The World Bank and many national governments are beginning to discover what a leading Peruvian economist has been saying for the past twenty years--corruption in Latin America, Asia and Africa is often a result of excessive government regulation.
In a massive study, the World Bank reported how many bureaucratic steps and how long it takes to set up a business in vrious 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 were corruption is most rampant. The study (despite its soporific title, "Doing Business in 2004) carried out world-wide the experiment that Peruvian economist Hernando de Soto did in his home country two decades ago. De Soto had 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 that time. In his 1983 book, "The Other Path," he concluded that Perú's excessive red tape (an estimated 28,000 regulations and laws a year) forced 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 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 5 procedures and 4 days to open a business in the United States and 2 bureaucratic steps and 2 days in Australia. Among the countries with the most regulations are Haiti, Paraguay, Bolivia, Ecuador and Honduras. Not surprisely, these are some of the countries that appear on the list of the highest perception levels released by Transparency International, the Berlin-based anticorruption group.
De Soto told me what I have long suspected that 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 posibly the most important source for corruption in the world." De Soto is conducing 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. The United States Government has taken note. "We would like to unlock the domestic capital generatrion capabilities of these countries", one official says. "Governments in Latin American, for example, have often been obstacles to development instead of its facilitators. Many of theme could reduce substantially their number of regulations."
In the 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.
