De Soto Interviewed
Hernando De Soto offers his views in this interview
it takes you 549 days to get a license to operate a bakery in Egypt and that is with a lawyer. Without a lawyer, it takes about 650 days. In Honduras, it costs an individual entrepreneur 3.765 dollar and 270 days to legally declare, register, and start up a business.
To create a mortgage in Mexico it takes 2 years. It takes 17 years to get a title on a house in Egypt; in Peru it used to be 21 years before we corrected that, and in the Philippines it’s 24 years.
…People in the so-called informal economy are the biggest entrepreneurial class in the world. There are more entrepreneurs in any Third World country than there are in the rich countries.
For Discussion. What is different about being an entrepreneur in the Third World vs. in the rich countries?
Mar 14 2005 at 9:38am
Everyone’s an entrepreneur, to some extent. Some are just better at it than others. Entrepreneurs notice profit opportunities and act on them. Where do these opportunities come from?
Some change in circumstances; for example,
1)a change in technology that makes a new product viable (for which there is a demand)
2)the emergence of a complementary product, which increases demand for an already viable product which isn’t yet produced (enough)
3)a rise in the price for an existing product, which increases demand for a(now) viable substitute
4)the existence of transaction costs, the reduction of which is valuable to the transacting parties
5)new laws/regulations/taxes that suddenly lower certain people’s wealth, which some people want to avoid, and others want more of, and
6)unexpected/uncertain inflation, which provides opportunities for arbitrage.
The opportunity to profit from 1-4 is present in countries with well defined and enforced property rights (ie, “rich” countries), where entrepreneurs can reap the benefits of their own actions, while 5 and 6 are most prevalent in corrupt (ie, “poor”) countries, where the potential profits from “unproductive” entrepreneurship beat profits from other sources hands down. People tend to go to where the money is…
Mar 14 2005 at 9:53am
Here in Denmark you can register a corporation in less than 10 seconds online. (This requires the assistance of an attorney; without an attorney, it takes a couple of days.)
Mar 14 2005 at 9:57am
It looks as if in the third world country you may be more likely to do so illegally (through the black market – true in some rich contries too), where in rich countries you can do so legally (for the most part). Jim Rogers chronicalled the black market nicely in his travels – “Investment Biker”. Cannot remember where I read this, but doesn’t Italy have a big underground economy?
Mar 14 2005 at 10:40am
In the US, you almost need to do nothing to set up a business where the income flows through yourself (taxed at your rate, a “sole proprietorship”). If your company has a name other than your own, you need to register “Doing Business As (DBA)” with the state, but that is more about avoiding fraud issues than actually registration.
It took about two weeks to set up a corporation (an independent taxable entity).
On the other hand, it did take six months for a certain county in Virginia to issue a building permit to land my house builder owned…
Mar 14 2005 at 10:05pm
Also see work by my colleagues at the World Bank, providing these De Soto-style benchmarks of the costs of regulation across 145 countries:
Lawrance George Lux
Mar 15 2005 at 3:23pm
Actual taxation ranges 10% of rich countries, but at least 30% of total income must be keep in Slush Fund form to pay for nonAccountable expenses. The business-owner in the Third World also faces potential Boycott, if they do not employ Popularly-accepted levels of employment. lgl
Mar 18 2005 at 1:30pm
I lived in Malawi for a couple of months on a mission for the World Bank. A few things I noted relate to the discussion question.
1. Market-dominant minorities. Virtually every business I encountered in Malawi was run by a European, a Chinese, or an Indian: almost never by a Malawian. By and large, I’d say the living standard of the ethnic minorities there was comparable to what they’d have enjoyed in the West, though their lifestyles were very different. For example, they had lots of nice carved furniture, they ate well, they had servants, but they had to supervise the construction of their homes, and the latest books on Amazon would take months to arrive. The ethnic minorities made up a tiny part of the population.
2. Dogs. Really nice homes were often protected by fierce dogs, which were trained to attack black people rather than white people (though a couple of them chased me once nonetheless). They were not on ropes.
If you can make money in the Third World, you can live really well in some ways. And because so many businesses are scared away, there are a lot of opportunities to do it.
Why the Malawians were less entrepreneurial than the foreigners was something that remained a mystery and a sort of scandal to me; even though I could think of a lot of explanations, I couldn’t bring myself to believe that it was true.
Mar 20 2005 at 1:24am
I knew two entrepeneurs in Chicago, about a decade apart, who transitioned from selling marijuana to selling hip clothing. Government barriers to legal entrepeneurship would have been a huge disincentive to achieving the government’s presumed desire.
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