Not counted: Nigeria’s GDP model is based on the year 1990. (Photo: Wayan Vota)
In 2014, one small policy tweak will grow Nigeria’s economy by 40 percent, causing it to overtake South Africa as the largest in the region. A similar change in Ghana caused that country’s economy to grow 60 percent, while in Guinea-Bissau and Gambia the economy doubled in size. Even the United States increased its output by 3.6 percent using the same technique. What happened?
GDP rebasing. Simply put, these countries are all changing the way they measure their Gross Domestic Product — the sum total of all economic activity in a country in a given year — to better reflect what’s really happening the economy.
When Nigeria’s rebasing is complete, it won’t mean the country is actually producing 40 percent more goods and services. Living standards won’t jump by 40 percent — the government will just be counting more accurately. But it’s still hugely important.
Informal businesses in rural areas are a key part of the economy in many countries, like India. (Photo: Wikimedia Commons)
The informal sector — the unlicensed, unregistered small businesses that make up the bulk of economic life in many countries — is not all bad.
A recent article in the Economist analyzed the issue of informality in the Indian economy and drew out a range of excellent points regarding the size of the country’s informal economy and the energy and dynamism that undocumented economic activity has brought to rural India, as well as the difficulties that informality can bring. These include costs to the entrepreneurs themselves, in terms of accessing credit and problems achieving scale, among others, as well as costs to the overall economy in terms of lost tax revenue and the circulation of money outside of the financial system. Indeed, there has been no shortage of research on the challenges posed by informality around the world.
What this article gets wrong however, is its conclusion, regarding what India can do to promote the formalization of the informal sector. The author writes “The best way to speed up the process is to extend the reach of the financial system. In return for coming into the formal economy and paying taxes, firms would get access to capital.” This analysis misses an important point about informality.
Although exact data is difficult to come by, it is estimated that women control as little as 2 percent of the land in Bangladesh. According to a survey of selected countries by the Food and Agriculture Organization of the United Nations (FAO), this leaves Bangladesh tied with Mali in second to last place out of 12 countries, ahead of only Saudi Arabia. I used the FAO’s data to compare Bangladesh to some of its neighbors and found land ownership by women at 11 percent in India and the Philippines, 9 percent in Indonesia, and 8 percent in Nepal (data is not available for all countries).
The role of women in Bangladesh extends far beyond the garment industry. Since 1991, two women have held the office of prime minister and 19 women have been elected to parliament beyond the 50 required by law. Despite these important contributions, women remain under-represented at all levels of society, and gender equality is still sorely lacking in many areas.
Women’s land ownership might not immediately seem to be the most important of issues. Although land ownership provides wide-ranging benefits to women, as well as their families and the economy as a whole, gender equality is a goal that needs no other justification. Nonetheless, it is worth reviewing the specific benefits of increasing the proportion of land owned by women.
More than two years ago, the suicide of a Tunisian street vendor named Mohammed Tarek Bouazizi set off a string of protests that eventually led to regime change and promises of reform throughout the Arab world. Unfortunately, the root causes of Bouazizi’s frustrations have still not been addressed in countries like Yemen.
In 2011, after having his wares confiscated for failing to pay a bribe, Bouazizi succumbed to the pressures of poverty and desperation, committing suicide by self-immolation. This tragic act led to what later became known as the Arab Spring, arguably the greatest geopolitical realignment since the fall of the Berlin Wall.
But the millions of street vendors and others who work in the informal sector have not yet realized the promise of democracy. They remain vulnerable to extortion, harassment, and other forms of abuse. By not addressing the root causes of the Arab Spring, emerging democracies such as Yemen risk losing the popular support and legitimacy that are essential to a thriving democracy.
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.
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.