Informals of the world unite

For an economic tract, Hernando de Soto’s book has had a remarkable success. It was first published in Lima, its subject, in 1986, but at once became a best-seller throughout Latin America. It is said to have been read with interest in China and the Soviet Union, and this summer de Soto was invited to Washington to discuss it with the American Treasury Secretary. De Soto says he was prompted to write it by Mario Vargas Llosa, who himself introduces it and has in effect made it his manifesto for the Presidential election in Peru next year.

Its first part is a report of research done in the Peruvian capital by de Soto’s own Instituto Libertad y Democracia. ‘It is in the cities,’ de Soto claims, ‘that today’s history is being written’; and it is being written by the ‘informals’. The facts are certainly striking. In the 1940s, two-thirds of Peru’s people lived in the countryside. Now, two-thirds of them do not. In the 1940s, most of those who lived in Lima itself paid rent. Now, nearly half the dwellings there have been put up without the usual legal permissions and acknowledged financial institutions, and those who live in them believe they own them. In Lima (as in many other cities in poor countries, especially those afflicted by debt) more than half of these people work in an analogously ‘informal’ economy; if they travel to work, there’s a nine in ten chance that they do so on one or another form of ‘informal’ transport. The levels of investment in what they do are low, and so also, therefore, is their productivity. But at least they are in work, and unemployment in the city is much less than the official figures suggest. In Peru as a whole, de Soto claims (he is a former managing director of Peru’s Central Reserve Bank) ‘informal’ activities – called, by those who dislike them, ‘black’ – may contribute as much as 40 per cent of the domestic product.

Vargas Llosa exaggerates when he says that ‘the vast majority of those who write and theorise about the backwardness and iniquity of life in the Third World do not seem to be aware’ of this informal economy. Ever since Keith Hart invented the phrase in the early Seventies to describe how he supported his fieldwork in Accra, it has been in common use, and one or two official development agencies have even proposed it as a solution for what seems otherwise intractable. But few have done more detailed work on it than de Soto’s ILD, and none has gone so far as de Soto himself in seeing a whole future in it. And none has written about it so well.

The success of The Other Path, however, is not mainly due to the research on which it’s based, or even to the good writing. For at the moment at which it appeared, it met a mood, in Peru itself and beyond. In Peru, a reforming military government had been in power between 1968 and 1975 (it continued, some-what weakened, until 1980). At the height of its zeal, this junta was issuing more than a thousand edicts a day. (In the Peruvian Administration, as one member of it said to de Soto, there is still no time to think.) But little was done for the urban poor, those in the countryside benefited little from the proclaimed changes in the agrarian structure that were meant to help them, the rich, to their dismay, were interfered with, debts began to mount, and the official economy continued to sag. Meanwhile the guerrillas of Sendero Luminoso, the other other path, came to control large parts of the highlands and to threaten daily life in the capital itself. Belaunde, whom the Army had replaced in 1968, returned to power in 1980, but was able to do little. And the rhetorically more radical Garcia, desperately defying the foreign creditors and even his own banks, has not stopped the decline. For de Soto and Vargas Llosa, who describe themselves as true liberals, the Peruvian state is no longer the solution, but the problem.

Many economists have agreed, and not just with reference to Peru. In her tempestuous tenure at the World Bank in the early Eighties, Anne Krueger insisted that her staff try to calculate the ‘transaction cost’ of economic activity in poor countries, the ‘rents’, as some economists think of them, that bureaucrats exact for their permissions, and the time and money lost in getting anything done at all through official channels. The calculations were something of a damp squib. Even to the uncharitable eye, these costs, so far as anyone could determine, proved to be only 5 per cent or so of national revenues. But conviction, as usual, overrode the findings, and the Bank, the International Monetary Fund and others have insisted in what have come to be called their ‘restructuring’ programmes for countries in trouble that ‘the state’ cut its staff and other costs and withdraw from many of its customary spheres of involvement. The common project is to fight what de Soto calls ‘mercantilism’.

