The dead capital
Lack of information on income prevents governments from collecting taxes and acting for the public welfare
The writer served as Executive Editor of The Express Tribune from 2009 to 2014
Pakistan’s informal economy has been estimated, using perhaps the rule of thumb, to be at least double, if not thrice, the formal economy in size. Most of it is being generated, it is believed, by the tax-exempted avenues; especially the agriculture sector, but tax avoiders and evaders which run into millions, too, have contributed greatly to its expanding size. Most of Pakistan’s economic woes, especially the country’s ever-increasing dependence on foreign dole are believed to have their roots in the informal economy. Attempts to document the informal economy have been consistently thwarted by the politically powerful benefactors, without realising that by doing so, they are only undermining their own long-term economic interests
Hernando de Soto, the famous Peruvian economist and author of the book The Mystery of Capital, asserts that no nation can have a strong market economy without adequate participation in an information framework that records ownership of property and other economic information. Unreported, unrecorded economic activity results in many small entrepreneurs, who lack legal ownership of their property, making it difficult for them to obtain credit, sell the business, or expand. They cannot seek legal remedies to business conflicts in court, since they do not have legal ownership. Lack of information on income prevents governments from collecting taxes and acting for the public welfare.
The existence of such massive exclusion generates two parallel economies, legal and extra-legal. An elite minority enjoys the economic benefits of the law and globalisation, while the majority of entrepreneurs are stuck in poverty, where their assets — adding up to more than $10 trillion worldwide — languish as dead capital in the shadows of the law. To survive, to protect their assets, and to do as much business as possible, the extra-legals create their own rules. But because these local arrangements are full of shortcomings and are not easily enforceable, the extra-legals also create their own social, political and economic problems that affect the society at large.
According to De Soto, the real problem is within the flawed legal systems of developing nations that make it virtually impossible for the majority of their people — and their assets — to gain a stake in the market. The people of these countries have talent, enthusiasm and an astonishing ability to wring a profit out of practically nothing. What the poor majority in the developing world do not have is easy access to the legal system which, in the advanced nations of the world and for the elite in their countries, is the gateway to economic success, for it is in the legal system where property documents are created and standardised according to law.
That documentation builds a public memory that permits society to engage in such crucial economic activities as identifying and gaining access to information about individuals, their assets, their titles, rights, charges and obligations; establishing the limits of liability for businesses; knowing an asset’s previous economic situation; assuring protection of third parties; and quantifying and valuing assets and rights. These public memory mechanisms, in turn, facilitate such opportunities as access to credit, the establishment of systems of identification, the creation of systems for credit and insurance information, the provision for housing and infrastructure, the issue of shares, the mortgage of property and a host of other economic activities that drive a modern market economy.
In a series of articles that appeared in the US and Europe in 2011, De Soto used the findings of his Institute for Liberty and Democracy (ILD) field research in Egypt, Tunisia and Libya to make his case for “the economic roots of the Arab Spring”. The ongoing Arab revolutions, he argued, were “economic revolutions” driven mainly by the frustrations of 200 million ordinary Arabs who depended on the informal economy for their livelihoods. He pointed to the ILD’s earlier 2004 findings in Egypt, which revealed that the nation’s largest employer, with 92 per cent of the property in the informal economy, had assets worth almost $247 billion. Also, as proof of the extent of desperation among entrepreneurs, he elaborated on Mohamed Bouazizi, the Tunisian street vendor whose public self-immolation in protest of the expropriation of his goods, literally sparked the Jasmine Revolution in Tunisia, which spread unrest throughout the Arab world.
Published in The Express Tribune, September 2nd, 2015.
Hernando de Soto, the famous Peruvian economist and author of the book The Mystery of Capital, asserts that no nation can have a strong market economy without adequate participation in an information framework that records ownership of property and other economic information. Unreported, unrecorded economic activity results in many small entrepreneurs, who lack legal ownership of their property, making it difficult for them to obtain credit, sell the business, or expand. They cannot seek legal remedies to business conflicts in court, since they do not have legal ownership. Lack of information on income prevents governments from collecting taxes and acting for the public welfare.
The existence of such massive exclusion generates two parallel economies, legal and extra-legal. An elite minority enjoys the economic benefits of the law and globalisation, while the majority of entrepreneurs are stuck in poverty, where their assets — adding up to more than $10 trillion worldwide — languish as dead capital in the shadows of the law. To survive, to protect their assets, and to do as much business as possible, the extra-legals create their own rules. But because these local arrangements are full of shortcomings and are not easily enforceable, the extra-legals also create their own social, political and economic problems that affect the society at large.
According to De Soto, the real problem is within the flawed legal systems of developing nations that make it virtually impossible for the majority of their people — and their assets — to gain a stake in the market. The people of these countries have talent, enthusiasm and an astonishing ability to wring a profit out of practically nothing. What the poor majority in the developing world do not have is easy access to the legal system which, in the advanced nations of the world and for the elite in their countries, is the gateway to economic success, for it is in the legal system where property documents are created and standardised according to law.
That documentation builds a public memory that permits society to engage in such crucial economic activities as identifying and gaining access to information about individuals, their assets, their titles, rights, charges and obligations; establishing the limits of liability for businesses; knowing an asset’s previous economic situation; assuring protection of third parties; and quantifying and valuing assets and rights. These public memory mechanisms, in turn, facilitate such opportunities as access to credit, the establishment of systems of identification, the creation of systems for credit and insurance information, the provision for housing and infrastructure, the issue of shares, the mortgage of property and a host of other economic activities that drive a modern market economy.
In a series of articles that appeared in the US and Europe in 2011, De Soto used the findings of his Institute for Liberty and Democracy (ILD) field research in Egypt, Tunisia and Libya to make his case for “the economic roots of the Arab Spring”. The ongoing Arab revolutions, he argued, were “economic revolutions” driven mainly by the frustrations of 200 million ordinary Arabs who depended on the informal economy for their livelihoods. He pointed to the ILD’s earlier 2004 findings in Egypt, which revealed that the nation’s largest employer, with 92 per cent of the property in the informal economy, had assets worth almost $247 billion. Also, as proof of the extent of desperation among entrepreneurs, he elaborated on Mohamed Bouazizi, the Tunisian street vendor whose public self-immolation in protest of the expropriation of his goods, literally sparked the Jasmine Revolution in Tunisia, which spread unrest throughout the Arab world.
Published in The Express Tribune, September 2nd, 2015.