Tag Archives: property rights

Why Do Entrepreneurs Operate in the Shadow Economy?

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.

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Untapped Potential – Don’t Overlook It!

It can be hard for policy makers to guess which company will stand out from the herd. (Photo: Wikimedia commons)

It can be hard for policy makers to guess which company will stand out from the herd. (Photo: Wikimedia commons)

As the world catches on to entrepreneurship’s power to spark growth and employment, high-growth firms have grabbed our attention. Less than one percent of firms – the “gazelles” – propel job growth at more than 10% percent per year (OECD, Entrepreneurship at a Glance 2012). Many policymakers and NGOs rightly seek to encourage high-growth entrepreneurship.

Stop and think, though, before chasing the excitement of glamorous entrepreneurs. You could be missing out on genuine untapped potential in the process.

  • Don’t pick winners – It is exceedingly difficult to predict which firms will succeed in new markets. The best entrepreneurs may not match the profile of past successes; rather, they tend to be the ones who go against the grain.
  • Don’t subsidize the elite – There’s absolutely nothing wrong with talented, educated individuals from well-off families starting innovative firms that create jobs. However, helping entrepreneurs who already have what it takes wastes resources and risks reinforcing barriers that confine opportunity to the elite.
  • Don’t forget mid-size firms – Common perceptions and programs for business focus either on large corporations or micro businesses. Mid-size firms are potential leaders, more serious than many startups, and underserved.
  • Don’t forget the informal sector – While the sector is often characterized in terms of underemployment, Hernando de Soto has shown us the vitality of entrepreneurship in the sector. Sure, not all informal businesses have growth aspirations or productive potential, but just like gazelles, a fraction of them can take off if they break into the formal economy.
  • Don’t forget women – The rise of women’s entrepreneurship represents one of the biggest phenomena in development. Women face distinctive barriers that hinder their enormous talent.
  • Don’t neglect the provinces – Investment and services gravitate to large capital cities. Meanwhile, provincial areas are cut off from global markets and even domestic markets. This is the frontier of emerging economies.
  • Don’t limit attention to high-technology firms – Technology generates the greatest productivity gains outside of the technology sector itself. Entrepreneurship is about new business models and commercializing innovation, not new inventions.
  • Don’t miss the entrepreneurial environment – No question, the regulatory environment affects decisions to start a business. In environments hostile to business, entrepreneurs have no incentive to invest and take risk. Institutions hold the key to long-run economic performance.

Peru’s Lesson for the Middle East and North Africa

Hernando de Soto

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.

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What’s Next for the Kenyan Coast?

Security forces patrol the streets of Mombasa after rioting last month. (Photo: BBC)

Mombasa recently made international headlines when the city, commonly associated with the tranquility of paradise-like resorts, erupted in vicious violence after the killing of a radical Islamic cleric Aboud Rogo Mohammed. Rogo was suspected of links with the Somali terrorist group al-Shabaab, which is affiliated to al-Qaeda. He was killed in broad daylight by unknown assailants in a drive-by shooting.

Coming to Mombasa merely a month after these events, I expected the city to feel on edge, anxious. But surprisingly I found nothing of that sort: life goes on as usual, from hawkers lining narrow, ancient streets of the Old Town to sun-worshipping tourists lining white sand beaches – although in somewhat lesser numbers due to security concerns.

On the surface of it, the unrest was a simple case of ill-targeted revenge. The culprits in Rogo’s assassinations remain unclear. Muslims, who constitute the majority of Mombasa’s population, blame the police, given that Rogo was on the U.S. and UN sanction lists for allegedly supporting al-Shabaab. Meanwhile, the police claim that al-Shabaab killed the cleric “to galvanize support among the youth.” Whatever the truth, disaffected Muslim youths turned their anger against Mombasa’s Christian population, looting stores and burning churches. But was there more to it than religious fervor?

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The Path Towards Democracy in Burma

President of Burma U Thein Sein at the US-ASEAN Forum (Photo: The Nation)

In his speech at the July US-ASEAN Business Forum in Siem Reap, Cambodia, U Thein Sein explained that Burma “has embarked on a democratic path” and is “moving toward a new democratic era.” He went on to outline the reform efforts his country is presently undertaking, efforts that give reason for optimism following April’s dramatic electoral victories for Aung San Suu Kyi and the National League for Democracy.

In addition to promises of regular and free elections, increased media freedom, and constructive engagement with leaders of ethnic minorities, President Thein Sein announced plans “to transform [Burma’s] centralized economy into a market-oriented economy.” At this same event, US Secretary of State Hillary Clinton said that President Thein Sein is a leader “who has moved his country such a long distance in such a short period of time.”

