Tuesday, July 6, 2010

Economic Development, Despite the Law

I am reading Hernando de Soto's "The Other Path" for an upcoming class. I highly recommend it. His points are difficult to summarize in a short blog post, but I'll do my best. Writing in 1989, de Soto and his colleagues examined the poor "informals" residing in Peru's capital, Lima.

The legal process in Peru at that time made it next to impossible for most residents to do anything through formal means. Acquiring formal housing took nearly two decades. The above photo shows de Soto's staff holding a 30-meter-long list of procedures that were required to start a small business.

So, the informals took the law into their own hands, setting up 60% of the city's housing and establishing 95% of its bus routes without the proper government endorsements. De Soto argues that such "illegal" activity did not reflect an outlaw mentality, but rather, economic entrepreneurship.

While these informal residences and businesses were surprisingly efficient, they wasted a huge amount of resources defending their property and bribing public officials. These residents had no guaranteed property rights, which severely hampered their willing to invest. After the book's publication, de Soto's organization worked with Peru's government to drastically simplify these legal processes.