But mercantilism, as Rondo Cameron explains in his cool review of the world’s economic history, is at best a baggy notion; it has meant many different things, been deployed in many different fights, and explained little. For Adam Smith, it was the success of merchants persuading the Crown that profit lay in exporting much and importing little and accumulating the difference in gold and silver. For Germans a hundred years or so later, by contrast, as for de Soto himself, although his attitude towards it is more like Smith’s, it was ‘in its innermost kernel’, as von Schmoller described it, ‘nothing but state-making – not state-making in a narrow sense but state-making and national economy-making at the same time’. Latin America inherits a tradition that would have been congenial to these Germans: the assumption there has always been that a centralised state is the guide and guarantor of the nation. But de Soto is wrong to suppose that the canonical success of Britain in the 17th and 18th centuries was due to an army of energetic proto-informals who repeatedly defied the rules. If it had been, Smith’s polemic would have had no point.

De Soto also ignores the countryside. Like most states in Latin America, Peru is unable both to feed itself and to provide a decent level of living for most of its rural inhabitants. Successive agrarian reforms, by Belaunde in his first administration in the Sixties and by the military government that followed him, have not worked. The interests of the large land-owners have prevailed, prices remain low, marketing is bad, and the schemes which have been foisted on the rural poor have only increased their inclination to move to the cities.

And yet, at least in the once-forested areas to the east of the Andes, there is a new prosperity. Twenty years ago, as Edmundo Morales describes it, the small town of Tingo Maria, on a tributary of the Amazon, was just one dirt street. There was a tourist hotel, three roach-ridden establishments for migrating workers, a few awful eating-places and a grisly whorehouse. Now there is a new tarmac highway. The national banks have opened branches. There are expensive villas, dozens of decent restaurants and hotels, a high-class whorehouse (girls, like rock bands, fly up from Lima for the weekend) and some extremely expensive night-clubs. Three dealers sell Japanese vehicles (Morales saw an old man come in with a sack full of dollar bills and walk away – he could not drive – in possession of a new Toyota pick-up.) The town supports a professional football team; the players are bought from elsewhere in Peru and score regular victories against the best. There is even an agricultural university. A little of this, it is true, is due to Belaunde. Anxious about the rising rate of immigration to Lima, and not wishing to disturb the rural status quo, he encouraged poor Peruvians to open up the one last great empty area of the country, and his government started some co-operatives for cacao and other crops there. But most of these have failed, and the ones that remain pay poorly. Tingo Maria’s new prosperity, cosmetic though it may be, has a different, one might say more ‘informal’ cause. ‘Thank God,’ a retired police officer said to Morales after an all-night party, on which Morales thinks the man must have spent somewhere in excess of two and a half thousand dollars: ‘Coca makes dreams happen.’

Local Indians had long chewed the leaf. The Incas, when they conquered these people, forbade them to use it and reserved it for themselves. The Spaniards, however, sensing the political advantage, and knowing that the substance staved off hunger and fatigue in farmers and miners, allowed it. And successive Peruvian governments have continued to grant and to try to control a certain level of production. But it is only in the past twenty years or so, as the demand for refined cocaine hydrochloride has risen in America and Europe, that this ‘white gold’, as it’s locally known, has escaped all controls and given previously poor people a higher income than they can earn doing anything else anywhere else in the country.

In Peru, however, as in Ecuador, where it is also grown, the benefits of coca production are local and ephemeral. Peruvians and Ecuadorians cultivate the plant and manufacture the paste. But small planes then take most of this material to Colombia, where it is turned into hydrochloride for export. That is where the big money is made. Morales does not make it entirely clear why it is not also made in Peru itself. The reason does not seem to lie in effective enforcement of the law. Morales’s host at the party, who had left the Police to grow the plant and make paste, may have been an exceptional case. But those who remain in uniform are also often implicated in the wash of dollars in the region. (Morales, a Quechua-speaking native of the area, whose access to it seems to have been very good, is convincing on the question of the supposed complicity between the guerrillas and the cocaleros. He saw no such connection, and observed that official reports of ‘guerrilla attacks’ repeatedly coincided either with vendettas between gangs of cocaleros or with random raids, often on innocent people, by one or another of the armed police forces themselves.) The reason for the underdevelopment of the cocaine economy in Peru may be that there are too few opportunities for investment elsewhere in the country.