Moving forward, a successful and sustainable transition in Burma requires that economic growth be widespread and that economic opportunities arise for more than the well-connected few. However, numerous key institutions that are necessary for the realization of this goal are either weak or completely missing in Burma today.

Paramount among these institutions are private property rights and the rule of law. If these institutions, which are fundamental for the development of a market economy, are not substantively reformed and strengthened in Burma, its economic and democratic transition will prove unsustainable.

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Friday Wrap-Up: Democracy, CSR, Property Rights, and Dry Cleaning

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From Frank’s Taxi Backseat: Lessons on Ghana — Part 2

Women farmers in Ghana. (Photo: US Embassy, Ghana)

Read Part 1 of this series.

“So, sir, married or thinking of it?” Frank asked me.

He seemed shocked by my negative response. But after I had proferred a few reasons why, he became more understanding. However, I did not expect my responses to prompt the conversation to take the turn that it did:

“… I see. I, too, was raised by a single mother and I think that I understand what you are saying. The situation in Ghana is not favorable to women at all, sir. My mother raised my younger sister and me after my father left the family. Just like that – he woke up one day and just left! Simple. I woke one morning to find my mother crying; I was 8 years old. She told me that my father had left. For a child, like I was, it just sounded… normal. I do not think that I understood the true meaning of what she had said or of why she was crying because of it. I just wished for her to stop crying – that’s all. The reality of it all became clearer, as I grew older.”

“Have you seen him since?” I asked.

“No. Never since then. It was very tough, sir. I witnessed the hard times that my mother went through, as a single mother of two. At times, it was almost depressing. We lived in a rural community, where most people survived by farming on their lands and rearing their cattle. In our culture, land possession is handed over from fathers to sons. My mother had to struggle constantly to maintain possession of the land that was left by her father after he died. She fought mainly against her uncles, my late grandfather’s brothers, and her male cousins, my uncles. They all wanted possession of the land and tradition was on their side, even though the courts disapproved. It was very nasty. In the end, tired of all the hassles and to get some peace of mind, my mother gave away a significant part of her land. She gave up. Fighting over the land was taking so much out of her. She simply decided to give them enough of the land, so that they will leave us alone. What remained was just enough for her to farm for enough food for us to eat. That was the year when I decided to move to Accra. I had to find a way so that the family could survive.”

Frank had my undivided attention. He had broached a topic that was made prominent in global development circles by Peruvian economist, Hernando De Soto: the fundamental importance of land ownership on the economic performance of individuals. Also, he was describing a timeline in his life that I had witnessed so often in the lives of numerous others in my native Cameroon.

“After two years in Accra, I had saved up enough money to bring my sister over. I sponsored her studies at a vocational school, from which she graduated with a certificate in secretarial work. She began working as an assistant to a prominent Accra business man…”

He paused rather lengthily.

“He was married, and yet took a liking to my sister. He never stopped making advances to her, even as she repeatedly declined. Eventually, he became more assertive… she got involved. What else could she do? She needed the job and the money. I only found out about everything after she got pregnant and informed me about it. My nephew is now 2 years old.”

“Did she inform the business man, her boss, about the pregnancy and their son?” I asked.

“No, sir. If he realizes that the child is his, she’ll lose her job. He’ll find need to get rid of her, for the sake of his family, his reputation, and also because he knows that he can get away with doing so. When the pregnancy became obvious, she told him that the pregnancy was from her boyfriend, even though she never had one during that time. He lost all romantic interests in her ever since. She is no longer the person that I once knew. She goes about her daily business, but that experience has made her a very different person. It saddens me alot. Our women have a very hard time in this society, sir. Maybe, I am just too sensitive about it all because I was raised by women? Anyway, yes, marriage is not a joking matter. It is a very serious decision.”

I had just heard instances of social marginilization of women that bore significant economic consequences. Both in a rural and urban setting. In the rural setting, Frank’s mother’s legal claim to inherited land was called into question by traditional norms and this bore negatively on her economic performance. In the urban setting, Frank’s sisters faced limited employment opportunities and felt compelled to make certain compromises that have irrevocably altered the course of her life. Neither one of these women had the full benefit of a major aspect of a free-market economy: self-determination.

This benefit, or the lack thereof, is lacking among women in general on a global scale. The only difference comes in the degrees of variation of its absence in the lives of women in different regions of the world.