Books

back to issue

THE OTHER PATH by Hernando De Soto. Harper and Row, New York, 1989.

THE MYSTERY OF CAPITAL by Hernando De Soto. Basic Books, New York, 2000.

‘Things should be made as simple as possible… but not simpler.’ – Albert Einstein

Hernando De Soto’s analysis of the limitations and costs of the world’s poor choosing informality1 in The Other Path2 is taken to a new level of generality in The Mystery of Capital: what ultimately paves the way to the failure of capitalism and development at a global scale is the lack of a well-defined and enforceable system of property rights in developing and transitional economies. Undoubtedly, De Soto raises thought provoking empirical and conceptual questions that force us to reconceptualize the nature of the obstacles to economic growth and poverty alleviation. However, to determine the roots of economic and development divergence worldwide and subsequently devise a practical and revolutionary strategy to mitigate it is a somewhat ambitious if much needed task.

In practice, De Soto’s theory translated into a policy of land titling and regularization of land tenure has been implemented in many developing countries, from Peru to the Philippines. Possessing a formal title over one’s land was considered as the lever that would trigger compound economic growth by transferring thousands of economic agents into the spheres of a formal economy. It would symbolize participation in the legal system, create committed citizens and provide credit worthiness to entrepreneurs as a collateral for loans. Nonetheless, the attempt to change the nature of informality based on one tool alone may have left De Soto’s model prey to the flaws of over-simplification.

Is informality only a legal problem? Can the multiplier effect triggered by secure property rights truly transform the economic and cultural fabrics of our societies? Will all agents respond homogeneously to the perception of secure tenure of land? Can a system of property rights alone instil the economic, social and political incentives that are ultimately needed to support a sustainable process of formalization of a way of life? Because informality hinges on the embedded relationship between the state and society and not on perceptions of economic incentives alone, an entire gamut of formal and informal institutions that articulate this relationship must be clearly understood in order to address some of these questions.

Beware that you do not loose the substance by grasping at the shadow.’ – Aesop

In his most famous book, The Other Path, Hernando De Soto provides stunning evidence of the magnitude of informality in developing nations. He finds trillions of dollars in ‘dead capital’ unaccounted for in the informal world, assets far in excess of every World Bank loan, foreign aid package and foreign investment portfolio combined since 1945. Ironically, the author points out that if the United States were to increase its foreign aid budget to the level recommended by the United Nations for ODA3, i.e. 0.7% of a country’s GDP, it would take more than 150 years to transfer to the world’s poor resources equal to those they already possess. De Soto estimates the value of the extralegal property of informal communities worldwide as $9.3 trillion USD – about as large as the annual GDP of the U.S. economy. In particular, he presents the results of extensive fieldwork conducted among five developing countries from Peru, Mexico and Haiti in the Americas to Egypt and the Philippines.

In Egypt he shows that the poor have accumulated 55 times more capital than the sum of all direct foreign investment ever received, including the transfers associated with the Suez Canal. In Haiti, one of the poorest and most devastated nations of Central America, the poor have accumulated 50 times more wealth than all foreign investment received since independence from France in 1804. In Mexico City, the underground economy helps create 85% of the country’s new jobs. An immediate puzzle then follows: if the assets exist, why can’t they be profitable?

In De Soto’s view, and consistent with a large body of literature on property rights, assets are profitable when they can be clearly and securely transferred to their highest valued uses. The clarity and security of allocation and transfer is guaranteed in the capitalist economies of the West by a set of formal and efficient property rights institutions. However, in the developing world, a pervasive legal apartheid has thrown the poor into a parallel informal world. Securing and maintaining legal status is too costly, time consuming and in some cases outright excluding due to lack of education to understand how and why it is important to comply with the law. Thus, though the poor physically own the assets, they do not legally own them.

De Soto’s books are full of anecdotal evidence on the complexity of government’s bureaucracies in the developing world: it takes 77 bureaucratic procedures, the involvement of 31 agencies, and 5 to 14 years to acquire a piece of land in Egypt. Moreover, despite this formidable display of perseverance, there is still no guarantee that the deed will not be revoked by the next administration coming to power.

