It is not uncommon to hear that operating in the informal sector is an efficient response to inefficient regulations. In other words, if costs of joining the formal economy exceed the benefits of doing so, entrepreneurs will go around the legal institutions and conduct their activities in the extra-legal manner. Operating in the informal economy, some people say, is still better than not operating at all.
But, as Hernando de Soto has documented so well, operating in the informal economy comes with its own set of challenges – for example, you are likely to face a rather limited set of opportunities for growth and you certainly can’t expect the state to provide you with public services or protect you and your property.
Informal entrepreneurs in Bangladesh are re-learning this lesson. While state’s protectionist policies have pushed some innovative telecom approaches into the informal sector, they have also left these entrepreneurs without any opportunities to defend their property and their right to do business. So, as the government is cracking down on illegal business, it is simply confiscating property without any compensation.
Thousands of illegally built shops, businesses and slums have been torn down. The VOIP industry has gone the same way. “They have already taken my equipment from one of my places. This is huge equipment, 11 gateways and 22 modems, many pieces of equipment, maybe $60,000 worth,” Hassan says.
But why is it that many of the entrepreneurs have elected not to join the formal economy? One could say that they didn’t really have a choice.
VOIP has remained illegal in Bangladesh in an attempt by the government to protect the state-owned telephone company, the Bangladesh Telegraph and Telephone Board. But it simply hasn’t worked. Earlier this year it was estimated that VOIP calls accounted for up to 80% of the total telephone traffic from abroad.
Closing these businesses down
has thrown the system into chaos, as hundreds of thousands of people try to call home with fewer and fewer lines available.
How about reforming the system so that these entrepreneurs can operate and innovate legally instead? In its anti-corruption campaign, the government could consider letting these businesses compete against the state-owned telecom company, rather than simply shutting them down. And de Soto, with his global experience to back it up, would be the first one to say that all stand to gain from such a move – the government itself can tax the businesses, while entrepreneurs can produce, compete, and innovate and people can make phone calls. Why not give it a chance?
Published Date: April 11, 2007