Restricting Policies and what to do

Lessons from Hernando De Soto's work in Peru

Hello there,

A few weeks back I spoke about how learning from other emerging markets is more relevant and helpful to Africans, this week I’m practising that here.

Hernando de Soto Knows How To Make the Third World Richer than the ...

Source: Reason Magazine

Adapted from this conversation

“It takes a year-and-a-half to open a bakery in Egypt. And I've got every photograph of every document of what you do with the photograph to seal everything”*

That’s Hernando de Soto, he was born in Peru but grew up in Switzerland. When he moved back to Peru around 1980, he was shocked by the poverty. In the streets of the capital, De Soto saw people carrying stuff to sell on their backs or pushing stuff along in tiny little carts. A businessman himself, so he started talking to the street vendors about their businesses. He found out the street vendors didn’t want to be on the street.

The vendors wanted to have a little shop somewhere, a roof, running water, and De Soto discovered many of the vendors actually had enough money to move into a shop. Their problem was they didn't have bank accounts. They didn't have the permits they were supposed to have. They were living outside the law. De Soto wanted to understand why it was so hard to start a legal business in Peru. So he did the thing that wound up making him famous - he did an experiment. He tried to set up a little business, a small shirt factory, entirely inside the system. He hired a lawyer and a few students and told them to go out and do everything you have to do to make this a fully legal factory and figure out how long it takes.

Guess how long it took?

They had to get 11 different permits from seven different ministries. They were asked for bribes 10 times, had to actually pay bribes twice, there were lots of delays.

It took them 278 days!

Now if you’re just starting out, you can’t wait for nine months just to get all the necessary permits, so you’d start out illegally.

I’d pause the story here for a bit. The problem here is something most people in developing economies can relate with, starting and building businesses face many government-induced restrictions.

Last week, We looked at what was really powering education in this period. But in pointing that out, I started wondering what can we do while we wait for the systems/infrastructure to catch up?

In the past few months, we’ve been reminded of what govt policies can do to businesses in Africa: In Nigeria, the ban of bike hailing in Lagos, the introduction of new levies. In South Africa, the ban on booze and the pause on online sales of non-essential items, even in  Ghana - government wanting to break MTN’s dominance.  Businesses rely on policies to thrive.

What did De Soto do? He started an Ad campaign. Reminding the public and govt that life can be better if only they had access to capital and it was easier to run their businesses legally. And after facing a lot of resistance -- as much as assassination attempts -- it worked. The government started paying attention to the restrictions poor people faced. It got easier to start small businesses. There was even a TV show where the president of Peru himself heard the problems people were having and ordered them fixed on the spot. Peru's economy has improved, but of course, it remains a poor country. And De Soto's critics say his ideas are just too simpleminded or that his fix doesn't help the poorest of the poor. Still, De Soto's work got noticed outside Peru. He started getting calls from presidents and prime ministers in other countries. The World Bank in Washington, D.C., used De Soto's ideas to create this annual report - it ranks countries all around the world on how easy it is to start and run a business.

Hernando de Soto is probably more famous for popularizing the concept of Dead capital:  assets that can’t be converted to economic capital because they are informally held. The uncertainty of ownership decreases the value of the asset and/or the ability to lend or borrow against it. Think of owning a piece of land without official documents, for all it’s worth you can’t take it to a bank to be used as collateral for a loan or use it in an official agreement. This documentary does justice to explaining his work.

Having said that, Learning from his work on government policy. We can’t just wait it out, we’d have to keep asking for it because that works.

After electing government officials into power, the next best way of asking for change is lobbying. 

In lobbying, because finding policies of African national governments in the open is like looking for a needle in a haystack, relying on the mainstream media to give us a hint on all policies that are unhelpful would take forever, that’s why I think organisations like PolicyVault.Africa are doing a great job of increasing the awareness of government policies by curating them. 

Recent happenings are a constant reminder that it’s important to have one eye on building businesses and another on changing institutions.

One wrong policy can erase all the work done by brilliant minds.

*The Ease of Doing Business Index was created by the World Bank after seeing the effect of Hernando De Soto’s work. 2020’s Index says it takes 5-6 days to open a business in Egypt. 

I doubt it’s that spot-on as it also says it takes 7 days to fully set up a business to comply with all basic permits in Nigeria. As someone who’s aware of the process, on average if you don’t know someone inside, it takes about a month or more. 

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