In Peru, De Soto conducted a famous experiment to measure the cost of entry into the market. His team simulated the establishment of a small clothing workshop in Lima and set out to strictly comply with all the legal requirements the system imposed. The paperwork delayed things for almost a year and, during the process, they were asked to pay bribes 12 times, having paid them twice in order to continue the experiment. ‘To get a comparative idea, an American professor conducted the same experiment in Tampa, Florida. It took him two hours and he did everything by mail.’4

Thus, De Soto traces the rationale that steers life in the squatter settlements and street pavements of developing cities, juxtaposed to the complex irrationality of the bloated bureaucracies that represent the formal system of laws and regulations they are expected to observe. He finds ingenuity and resourcefulness among the former, unresponsiveness and inefficiency in the latter. Hence, despite their efforts, the poor seem to be losing the substance of development by grappling only with shadows of their wealth.

‘But if people in countries making the transition to capitalism are not pitiful beggars, are not helplessly trapped in absolute ways, and are not the uncritical prisoners of dysfunctional cultures, what is it that prevents capitalism from delivering to them the same wealth it has delivered to the West? Why does capitalism thrive only in the West, as if enclosed in a bell jar?’ – The Mystery of Capital

After diagnosing and measuring the extent of informality in The Other Path, De Soto’s Mystery of Capital probes into the roots of the problem. Here, he highlights the six effects of a formal system of property rights that allow citizens to generate valuable capital in the West. First, the fact that a formal system of property rights fixes the economic potential of assets and second that it protects transactions involving land. In Peru, whenever land was titled, its market value would double the same day. In the following 10 years, it could go up around nine times because it was easier to trade land once property rights were clear and established.

Third, it enables the integration of dispersed information on citizens’ wealth into one knowledge base. It also makes people accountable for property, respecting titles, honouring contracts, and obeying the law. The fifth effect is that of making assets fungible by reducing the transaction costs of mobilizing and using assets. Finally, a formal system of property rights enables the networking of people. De Soto argues that ‘by attaching owners to assets, assets to addresses, and ownership to enforcement, and by making information on the history of assets and owners easily accessible, formal property systems converted the citizens of the West into a network of individually identifiable and accountable business agents’ (De Soto 2000).

Therefore, much of the marginalization of the poor in developing and former communist nations comes from their inability to benefit from the six effects that formal property provides. In fact, unless an asset is legally owned it is tantamount to having ‘dead capital’ (De Soto 2000). Building houses on land that is not legally owned, starting businesses with undefined liability and little collateral for financial support, and settling disputes through informal communal mechanisms can work when economic transactions are restricted to the narrow radius of trust found in more cohesive and smaller communities.

Though De Soto often points to the efficient social reciprocity systems of these informal communities, there are also severe limitations to how they can substitute for formal central or local political and judicial management. For one, they lack collective mechanisms of management and collection to develop and pay the expenses of common projects. Furthermore, it is not only difficult and expensive to build a parallel system of justice, but it is generally not enforceable among elements of different communities. Thus, to ensure the respect for contract and property, individuals end up investing numerous resources in networking and creating social ties that can help in their economic relations with others. This is not only time-consuming but also restricts economic opportunities.5

Additionally, as these informal communities grow bigger, the once efficient social networks grow looser and more unmanageable. New groupings of people may appear that cut across traditional family and kinship ties, rendering communities increasingly heterogeneous. Conflicting economic and social interests sometimes cannot be solved by informal mechanisms of coordination alone.

In contrast, in the West, every ‘parcel of land, every building, every piece of equipment, or store of inventories is represented in a property document that is the visible sign of a vast hidden process that connects all these assets to the rest of the economy.’ It is due to this ‘representational process’ that assets exist in the shadow of their ‘material existence’ (De Soto 2000). They provide a link to the ‘owner’s credit history, an accountable address for the collection of debts and taxes, the basis for the creation of reliable and universal public utilities, and a foundation for the creation of securities and bonds that can then be rediscounted and sold in secondary markets.’6

As proof, De Soto highlights the fact that the ‘single most important source of funds for new businesses in the United States is a mortgage on the entrepreneur’s house.’ 90% of Peruvians, devoid of any title over their properties, cannot choose this path and inject life into their assets. Alas, herein lies the reason for the failure of capital outside the West.

