Alleviating Poverty through Data

Hernando de Soto is President of the Institute for Liberty and Democracy in Peru.

I am Peruvian and I chair an organisation, a think tank, an action tank, which discovered some twenty, thirty years ago, that we really didn’t know as much as we thought we knew about the world. We think that we are about seven billion people and that basically in 1989 when communism collapsed there was only one game in town and that was capitalism. But then thinking closer to our own reality, we became conscious that the majority of us were neither here nor there, that those who benefited from the system were a minority. It was a very good system—the one that had survived—but the majority were outside and they were in transition. We call them the extra-legals. Some call them the shadow economy, some call them the informal economy, but we call them extra-legals.

We thought that they were going to be a force to be reckoned with and we started calculating how big this force was, at first in Latin America and then gradually worldwide. In the case of Latin America, it has served us well because we’ve empowered it. The first thing we found out was that extra-legals have assets, but they’re not entitled to them legally and it’s a problem. They work, they’re not unemployed (anyone who’s poor and unemployed dies of starvation). We thought it was important to find out what it meant being within the law. After a while we got very interested in mapping because we sort of saw ourselves within that field. Most of the people who do mapping are trying to look at reality—the reality that God has created, the environment—but there is another environment which is the one that man has created: the environment of globalisation, of legal systems that talk to each other.

We’ve done pretty well. From the Second World War until today, the world has grown more than in the two thousand years since Jesus Christ appeared. Obviously the system works, but it’s not necessarily there for everybody.

We also follow the thinking of Wittgenstein who said some very simple things such as if you consider the universe, the universe is made up of things in relationship to one another. Look at that tiny little sentence: “Things in relationship to one another.”

That means there are two “things”: there are the things themselves and there is how they relate to one another. Things that are relations—marriages, how I’m talking to you—are not things that you can grab. The only way you can catch them is by documenting them and that has brought us closer to mapping.

The Importance of Counting

Then about ten or eleven years ago at least five heads of state in the Middle East started calling us and said the things we were looking at in Latin America seemed similar to some things they were trying to see in the Middle East and North Africa. They asked if we could come in and try to measure it because that is what we are: bean counters. We know that when you go in and measure something you’re always in for surprises.

In my own country, we just recently had big problems in the Amazon where the prices of raw materials are also going up. There is a lot of foreign investment and many indigenous people getting very angry at the foreign investment. We were told that there were one thousand and five hundred tribes in the Amazon. By the time we finished counting after one year, we had found five thousand.

We were then invited to Nigeria, the Niger Delta, where 30 per cent of Nigeria’s oil is found. Going in there, the first thing you get at the airport is, “Welcome to the Niger Delta, fountain of wealth of Nigeria. The population is between fifteen million and thirty million people.” And so as time goes by we know that we know less.

All of a sudden, the West is in a huge crisis. The West supposedly has everything on record. Everything is recorded in the West—automobiles, airplanes, boats. But now the West has a big crisis, and the big crisis is essentially because they don’t know what they’ve got. They’ve created seven hundred trillion dollars of financial derivatives and they don’t know where they are, and that’s the reason that you have this confidence crisis.

So what we do is count. We feel that counting, but not necessarily the counting of God’s creation which is the environment of nature, but man’s creation, which is how we’ve created havens for some and lack of havens for others, becomes important.

The Arab Spring

Our work in the Middle East, which is part of what we do throughout the world, of course was interrupted, like everybody else’s, by the Arab Spring. On 17 December 2010, Tariq Mohamed Bouazizi in the small town of Sidi Bouzid in Tunisia set himself on fire. Now what is interesting is that when he did so—and people have previously set themselves on fire all over the world, from Vietnam to Latin America—all of a sudden people in the Middle East started taking to the streets. We from faraway Peru were looking at this. People massively went to those streets. But not only that, we started counting how many other people had set themselves on fire in the Middle East, and there were about thirty-five in each Middle Eastern country. All of them were from the extra-legal sector—salesmen—so we said there must be a movement here. How can everybody, with such different realities—Tahrir Square in Cairo is one thing, Sidi Bouzid is another thing and the Tuareg of Libya are another thing—behave so similarly? All of a sudden in this cultural diversity, one thing cuts across. So what’s the commonality?

I’ve put people to work in these Middle Eastern countries to talk to the survivors and to try to find out what’s going on. The first thing we thought was that there was a political agenda, but when we went to see in the thirty-eight-thousand-inhabitant city of Sidi Bouzid in Tunisia whether there was a political agenda, Mohamed’s mother said, “He didn’t even look at the news.” His sister said, “His goal was to accumulate capital.” I asked his brother, as I reported in an article for the Financial Times, what would Mohamed say if he came down from the heavens to earth? What would his death have accomplished? His brother said, “That the poor also have the right to buy and sell.”

