My recent visit to Dakar, Senegal, where I met with longtime CIPE partner, l’Union National des Commercants et Industriels du Senegal (UNACOIS) was very informative and revealed how much impact a good CIPE partnership can bring to bear.
The decade-long partnership between CIPE and UNACOIS – a Senegalese private sector association with 70,000 members who operate small and medium enterprises, mainly in the informal sector — is proving increasingly consequential within Senegal’s civil society circles. CIPE and UNACOIS have partnered on three programs whose core objective was to enhance UNACOIS’ internal governance capacity.
What is the “rule of law” and why does it matter for entrepreneurs? In this video, Democracy that Delivers for Entrepreneurs keynote speaker Hernando de Soto explains how the legal and institutional structures that entrepreneurs and business people in the developed world take for granted are sorely lacking in many developing countries. As a result, those who want to start a business are often forced to operate in the shadows — lacking formal registrations, licenses, and any protection for their property.
De Soto’s organization, the Institute for Liberty and Democracy (ILD), estimated that up to five billion people may be completely shut out of the legal system. The results can be catastrophic and even world-changing.
When Tunisian fruit peddler Mohamed Bouazazi had his cart, scale, and inventory confiscated by a police inspector in 2011, he was so despondent that he set himself on fire — igniting the Arab Spring that brought down several governments around the region.
The great Peruvian democracy advocate Hernando de Soto has spent much of his career focused on bringing informal entrepreneurs into the formal sector, where their rights are enshrined in and protected by law. When citizens have the tools to access to capital and a business environment that supports them, they are able to move up the development ladder from the survival entrepreneurship of the informal sector to the prosperity of the formal economy.
De Soto’s work encouraged an important new way of thinking about how to create opportunity where none previously existed. In so doing, he and his organization, the Institute for Liberty and Democracy (ILD) in Peru, have had a profound and positive impact on the lives of millions in Peru and around the world. CIPE’s first partner 25 years ago, De Soto’s and ILD’s work personifies the proven belief that strong markets require vigorous governance and vice versa, and that open participation in both markets and government are a foundation of democracy.
In this most recent Economic Reform Feature Service article, De Soto looks at the necessity of institutions—and specifically the rule of law—to create and nurture a successful entrepreneurial environment.
Article at a glance
Creating wealth through entrepreneurship requires combining different resources (for example, the parts of a pencil or those of a watch). Institutions are crucial to facilitating that combination.
To do all the things that entrepreneurs in developed countries take for granted – like dividing labor, using property as collateral, protecting personal assets, expanding markets, or creating economies of scale – entrepreneurs in developing nations need the standards that only legal institutions can provide.
The wealthy in developing nations have convinced the poor that no matter how talented or enterprising they are, they will never succeed. In fact, the world’s most successful entrepreneurs just have access to superior legal institutions.
Informal entrepreneurs make up a large part of Cote d’Ivoire’s economy. (Photo: United Nations)
In Cote d’Ivoire, as in most nations in Sub-Saharan Africa, the government has pronounced its commitment to the creation of an entrepreneurial economy as a means to address the country’s sizable informal sector — despite the significant challenges posed by armed conflict and the legacy of civil war. CIPE’s current program in Cote d’Ivoire is aimed at enhancing the participation of the informal sector in policy reform processes and improving access to information on government economic and regulatory reform initiatives.
The existence of an informal sector in Cote d’Ivoire, along with a business organization to represent its interests, presents quite a contrast to the economic situation in the country during the immediate decades following its independence. Prior to its descent into civil war in 2002, Cote d’Ivoire was known to be the engine of stability, growth, and jobs in West Africa, with a more advanced private sector than most other sub-Saharan African countries. The economic capital, Abidjan, was known across Africa as ‘le Paris de l’Afrique’ – the Paris of Africa. However, the fact was that Cote d’Ivoire was experiencing political and economic dynamics that were a legacy of its colonial and post-colonial ties to France: autocratic political rule that was supported by economic etatisme or dirigisme.
In 1993, the death of autocratic ruler Felix Houphouet-Boigny coincided with a significant drop in the price of cocoa, the country’s main export commodity. These led to a rocky transition from autocracy to democracy, culminating in a civil war in 2002 that split the country into two regions, along ethnic lines. The ensuing period of prolonged political instability fostered political patronage and neo-patrimonial networks that exacerbated the country’s post-colonial economic predicament, thereby creating a sizable informal sector.
Last October U.S. Secretary of State Hillary Clinton traveled to Peru. Clinton’s Peru trip barely made the headlines, but her remarks deserve attention and continue to ring true worldwide, especially in Latin America.
On her agenda: discussing bilateral and regional cooperation and delivering a keynote on women’s financial inclusion. In her remarks, she emphasized that economic strength is derived from social inclusion, and “at the heart of social inclusion [is] a commitment to women and girls.” But unfortunately the world’s attention was elsewhere, caught up in controversy over Libya and other regional priorities.
One of the first people to walk through the doors after CIPE’s founding in 1983 was Hernando de Soto, President of the Institute for Liberty and Democracy (ILD) in Lima, Peru. Mr. de Soto had the fundamental insight that poor people were not part of the development problem but instead part of the solution. In his best-selling books, The Other Path and The Mystery of Capital, he explained how the lack of access to property rights and other institutions of a market economy keeps the poor in most developing countries trapped in the informal sector.
In one of its first-ever programs, CIPE teamed up with de Soto and ILD to begin bringing the poor in Peru from the extralegal economy into the formal economy and the rule of law. As a result of ILD’s unique and innovative property rights and business reform program, Peruvian society received $18.4 billion in net benefits between 1992 and 1997, including saving formalized urban owners some $196 million in red tape costs.
Over the past thirty years, China’s GDP has soared from $140 billion to nearly $6 trillion. This phenomenal growth has been sustained at double-digit rates largely through a reliance on exports from heavy industry. Recently however, slow growth in the US and a renewed crisis in Euro zone countries have shown China that it cannot count on exports forever. The new leadership, headed by Xi Jinping, must now oversee a transition to an economy that relies on domestic consumption over export based industrial production.
With the world’s largest population one would think domestic consumption should not be difficult to achieve. Wang Shiling, who runs a mall in Linyi, perhaps put it best when he said, “people still need to consume living necessities. Toothpaste, notebooks, basins, you name it. Don’t forget that China has 1.3 billion people!” Even with such a large population though, domestic consumption only constitutes about 37% of China’s economy (the rate in developed countries is closer to 70%).
Economic indicators also suggest that China is on the path to rebalancing the economy. Since 2009, wages have been on the rise while government stimulus packages have focused on infrastructure and construction, which not only employ workers but aid the movement of goods and services throughout the country.
For all this though, China still faces many barriers to growing domestic consumption. The average Chinese may be earning more than before and stringent restrictions on the financial sector have recently been (ever so slightly) relaxed, but rebalancing the economy is about more than salaries and interest rates. In order to spur wider consumption, the government must reform current policies to encourage citizens to spend more and local businesses to expand productivity.
The CIPE Development Blog provides coverage of the Center for International Private Enterprise and its partner network at work -- highlighting successes, drawing out lessons from failure, and exploring the broader issues of political and economic development. For more information visit CIPE.org.