Lacking this representational process, the challenge then becomes for developing countries to summon the political will necessary to build a property law system that is easily accessible to the poor. A multiplier effect would be triggered in a capitalist market economy: with well-protected, stable and transferable property rights, agents have incentives to increase production and are made accountable for what and how they produce. Therefore, the policy implications of De Soto’s approach is that micro-enterprises and individuals can be brought into the formal sector through the implementation of a clear, de-bureaucratized and cost-effective system of property rights that simply renders them legal.

The first contribution of De Soto’s work is the emphasis on the need to broaden the informational base on which development is theorized.7 One of the most powerful attributes of his work is that it is based on sound empirical evidence derived from years of qualitative and quantitative research into the reality of economic life in places as disparate as Haiti, Egypt, the Philippines and Peru. Ronald Coase’s witty yet trenchant comment on the nature of abstract economic research with which De Soto prefaces the second chapter of his book is most pertinent when contrasted with the latter’s hands-on approach.8 De Soto documents not only the nature of informal economic transactions but an entire way of life, with informality permeating the many spheres of law, business, labour and social welfare.

Second, The Mystery of Capital draws on the work of classical economists like Adam Smith9 to revive the true nature of capital and property as relational concepts. The notion that the latter consists not of the assets themselves but the social consensus on how they can be owned, used and exchanged has major policy and research implications. Poverty alleviation requires us then to go beyond identifying assets or the lack of them among the poor, to actively thinking about how they can be used. In other words, what the ‘poor’ lack are not the assets necessary to economic success but, most importantly, an easy access to the property mechanisms that can legally unleash the economic and social potential of these assets. Only then can they be used to produce, secure and guarantee greater value in the expanded market.

Another interesting part of his work is the power ascribed to history and its lessons for the present, reminiscent of Rostow’s10 sequential stages of growth. He notes that the property-title revolution of the 18th and 19th centuries was a catalyst for capitalism’s triumph in western Europe and North America. He proceeds to a narration on the various ways in which informal property relationships were brought to formality by means of a complex interaction among the informals, greater society and the state.11 ‘The genius of the western nations,’ De Soto writes, was that they ‘recognized that social contracts born outside the official law were a legitimate source of law and found ways of absorbing those contracts,’12 creating a unified legal property system.

Finally, and converging with recent trends in the discipline of Development Economics De Soto’s work keeps research and policy well in the domain of incentives,13 and how these are perceived by economic and political agents. However, despite this convergence in the literature on how to create the right structure of incentives, poverty alleviation and economic growth have not taken place in the developing world partly because incentives do not emerge automatically. Instead, they are shaped by an interaction of public policy and societies’ perceptions and reactions to it.

As mentioned above, De Soto’s theory was translated into land titling projects in several countries, attempting to create a formal system of property rights that would trigger development. However, it is yet to be empirically confirmed that possessing a title automatically shapes the right incentives to which agents unfalteringly respond to, or whether they face other more binding constraints. Broadening the informational base on which development is theorized involves not only the breadth of information used to understand the problem but also to devise the solution for it. Ultimately, the claim that the legal system will eliminate chaos by defining and enforcing property rights assumes that such definition and enforcement is easy.

‘What is it about these social constraints that gives them such a pervasive influence upon the long run character of economies?’ – Douglass North, 1990

On Culture: Leading social and political theorists from Tocqueville to Weber have postulated that culture exerts a decisive influence on the people’s economic and political development.14 Yet, an interesting premise of De Soto’s theory is the denunciation of the myth of cultural or geographic determinism and how it can hinder or promote development. The line of argument used is that developing and former communist countries do not share a lack of entrepreneurship or cultural backwardness. The proof is that the poor have accumulated trillions of dollars of real estate during the past forty years and have built parallel worlds with their own sources of employment and wealth creation, as well as various successful forms of self-government. However, De Soto goes from an open refusal of cultural determinism to an outright neglect for informal institutions, particularly salient in the translation of his theory into policy.15 He thus neglects a possible gap between law and behaviour once a formal system of property rights is implemented.