Now, I’ve never heard anything so unromantic. This guy was obviously a businessman. What was obvious, and if there’s one thing that Marx taught us—and I’m as far from being a Marxist as you can imagine—it’s that when a lot of people start suffering, and saying they’re suffering in the same way, it is because there is a social class under formation. So what I do with my team of Peruvians is we map underclasses, because they’re the majority of the world. We also go into details.

Pushed Too Far

It is a big thing, suicide. What did they take away on 17 December from this businessman, twenty-six years old, who set himself on fire right in front of the governorate? Well, they took a cart which had valuables, his scales (that was his capital)—electronic scales so that he could weigh the fruit. That was 179 dollars. He had one crate of bananas—that was nine dollars. He had another crate of apples—that was twenty-two dollars. All in all, he lost 225 dollars. Now 225 dollars, you have to be poor, very poor, but to commit suicide over that? That is the visible side. The other side was in Sidi Bouzid, which we went and mapped, the way we know how to map. What we mapped there, was where he lived. His father had squatted on some land and Mohamed had received municipal recognition, but not a full title. Because he didn’t have full title his property was undervalued, and he was going to have trouble using that property to buy what was essential to get his food to the market, namely, an Isuzu truck. By the time the police had taken everything from him, at 10.30 in the morning on 17 December, he no longer had the collateral to move ahead.

But not only that. They had also taken away his right to stay on his sales patch in front of the governorate where he was able to show his wares. A businessman has got to be able to sell. And there are nine types of extra-legal property in Sidi Bouzid: public and private buildings on land under dispute; properties illegally transferred with scattered cases of joint ownership; properties in illegal subdivisions; properties in illegal subdivisions of state and private land; recent illegal subdivisions of farmland; houses built on old squatters’ settlements; invasion of lands after the revolution; formal properties legally adjudicated on Sidi Bouzid industrial zone; and land reserved for private housing projects. Mohamed was one of the nine types of illegal settlers.

This meant that, like 90 per cent of people in Sidi Bouzid, he had no legal title and sense of belonging. There are legal procedures for becoming legal but interestingly enough none of them is really followed. For example, if you want to get a public spot from which to sell goods you need an authorisation d’occupation de l’espace public. If you really want to sell you have to get a carte du commerçant détaillant ambulant. If you really need to have a final legal title you need to have a certificate from the ministry of interior. And we said, well obviously Mohamed wasn’t a very legal guy, except that when we looked at the records there was no one who had ever complied with all three requirements. The law was there, but the law was not there for a poor capitalist. That’s what the Third World is full of, poor little capitalists.

So, by the time this man had been slapped around, he had not only lost his wares, he had lost his wares which had been given to him on credit, which he could not repay. So he couldn’t go to the bank again. He was bankrupt. And because he had no way of selling any longer or of realising his dreams of building a higher business, he was ruined. At 11.30 a.m. he committed suicide.

The Extra-Legal Economy

When he set himself alight, obviously all around the Middle East somebody paid attention. I don’t know why because I’m not Middle Eastern. All I do is basically count.

I have counted in Tripoli the number of extra-legals there are and I came up with 90 per cent of the population. I did the same in Cairo and I also came up with 90 per cent, roughly. And examining the businesses in these three countries—Tunisia, Egypt, Libya—which I’ve studied to a certain degree with my people, we find that about 80 per cent of the businesses are outside the law.

What does it mean for them to be outside the law? Should anyone care? It’s actually very important, because if you’re outside the law you cannot really hire anybody that’s not a family member. You’re circumscribed. In Peru, for example, it’s a real problem. If for work colleagues you have to choose your brother-in-law, who drinks too much, or the sister of your brother-in-law, who unfortunately just goes partying all the time, or if you have to consider somebody who got bad grades in school, then it’s not a good idea to hire just family members. You need to get out there, but for that you need to have something more than a family.

Then, you don’t have limited liability either. If an American comes and invests here in Abu Dhabi, he’s got limited liability, so does a Frenchman, so does an Englishman. This means he’s only liable for a certain amount and that means they take minimum risks. They calculate them. It’s a wonderful legal clause brought about by the Industrial Revolution. But in the case of Mohamed there’s no limited liability. His liability is totally unlimited. That’s why he committed suicide. Because when one thing is taken away from him and he falls into disfavour, he’s completely out.

