Black Economies and the Poor
There is much abstract argument about the merits of the free market versus a planned economy, but a careful look at the real world underscores the futility of such abstractions.
It is now widely believed that the Western nations, especially the United States, are primarily responsible for Third World poverty. Indeed, an entire branch of modem theology has incorporated the accusation that Latin America is poor because it has been plundered by the United States. But an honest look at the facts reveals that much of Latin America's difficulty results from the destructive policies of its national and regional governments. It is encouraging to learn that despite the failure of the "official" economy to provide, many in the Third World contribute to and benefit from—indeed, survive on—an "informal" economy.
The Other Path (El Otro Sendero) is a recently published study by an independent research institute in Lima, Peru, headed by the international economist and lawyer Hernando de Soto, into the informal (black) economies of Peru and several other countries. Similar research in other Third World countries bears a remarkable resemblance to the findings of the Peruvian team, showing the underground economy to account for 60 to 70% of the GNP.
The study reveals that the informal sector is a substantial part of the Peruvian economy. For example, in Lima, informal businesses employ nearly half a million persons and they operate 83% of the covered and open air markets. Informal industry manufactures almost the entire range of factory-made goods: furniture, television sets, washing machines, clothes, kitchen utensils, bricks, cement, electrical plant, shoes, and various tools. Even public transport and the building industry are dominated by the "informals." Unofficial builders have constructed entire neighbourhoods, including hundreds of thousands of dwellings, and if Lima were forced to use the official municipal transport system alone, 95% of the population would be without transportation. The study found that some 60% of the Peruvian total working hours are worked in the unofficial sector. These are not sweat shops, but unofficial businesses carried on by the poor themselves in order to survive.
An Obstacle Course
Hernando de Soto's team tested the pressures driving Peruvian entrepreneurs into the informal economy. The team had an ordinary worker apply to open a small clothing workshop in accordance with all the usual requirements. This worker presented his application and followed it through eleven different ministerial and municipal departments. Ten public servants out of eleven demanded a bribe. The would-be entrepreneur was instructed to refuse any such request, to find out exactly how long a refusal would delay the application. However, he twice complied with the demand, for without the bribe his application would simply have disappeared. It took the applicant 289 days to see his request through to successful conclusion at a total cost in expenditures and lost working time of approximately $ 1,231.00 (which was 32 times the minimum wage in Peru in 1986). This, and similar experiments, proved it entirely out of the question for an ordinary person in Peru to start a small business in the legally prescribed manner.
Third World countries are not alone in suffering from bureaucratic inertia and plain corruption. Nor are they the only ones with substantial informal sectors. Spain is estimated to have at least 300,000 non-taxpaying small businesses whose annual turnover is roughly a quarter of the GNP. In commenting on this phenomenon, Jean-Francois Revel writes that it is intellectually and politically irresponsible not to study the deeper causes of the so-called informal economies. Revel points out that the implications of the studies done of the Spanish, Peruvian and Italian economies imply that were the small enterprises in the underground sector of the economy taxed in the normal way they would not be able to survive. According to Revel, "The proper question for lawmakers to ask themselves is why their laws and regulations should be so heavy-handed that a significant fraction of national production would be condemned to death if they were applied." He then asks, "What is wrong here, and what should be changed—reality or the law?"
This question comes at a time when even the totalitarian regimes are beginning to realize (both in the Soviet Union and in China) that a healthy and productive economy demands a greater measure of freedom and incentive. As Revel concludes:
So it is possible to shake off ideology if one is prepared to look at what has really happened. The ideologue strives to demonstrate that his system solves every problem. This intellectual absolutism is quite out of date. To take due note of the fact that the market has displayed more vitality and creativity than socialism, and most of all in the poorest countries, does not amount to asserting dogmatically that it always has all the answers, everywhere. Far from it. But at least it does not make the answers radically impossible.
—Jean-Francois Revel, "'Black Economies': The Liberalism of the Poor," Encounter, May 1987.)