Though there is some empirical evidence that the law can be a very powerful tool in promoting institutional change, social consensus on property is determined not only by formal institutions but also by the informal social institutions of trust, ethics and values, which ultimately ensure the effectiveness and sustainability of any legal reform.16 Secure property rights are neither granted politically by the state nor guaranteed economically by private actors, but emerge as an equilibrium outcome of the interaction of both. Concerning informal institutions, a social consensus must develop on how upholding the obligations and rewards of a just and stable society is a matter of universal self-interest. The system must therefore be understood and desired by all to be sustainable and respected (Bateman and Hochman, 1991).17

Ultimately, culture need not only be considered an immutable feature that determines societies’ mental constructs, which in turn condition behaviours. It can instead be understood as an evolving hybrid of influences and perceptions of incentives that result form the interaction between formal and informal institutions.

On Citizenship: De Soto tends to view property rights as the overarching factor creating responsible, committed citizens. However, this can be particularly difficult in the case of for instance Latin America where corruption, lack of civic and legal education, rent-seeking and the contradictions between well-intentioned public policy and uneven enforcement run deep.18 A growing shadow economy can symbolize a weakening of the state and its democratic potential as too many chose to ‘exit’ the system rather than to ‘voice’ their needs through it.19 An erosion of the credibility and loyalty to formal public institutions can thus strongly impact the quality of governance and the individuals’ response to the incentives it seeks to promote.

Developing nations face problems of low productivity, low investment, inefficient tax systems, misrule of law, unqualified labour and uneducated citizens, and limitations of technological progress, among others. To thrive and be brought voluntarily into the formal sector in a sustainable manner, informal communities need training, know-how, access to technology, trust in the state-society relationship, work ethics and mostly formal and informal education on how to use their newly acquired legal and economic rights.

There is a real risk that public policy focuses exclusively on the provision of a formal title over property, while neglecting a bundle of financial, legal, political and educational reforms that would together provide the informal sector with the necessary scheme of incentives to use the formal system of regulation of the economy and society. If the private sector and civil society clearly understand and accept the legitimacy and procedures of the system, not only can they increase the likelihood of successful enforcement but will also lower the costs of the process. Only then will a dual track enforcement guarantee the sustainability of property rights: the efficiency and accessibility of formal institutions supported by the self-enforcement provided by agents trusting and understanding the system.

On the other hand, the level of generalizability of De Soto’s theory is also weak when facing the possible urban/rural dichotomy. Though implicitly aimed at the urban informal sector, De Soto frequently alludes to its similarities with the rural sector instead of stressing the differences between them. The notion of individual property rights is alien to many rural communities, whose development, given their levels of social capital and social cohesion, may well lie in the maintenance of a communal property system. Furthermore, informality doesn’t always include the poorest and most vulnerable in society. To some extent, De Soto does not recognize the heterogeneity of the sector, which includes both entrepreneurial as well as exploitative forms of economic activity that have little incentive to formalize even when given the opportunity to do so.

On the Nature of Law: Alvarado (2001) takes on another line of argument to criticize De Soto’s work concerning the nature of law and codification. In his view, De Soto’s argument equates the integration of property systems with the establishment of unified law codes. However, the author stresses that these two processes are far from being identical as an ‘integrated property system can exist quite independent of a unified, centrally administered legal system.’ In fact, ‘the former provides information about property that can be accessed centrally while the latter provides security of transfer of property’ (Alvarado 2001). Therefore, the ‘extra-legality’ De Soto highlights in the western past20 is not the extra-legality currently being experienced in the developing world.

In Alvarado’s view, it corresponds to another form of legality, that of customary law rather than centralized legislation. De Soto’s argument overlooks this distinction arguing that because there was no centralized legislation and codified law, then there was extra-legality. However, the kind of exclusionary legal order that typifies developing nations is the product not of custom but of ill-devised legislation and codification of law that makes extra-legality a necessity for survival.21 This thrusts the discussion into the realm of common law versus civil law systems, which De Soto does not deal with in-depth, assuming instead the superiority of the latter over the former.

All in all, The Other Path is a well-documented and eye-opening piece on informality in the developing world. The Mystery of Capital in turn reduces the scope of the problem to the role of property law in economic development. However, a simple, stable and efficient system of property law can only be the beginning as a necessary yet not sufficient condition for development.

