The Mystery of Capital
 Workshop Participants in Brazil Prioritize Changes Needed for Full Participation in Economic Life

The dominance of the informal sector in many economies is a stumbling block to growth. This is a recurring theme in CIPE programs and was recently addressed in a groundbreaking workshop in Brazil in November entitled "Barriers to Participation: The Informal Sector in Emerging Democracies." CIPE partners who served as presenters included Laszlo Kallay from the Institute for Small Business Development (Hungary), Ion Anton from the International Center for Entrepreneurial Studies (Romania), and Peter Ivanovic from the Center for Entrepreneurship (Montenegro). The session was part of the National Endowment for Democracy's Second Global Assembly of the World Movement for Democracy.

Workshop participants from twenty-four nations grappled with this fundamental question: How can policymakers reform key political and economic institutions so that informal sector entrepreneurs in emerging democracies will participate actively in the formal economy and the policymaking process?

Participants put together a list of ten policy measures that they felt would bring informal sectors into the formal economy. These included such reforms as streamlining legal and regulatory codes, overhauling tax systems and labor laws, and enhancing corporate governance structures.

Economic barriers to participation currently exist despite democratic elections for public offices. Holding free and fair elections is the first essential step toward a participatory political system. The next step is to remove impediments that prevent routine, daily participation in decisionmaking and which foster unresponsive policies (including exorbitantly high costs for doing business). In the long run, such obstacles disenfranchise citizens politically and economically, jeopardize much-needed reform, and threaten exclusion from global markets.

As a result of the workshop in Sao Paulo, CIPE has taken the following steps:

Details about other CIPE efforts are available online, and the background paper will be available in Russian and Arabic soon.

The sweeping changes that were agreed to at the Sao Paulo workshop will not come about overnight. Implementing them, however, would be a major step toward changing the "rules of the game" and meeting the needs of entrepreneurs who operate without permits or legal status because they lack the resources to comply with burdensome regulations. Participants agree with Peruvian economist Hernando de Soto that without these changes, the "triumph of capitalism only in the West could be a recipe for economic and political disaster." De Soto concludes, "We must make representational systems simpler and more transparent and work hard to help people understand them. Otherwise, legal apartheid will persist, and the tools to create wealth will remain in the hands of those who live inside the bell jar."

THE "MYSTERY OF CAPITAL" is UNVEILED

Hernando de Soto's long-awaited book, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, is now available at the CIPE online bookstore. (www.cipe.org/bookstore)

In de Soto's words, "The hour of capitalism's greatest triumph is, in the eyes of four-fifths of humanity, its hour of crisis." De Soto explores the collapse of world communism and why it has not ushered in an era of prosperity in the developing world. Why do some countries succeed at free-market capitalism while others fail? He refutes the popular view that success is determined by cultural differences. Instead, de Soto suggests that the disparity has to do with the legal structure of property and property rights.

One of the least recognized facts in developing countries and emerging economies, de Soto argues, is that the poor often have enormous assets. He notes that five-sixths of the world's population is sitting on mountains of dead capital - at least $9.3 trillion in real estate alone. The problem is that these assets are not formalized or recognized and, as a result, they cannot be converted into working capital.

Prosperity cannot be broad-based, according to de Soto, until property rights are secure for all citizens. He also reminds policymakers that every developed nation in the world went through the transformation from predominantly informal, extralegal ownership to a formal, unified legal property system. This transformation, he posits, is the challenge that developing countries are facing today.

FROM INFORMAL TO FORMAL: "TOP TEN" PRIORITIES

CIPE's workshop during the National Endowment for Democracy's annual World Movement for Democracy assembly generated a list of ten priorities to legalize the informal sector and to tap its growth potential.

  1. Instituting transparent, inclusive decisionmaking procedures and providing regular opportunities for the public to comment on existing and proposed laws and regulations.
  2. Clarifying and streamlining legal and regulatory codes by eliminating duplicative, superfluous laws that increase the cost of doing business and invite corruption.
  3. Making private property rights accessible to all citizens, clearly defined, and strongly enforced.
  4. Simplifying business permits and licenses and making them affordable so that becoming part of the formal economy is within reach for entrepreneurs of modest means.
  5. Reforming tax systems in order to encourage profitable economic activity and promote widespread compliance.
  6. Overhauling labor laws to allow for more flexibility.
  7. Reforming economic systems through improved corporate governance legislation to encourage open markets rather than crony capitalist systems. These include adopting internationally accepted accounting principles, standards of disclosure, and anti-trust & anti-conflict of interest measures, as well as prohibiting insider trading and overhauling bankruptcy laws.
  8. Reforming excessively bureaucratic government agencies and strengthening their administrative and enforcement capacity so that laws and regulations are administered and enforced efficiently, effectively, and inexpensively.
  9. Making available to all citizens such business-related information as how to obtain a license or permit, how to start a business, how to form commercial entities, and how to run a business.
  10. Bringing about a high quality, efficient, and cost-effective infrastructure essential for a democratic, market-based system so that entrepreneurs benefit from joining the formal sector.