Posted on 10/19/2003 9:03:15 AM PDT by Luis Gonzalez
Hurrah! The World Bank and the Bush administration are beginning to discover what a leading Peruvian economist has been saying for the past 20 years -- corruption in Latin America, Asia and Africa is often a result of excessive government regulation.
In a massive study released earlier this month, the World Bank reported how many bureaucratic steps and how long it takes to set up a business in various countries of the world.
Guess what? It discovered, among other things, that the countries with the most regulations are the ones in which people have to pay the most bribes and where corruption is most rampant.
The study -- which despite its soporific title, Doing Business in 2004, contains some fascinating data -- carried out worldwide the experiment that Peruvian economist Hernando de Soto did in his home country two decades ago.
At the time, de Soto followed all legal bureaucratic steps needed to open up a one-employee garment factory in Lima and discovered that it was almost impossible to do it legally, because it would take 289 days and $1,231, the equivalent of three years of wages at the time.
LIKE CONCLUSIONS
In his 1983 book, The Other Path, de Soto concluded that Peru's excessive red tape -- an estimated 28,000 administrative regulations and laws a year -- forced the rich to bribe government officials and condemned the poor to operate in the informal economy, outside their country's legal system.
The World Bank did the same exercise in dozens of countries around the world and concluded that poor and middle-income countries have much more cumbersome regulations than rich ones and tend to be more corrupt.
According to the World Bank study, it takes 15 procedures and 68 days to legally open a business in Argentina; 18 procedures and 67 days in Bolivia; 15 procedures and 152 days in Brazil; 10 procedures and 28 days in Chile; 14 procedures and 90 days in Ecuador; 12 procedures and 115 days in El Salvador, and 7 procedures and 51 days in Mexico.
By comparison, it takes five procedures and four days to open a business in the United States and two bureaucratic steps and two days in Australia.
Among the countries with the most regulations are Haiti, Paraguay, Bolivia, Ecuador and Honduras, the World Bank report shows.
SAME COUNTRIES
Not surprisingly, these are some of the countries that appear on the list of countries with the highest corruption perception levels released last week by Transparency International, the Berlin-based anticorruption group.
In a telephone interview, de Soto told me what I have long suspected -- the main causes of corruption are not cultural but political.
''When countries pass laws that are unreasonable, people will try to get around them,'' de Soto said.
``Laws that are costly to comply with are possibly the most important source for corruption in the world.''
De Soto is conducting a new research project in Egypt, Mexico, the Philippines, Haiti and Honduras.
By next year, his research team will be helping 21 countries -- including Russia -- to streamline their regulatory mazes.
U.S. TAKES NOTE
The Bush administration is also taking note of de Soto's findings.
A senior Bush administration official told me in a recent interview that Bush is likely to bring up de Soto's themes at the 34-country Summit of the Americas to be held in Mexico in January.
''One of the main things we would like to see come out of this summit is to unlock the domestic capital generation capabilities of these countries,'' the official said. ``Governments in Latin America have often been obstacles to development instead of facilitators of development. Many of them could reduce their number of regulations.''
Meantime, de Soto is fully embarked on his new project -- helping countries give legal property rights to hundreds of millions of poor around the world who can't start small businesses because they don't have property rights on the shacks in which they live.
Because of that, they cannot use their homes as collateral to get even $50 bank loans to buy sewing machines or tools to set up car repair shops.
Cross your fingers. Maybe, 20 years from now, long after de Soto wins a Nobel Prize, the World Bank and the U.S. government will start pushing for that, too.
In a system where the state is very intrusive, corruption is how people make a space for individual initiative.
There are essentially two kinds of corruption. There is the kind driven by greed, and the kind that an intrusive, statist system makes necessary.
The first kind is made possible by concentrating power in government hands, with insufficient checks and balances. The latter kind is made necessary by economic stagnation, which is also caused by intrusive statist rule, which in many countries means that government employees are behind months in their salaries, or paid salaries that are a pittance. In such cases they will charge an unofficial fee for their services.
If a lawyer is handling your case, you may never be aware of the unofficial fees being paid, you just pay the lawyer his fees and it all happens.
And the latter kind is made necessary by the lack of legal clarity, and the maze of conflicting legal requirements. In many cases conflicting and irrational regulations mean that meeting the letter of the law will never be possible.
And in third world countries, where a kind of populism is the default political tendency, written law takes a back seat to desired outcomes, which means that everything becomes politicized. The resultant lack of clarity opens the door to every kind of red tape obstruction, which makes personal contacts in the various agencies an absolute necessity. If you have the contacts, or can get access to them by some means, you can get the permits you need to operate. If you don't have access, then you try and go ahead without them, hoping to pay off the inspectors who sooner or later will try and shut you down.
So this kind of survival corruption is how people carve out a kind of freedom for themselves. But it is a slippery kind of freedom, it relies on having friends at city hall, cousins at the police station, in-laws in the military high command. And if the other party gets voted in, you need some new friends fast.
The party on the outside will always rail against corruption, and vow to end it if they get into power. But since they are also populists, they will also concentrate power in order to solve society's problems, and they will also implement outcome-oriented government as opposed to strict rule of law, so that corruption under the new guys will be even more possible and even more necessary than it was under the old guys. And the economic stagnation that they swore to address becomes even worse. Its not that they go into office planning to be corrupt, its that intrusive government means even more red-tape which forces everyone to rely on personal contacts and unofficial fees to get anything at all done.
A guy I used to work for had a tactic he used in the face of irrational regulations, which was "compliance unto destruction", which meant that if you insisted on obeying every rule to the letter, eventually the whole thing would come apart and you would then be free to do as you like. The flip side of that, which happens in well meaning new governments, is "enforcement unto destruction". They have no intent to be corrupt as their predecessors, so they try to enforce every rule. It doesn't take long, though, for the folly of that to become obvious, and so slowly but surely they are back to the more rational selective enforcement as is traditional. And since they can't pay their public officials either, well, welcome to the new day, same as yesterday.
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