For De Soto, possessing a title over one’s land would create credit worthiness as well as committed and socially responsible citizens. However, this argument assumes that trust in the state would suddenly increase in order to uphold the system, with the power of economic rationality prevailing over social norms in individual decision-making; that a title can serve as an effective collateral for business loans, despite the fact that the judiciary might be slow and inefficient, making it impossible to foreclose a collateral. It assumes that individuals would believe in a title issued by a certain government authority without fearing that it might be revoked when a new party comes to power and that land trafficking and re-invasions of land would halt despite the weak policing of these areas such as inner city slums or suburban squatter settlements.

As De Soto argues, property consists not on the assets themselves but on the social consensus on how they should be owned, used and exchanged. Only when this consensus is sufficiently strong can these assets be translated into capital in order for them to actually raise the quality of life of the poor. Social consensus is shaped precisely by both formal and informal institutions as there is a difference between the legalization and the institutionalization of property rights. The former requires a broader set of institutional adjustment beyond a system of property law. The latter requires an entirely different set of societal norms, values and structures that need to be understood by policy-makers and citizens alike. Legitimacy and trust in the system involves the joint efforts of improved sanctioning and enforcement of a whole spectrum of legal, political and economic rights.

Hernando De Soto’s work has provided an invaluable contribution to development theory and the prominent role given to legal engineering refocuses development research and practice on the re-emerging field of law and development. His empirical investigation gives a new boost to the study of how institutions and particularly legal systems play a quintessential role in sustainable development. However, further research ought to be focused on how to translate this body of knowledge into implementable and effective policies to address informality. Attempting to strike a balance between the need to simplify policy procedures and the need to reach a broad range of goals that constitute development, as always, remains the challenge of the day.

Sandra Sequeira

 

Footnotes:

1. I use the term informality in this article in order to be consistent with Hernando De Soto’s terminology. As stressed by the author, this term does not refer to a lack of rules in ‘informal communities’ but instead refers to a different set of rights and duties that are confined to each community. It encompasses economic activity that takes place outside the formal norms of economic transactions established by the state and formal business practices, in a legal and social environment in which similar activities are regulated. It can be present in every single sphere of social, political and economic life from housing, to industry and commerce, to law.

2. Hernando De Soto, The Other Path, Harper and Row, New York, 1989.

3. ODA stands for Official Development Assistance.

4. Enrico Ghersi, ‘The Informal Economy in Latin America’, The Cato Journal 17(1).

5. The absence of formal dispute settlement mechanisms and strong rule of law hinder the enforceability of contracts and are a source of social and economic instability. Entrepreneurs in the informal sector cannot take advantage of economies of scale, remaining small and hidden. First to avoid detection, second because they lack legal protection over their capital investment and third because in a risky environment it is preferable to substitute labour for capital –while evading the costs of labour regulations – and remain small in order to capture economies of flexibility. Risk management is also sub-optimal as informal firms have no possibility of declaring limited liability, cannot expand their network of consumers through advertisement or obtain insurance coverage. All create serious disincentives for growth and capital investment. De Soto (2000).

6. Hernando De Soto, The Mystery of Capital. Basic Books, New York, 2000.

7. A plea reiterated time and again by Amartya Sen. See Amartya Sen, Development as Freedom. Anchor Books, New York, 2000, as well as footnote 13 in this study.

8. ‘If economists wished to study the horse, they wouldn’t go and look at horses. They’d sit in their studies and say to themselves, ‘What would I do if I were a horse?’ Ronald Coase, in De Soto (2000).

9. In the Wealth of Nations, (p. 492), Adam Smith defined capital not as ‘the accumulated stock of assets but as the potential it holds to deploy new production.’ According to De Soto, this essential meaning of capital has been lost to history. Its revival is one of his major contributions to the field.

10. W.W. (Walt Whitman) Rostow, The Stages of Economic Growth: a Non-Communist Manifesto. Cambridge University Press, 1960.

11. The example given in De Soto (2000) is the 1862 Homestead Act in the United States that turned ‘millions of rebellious squatters into legitimate landowners overnight, giving life to vast amounts of capital.’ Yet this perception took time to prevail. In the United States, 80 years passed between George Washington’s complaining about squatters and the enactment of the Homestead Act. In Japan, the formalization of property rights took 60 years, from 1890 to 1950. In the United Kingdom, reform efforts continued from 1829 to 1925. Thus, De Soto concludes, it is a long yet rewarding path for development.