So what has to be done? Well, here you have a lot of documents. We call them extra-legal documents. Nowhere that we have worked in the Middle East and North Africa—and we haven’t worked everywhere—have we ever found a house without a title, or a business that’s undocumented. We found the same things in the Bouazizi family. This means there’s a sub-system in each of these countries that does title. So if anyone comes to me and says, “You know, you must understand my friend, it’s like you Peruvians, Arabs don’t like documents. Arabs don’t like buying and selling”—that’s not true. Look at the Casbah. I can’t walk around Cairo without somebody trying to sell me something while walking down the street.

Bureaucratic Obstacles

So there is a sub-stratum capitalist system. Bouazizi seems to be part of it. Why doesn’t he enter the legal system? So we go and we find out that if you want to create a small business it takes a long time. For example, if you’re in Tanta, Egypt, it takes 544 days, working eight hours a day, to get the right to open a bakery. That doesn’t tell you the time it takes actually to keep the business going in Egypt, or even to exit it. In fact, most people don’t stay in the system because it becomes so expensive. So what they do is they go to the extra-legal economy.

If you go to Egyptian jails, about 80 per cent of their inmates are in there for debt, and of those, 50 per cent lose their houses. In the United States, 1 per cent of Americans lose their house, 2 per cent of Norwegians lose their house, but because of the lack of legal documentation, 50 per cent of those in debt in Egypt lose their houses.

What is it then that I’m trying to say with all of this? I’m trying to say that you have, like we in Latin America, an underclass that is eminently entrepreneurial. But this underclass meets the hostility of a legal system. This Arab Spring is a really interesting phenomenon because it means that somebody is thinking about renovation and rethinking their country. When you rethink your country there is the possibility to do something new.

One of the things that surprises me the most is when my Western friends—remember I’m South American from deep, deep in darkest Peru—when my Western friends meet about the Middle East and they invoke the Group of Eight and say we’re going to support, to make sure that the Middle East goes down the right road of open societies, of good, solid capitalist economies, nobody is talking about Mohamed Bouazizi. Nobody is talking about this powerful underclass. Because you see one of the interesting things after interviewing the families of each of these people—and I’m going country by country because I find the phenomenon extraordinary—is that businessmen, especially poor businessmen, don’t talk so well. They are very poor intellectuals. They do numbers, they have a different thing. The people who take the agendas are the guys who know how to spin, the guys who’ve got the Tweeters, the guys who can operate on Facebook. But the guys who do the fuel are a different bunch. It’s important to identify them—after all, revolutions have been stolen before.

It’s important to know what the obstacles are. If you’re in Egypt, for example, there are 347 groups of law that you have to deal with if you’re poor, and you had better know them. What are the chances of somebody who is poor being able to do that? If you have to deal with government offices, you’ve got to deal with seventy-three of them. Seventy-three! I don’t touch, whether I’m in the United States or Europe, more than four or five. To undo a system that has these blockages, you need an administrative state system that puts you in contact with the people who are being affected. In the case of Tunisia, for example, we were told that these informal businessmen are really a very small part of the whole, that a large part of them are the unemployed, so we should go and see the association of the unemployed.

Bouazizi the Icon

The first thing you find out about the statistics of the unemployed is that if you work two hours a month, you’re officially employed. So those statistics are very rigged. We haven’t seen one person who directs the unemployed that actually doesn’t have a job. It’s very simple: if you are in a poor country and you’re unemployed most of the time, you die. You die of starvation. So all those people they tell you are unemployed are not unemployed, they’re working at something extra-legally. This means that it’s important to get the statistics right and then find out how many people are involved. Why? Because wherever we walked in these different parts of the shantytowns of the Third World, the image of Bouazizi is emblazoned on walls and streets. He’s even commemorated on a Tunisian postage stamp, and if you look at that stamp, he’s even got a vendor’s cart. How more commercial can you get? His story, however, is not simply a tale of one man. It’s a story of the majority of ordinary Arab people eager to secure their place in the legal market.

Our calculation vaguely—because we Latin Americans, we’re not precise, don’t look at us as Swiss—is that Bouazizi represents about 180 million Arabs, and those were the people that it looks like were out on the streets. We’ll find out, we’ll finish the study in one year.

We think that it’s important to focus because we had a revolution in Latin America in about the 1890s and we turned from mercantilists, mostly dictatorial republics, into market economies, which have been growing at Chinese rates. When a revolution happens, it’s a wonderful opportunity to do the right thing. I think it’s time to look at the poor because—certainly in the case of the Middle East—they seem to have something interesting to say. Anyhow, we’re getting into the mapping business and we’re trying to find out how not only to get God’s work on the maps, but also the works of mankind, which sometimes does interesting things.