This is certainly de Soto’s argument. To make the point, his institute set up a small garment factory on the outskirts of Lima. The team decided to handle all the red tape themselves, as poor people would have to do, and to act as though they were commuting every day from one of the informal housing estates. They discovered that they had to obtain permissions from 11 different offices. These took in all ten months to achieve, and two bribes. The total cost, if one also includes the production that was lost while they waited, was well over a thousand dollars, 32 times the minimum wage. No wonder, as de Soto says, that those wanting to start a small enterprise do so directly, and thus illegally. ‘The state’ in effect encourages them to do so: but then this ‘state’ seems largely to be the municipal authority, which was responsible for 174 of the 289 days’ wait.

De Soto’s inference from this, beneath his too-diffuse polemic against ‘mercantilism’, is that ‘the state’ has to give more priority to production and less to what he calls ‘redistribution’; and that to do so, it has to reform its legal procedures. This is reasonable. Latin American states, like those elsewhere in the Third World, have tended to be run by people who have at least as much interest in diverting the goodies which state power brings to those whose support they seek (as well as to themselves) as they have in promoting wealth and well-being more generally. And as de Soto rather sadly points out, this is as true of the nominally left, purporting to represent the interests of lo popular, as it is of the right: one can indeed read much of his book as a criticism of the purportedly progressive officers who ran Peru between 1968 and 1980, and of Garcia. Moreover, these states tend to legislate by executive edict rather than through parliamentary debate.

Reasonable though this case might be, however, one might at first think that it’s all but hopeless. The vested interests are surely too many, and too embedded, for a Vargas Llosa or anyone else to be able to make much headway? Yet elsewhere in Latin America, if not yet in Peru itself, there have been changes since de Soto wrote his book. In Argentina, Menem is rounding on the Peronistas who voted him in. In Venezuela, Perez is taking a similar line against his own once-comfortable and self-serving supporters. In Mexico, Salinas has seen the red light in the international institutions and in his own reduced votes, and is trying to reduce the power of the corporate bodies, both business and union, which his party has been serving since the late Twenties. Even in all but ungovernable Brazil, the now crippled Sarney is doing something to restrain his state. Each is trying to cut his civil service, to sell off state enterprises and to cancel price-freezes and automatic wage-increases. Each, it is true, is still acting more more by presidential fiat than by debate, and each has yet to do much to make capital more accessible to those with few assets. And none can be said yet to have succeeded even in what he is attempting to do. There is far to go.

There is especially far to go in Peru, whose political classes have been as divided as any in the continent ever since they quarrelled about independence from Spain. Vargas Llosa himself lost his temper for a moment in the quarrels earlier this year, and publicly announced his withdrawal from the Presidential race. But he is now back in, and the most recent opinion polls – for what they are worth – suggest that he has a slightly more than even chance of victory. If his introduction to The Other Path is anything to go by, he thinks still in customarily rhetorical rather than pragmatic fashion. But with a de Soto to advise him, and with the support of the thousands of ‘informals’, who faute de mieux, and despite what de Soto claims is their fierce individualism, have been inclined to the left, even he might manage a little of the distance. There is small prospect, of course, of Peru or any other Latin American country itself going on to generate one of those ‘epochal innovations’ – the phrase was Simon Kuznets’s – which Cameron suggests explain the longues durées of economic history. But the Japanese are investing heavily in the continent, and de Soto is right to imply, against the still prevalent proud nationalisms there, that this is no drawback. It does not, so far at least, pre-empt internal reform.