12. De Soto (2000).

13. Amartya Sen’s (2000) seminal reconceptualization of development as freedom also urged for the creation of the right scheme of incentives for development. In this case, emphasis was placed on how freedom is instrumental and constitutive of development. By introducing this freedom-valuing ethical system to guide public policy, Sen tries to reconcile the benefits of economic growth through the operation of free markets with the broader aim of fulfilling intrinsic individual liberties and needs through social safety nets. Thus, in the search for the right incentives, we should broaden the informational basis of social choice theory to include the crucial variable of how people value freedom, reacting not only to income-generating but also to freedom-generating incentives. Analyzing the economists’ adventures and misadventures in the tropics, William Easterly (2001) also concludes that it is all about getting the incentives right for private individuals, governments and donor agencies to behave as economic theory predicts them to. These are but two influential examples from the literature.

14. For a compilation of articles on the subject see Culture Matters: How Values Shape Human Progress edited by Lawrence E. Harrison, Basic Books, 2000.

15. Institutions are rules that shape the behaviour of organizations and individuals in society. Formal institutions consist of constitutions, laws and regulations, contracts and internal procedures of specific organizations; while informal institutions relate to values, norms and social codes (Rutheford, 2001; Burki and Perry, 1998).

16. To understand what creates an efficient institution of property rights, Douglass North stresses the need to consider ‘informal constraints, formal institutions and the transaction costs’ inherent in political processes (North, 1990).

17. Barry Weinsgast (1997) presents an interesting model on how democratic stability as a limited form of government emerges when there is societal consensus about the limits placed on the state. Citizens in stable democracies then possess a relatively common set of understandings about the ‘appropriate boundaries of government, the sanctity of political rights and the duties of citizens to preserve them. Societies that have resolved their coordination dilemmas, paralleling the Pareto optimal equilibrium, will therefore exhibit three complementary phenomena: stable democracy, a set of political institutions and rights of citizens that define limits on the state and a shared set of beliefs among the citizenry that those limits are appropriate and worth defending.’ What is interesting to retain from this model is how he looks at the reverse causality of the variables. Democracy does not arise because some countries happen to have the relevant share of values. Stable democracies instead may be the ones fostering citizen values. Yet the pre-condition for these values to reinforce and be reinforced by democracy is that agents in society solve their coordination dilemmas and social trust in the system prevails (Almond and Verba, 1963).

18. Examples of this situation are already emerging in Peru where a recent land titling project initiated by De Soto has delivered over 1.2 million titles to informal settlers. Land-trafficking, now fuelled by formal titles that increase the value of the assets in the market, chaotic urban development and environmental urban degradation due to haphazard titling linked to the need to secure vote banks, are both still hindering the improvement of quality of life among these communities.

19. Albert O. Hirschman, Exit, Voice and Loyalty, Harvard University Press, Cambridge, 1970,

20. Vide footnote 9 of this study.

21. In The Mystery of Capital, De Soto describes how settlers in the American West in the 19th century could not obtain clear title to their land because lands had previously been granted to large landowners by decree, by colonial assemblies, or by governors. He goes on to claim that the existing common law did not ‘provide guidance for how courts should handle cases involving people who had bought or inherited land of dubious title,’ and that, ‘the English common law of property was often ill-suited to deal with the problems that confronted the colonists.’ However, as argued by Alvarado (2001), the fact that there were no precedents to solve new situations does not mean that the common law provided no solutions to the case. ‘It is precisely in such situations that the common-law approach proves its worth, for it provides a mechanism for dealing with the situations as they arise on the ground.’ Alvarado (2001).The courts could then turn to local communal customs and create a precedent that would build into the body of law aimed at regulating transactions over land.

 

References:

Gabriel Almond and Sidney Verba, The Civic Culture: Political Attitudes and Democracy in Five Nations. Sage, Newbury Park, CA, (1963) 1989.

Ruben Alvarado, ‘A Review of Hernando De Soto’s The Mystery of Capital’, 2001, www.wprdbridge.net

Worth Bateman and Harold Hochman, ‘Social Problems and the Urban Crises: Can Public Policy Make a Difference?’ The American Economic Review 61(2), Papers and Proceedings of the 83rd Annual Meeting of the American Economic Association (May 1991).

