How government causes poverty in Latin America

As frequent readers of this blog will know I am an ardent believer that government with their ridiculous believe in regulating everything is the main cause of poverty in the developing world. In particular Hernando de Soto from ILD (ignore Clinton’s ugly mug on the home page) in Peru has done a great job uncovering this and therefore debunking years of idiotic myths about Capitalism being the cause of poverty.

Now the Inter American Development Bank has funded a major study with De Soto to map out so called “dead capital” in Latin America. The results were recently announced and are astounding for most readers:

In each country, ILD analyzed the characteristics of the informal or “extralegal” sector, access to property rights and business formalization, and the magnitude of so-called “dead capital,” assets that cannot be used in formal transactions, such as establishing collateral for loans, because they are not recognized legally.

“A lot of tools that are necessary to build the growth machine are not in place in Latin America,” said De Soto. “And that is certainly one of the most fundamental way to reach the majority.”

According to ILD, nearly 92 percent of businesses, 76 percent of rural properties and 65 percent of the dwellings in the 12 countries it has studied so far are in the informal or “extralegal” sector. This includes homes and land without valid title or registry, with legal irregularities, or restrictions for their transfer; as well as businesses that are not registered or that operate without full legal permits or without limited liability.

Regarding obstacles to formalizing property holdings, the study found that the process to buy, register, title and obtain building permits for a plot of land takes 101 days and costs $1,040 in El Salvador, which has a thriving market for urban lots accessible to low-income families.

In contrast, in Guatemala the same process can take 4,307 days (almost 12 years) and cost $9,312. Per capita income is $4,880 in El Salvador and $4,229 in Guatemala (measured by purchasing power parity).

Of the 12 countries in the study, Colombia has the quickest and least expensive process for registering a business (16 days and $555). In Haiti, the region’s poorest country, it takes 117 days and costs $2,902. Colombia’s per capita income is $6,904. Haiti’s is $1,166 (measured by purchasing power parity).

As for the process of establishing collateral and obtaining credit, it takes 251 days and costs $981 in Bolivia (GNP per capita $2,553), while in Ecuador (GNP per capita $3,758) it can take 1,454 days (nearly four years) and $2,195.

Due to these obstacles, most of the population in Latin America and the Caribbean is forced to live in the informal sector. Since they cannot legally protect their property or use it as collateral to obtain credit, low-income people invest less in their properties and businesses, missing opportunities to build up their assets.

To overcome these hurdles, ILD recommends a series of “legal shortcuts” that would help establish reliable records for “extralegal” assets, organize informal sector businesses efficiently to boost their productivity, and expand markets by identifying people, businesses and documents and making transactions traceable. People and businesses that now operate in the shadows would then be able to enter contracts, demand legal protection, obtain formal credit and expand the scale of their economic activities.

Unfortunately many of the conclusions are what you would expect from a development bank. Invest more money in infrastructure:

Mexican business leader Carlos Slim, chairman of Telmex, argued that the best way to create opportunities for the majority was to generate sustainable economic growth. But to achieve higher growth rates Latin America would have to increase its investments in infrastructure and education, he added.

Since governments face fiscal constraints to boost spending, Slim called for more public-private partnerships to develop infrastructure, where the private sector can provide the needed financial resources. Mexico, he added, should invest some $65 billion in infrastructure every year – roughly 8 percent of its gross domestic product – but still needs $30 billion more.

I think this would be a huge error. What they need to do is get out of the way. Those of us from US and Western European countries complain about size of government, but most of us don’t realise the shear size and inefficiency of government in most Latin American countries.

They could easily close down most government agencies in most Latin American countries and everyone besides government workers would be much happier. The distrust of government is much higher there than we see here in Denmark or even in the US. Unfortunately this is the distrust that has caused people to vote for people like Evo Morales and Chavez.

I respect entrepreneurs of any kind (and no, social entrepreneurs are not entrepreneurs). I have tried to document some of the small scale entrepreneurs in my blog series People like me. These people are smart, courageous, independent, proud and everything I aspire to be and I hope this report manages to highlight the difficulties but also ambition and potential of them.