producing everything from bicycles and mining equipment to clothes and furniture. Lima's 91,000 unlicensed street vendors sell $322 Million worth of goods, including 60% of city's food.

But the informals waste tremendous resources just to keep operating. They pay 10% to 15% of their gross income in bribes. They stay small, thus losing economies of scale. While the legals get the credit from state-regulated banks, informals must pay quadruple interest rates on the back market. Simply by removing the legal barriers that stunt their growth, the ILD estimated that the informals would increase Peru's GNP by over 50% in a decade.

De Soto concluded that Peru - like other Third World Countries - has never really tried free-market economics. Rather, the privileges of the few are protected against competition of newcomers. Too many of Peru's 'legal' capitalists, far from being real entrepreneurs, resemble the privileged monopolists of the 18th century. An this produces inefficiency, corruption, stagnation and revolution.

In 1984, De Soto launched a revolutionary movement of his own - a peaceful, grassroots campaign aimed at democratic reform. When Lima's Marxist mayor imposed stringent regulations on all street vendors, ILD economists explained how the new rules would aggravate the bribery problems, waste countless hours in bureaucratic delays, and raise food prices for everybody. De Soto presented petitions denouncing the regulations from 111 of the 120 vendor organisations. Astounded city authorities quickly backed down.

In 1986, the ILD unveiled an "ombudsman" program. The first issue : legal titles for homeowners without them. In 1 month, the ILD gathered 300,000 complaints. Within weeks, then-President Alan Garcia sped an ILD-amended title law through parliament. Then local politicians, fought to see who would get the privilege of handing out the certificates of private property to tens of thousand of informals.

In November 1986, De Soto published the ILD's findings in a book called "El Otro Sendero" ("The Other Path"), a powerful indictment of Third World government's negative interference in the economy.

Today, de Soto presses his crusade to cut down government bureaucracy in Peru and elsewhere. "I now know why some countries are poor and others rich. We're a world of 169 countries, and only about 25 of them have 'made it' economically. They were able to do so because they stripped governments of the power to deprive the humblest citizens of the fruits of their industry and creativity. The answer boils down to one word : Freedom".

p.s. The above article was extracted from November 1991's Reader's Digest. Can you find any similarities between our current Ibu Pertiwi and Peru back in 1980s? This is a wake-up call for us. No, we don't need politics to run our lives but we need conscientious people, the like of De Soto, to lead the right way out of this Third World phenomenon.

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