Shahid Burki and Guillermo Perry, Beyond the Washington Consensus: Institutions Matter. World Bank, Washington DC, 1998.

Hernando De Soto, The Other Path. Harper & Row, New York, 1989.

Hernando De Soto, The Mystery of Capital. Basic Books, New York, 2000.

William Easterly, The Elusive Quest for Growth: Economists’ Adventures and Misadventures in the Tropics. The MIT Press, Cambridge, 2001.

Enrico Ghersi, ‘The Informal Economy in Latin America’, The Cato Journal 17(1).

Lawrence Harrison, Culture Matters: How Values Shape Human Progress. Basic Books, 2000.

Albert O. Hirschman, Exit, Voice and Loyalty. Harvard University Press, Cambridge, 1970.

Douglass North, Institutions, Institutional Change and Economic Performance. Cambridge University Press, 1990.

Douglass North, ‘Institutions’, The Journal of Economic Perspectives 15(1), Winter 1991: 97-112.

W.W. (Walt Whitman) Rostow, The Stages of Economic Growth: A Non-Communist Manifesto. Cambridge University Press, 1960.

Malcolm Rutherford, ‘Institutional Economics: Then and Now’, The Journal of Economic Perspectives 15(3), Summer 2001: 173-195.

Amartya Sen, Development as Freedom. Anchor Books, New York, 2000.

Barry R. Weinsgast, ‘The Political Foundations of Democracy and the Rule of Law’, The American Political Science Review 91(2), June 1997: 245-263.

Oliver E. Williamson, ‘Economic Institutions and Development: a View from the Bottom’, in Mancur Olson and Satu Kahkonen (ed.) A Not-So Dismal Science: A Broader View of Economies and Societies. Oxford University Press, 2000, 92-118.

 

INFORMAL ECONOMY CENTRESTAGE: New Structures of Employment edited by Renana Jhabvala, Ratna M. Sudarshan and Jeemol Unni. Sage Publications, New Delhi, 2003.

CONCEPTS such as ‘informal workers’ and ‘informal sector’ are now giving way to a new understanding in terms of ‘informal economy’. The idea here is to overcome the two distinct notions of informality in work as between informal production denoting the nature of organisation of production and informality in conditions of employment. The editors of the book are associated with the Delhi Group, which is one of the City Groups of the United Nations Statistical Commission that examines the concepts and definitions used to measure the informal sector. The editors are either researchers or activists associated with the working of the informal economy in India and as such they have been rightly motivated to produce this volume.

The point of departure is the inadequacy felt in the Indian as well as international surveys in capturing fully the meaning and reality of informal economy in terms of informal employment of people and informal organisation of production. On the basis of a survey of concepts and definitions, two scholars (Jeemol Unni and Uma Rani) report the results of an empirical study conducted in the city of Ahmedabad. The study attempts to measure the informal economy and its contribution to output, wages, savings, and so on by covering two components of informality. The first is that of non-wage employment covering (a) own-account workers, (b) employers/owners of informal enterprises with at least one hired worker, and (c) unpaid family helpers in both types of informal enterprises. The second is that of wage employment covering (a) employees in the enterprises of informal employers, (b) outworkers or homeworkers, (c) independent wage workers not attached to any one employer, and (d) informal employment in formal sector enterprises.

The results show that in the city of Ahmedabad informal employment constitutes around 75% of total employment (The authors, however, have mentioned that their survey under-enumerated large enterprises but this is something that could be methodologically taken care of). In terms of income, around half the income generated in the Ahmedabad city comes from the informal economy. These two facts highlight the importance of the informal economy which is shown to have increased over time.

The second study (by Keshab Das) in this volume concentrates on a specific industry, ceramics, to examine the informal production arrangements and the quality of employment. A survey of enterprises being the empirical basis of this study, it is limited in its coverage of the informal economy to that of the informal sector. In fact, the definition of informality employed in the studies contained in this book is not uniform, something the editors have pointed out at the outset. To that extent, the empirical application of the informal economy concept has been both limited and diverse. However, the focus on the ceramics industry has brought to light the serious under-estimation of the unregistered sector in the official statistics. Even in the registered sector, there is a high degree of informality in employment conditions. The system of piece-rate wages has been found to be widely prevalent in both the registered and unregistered sectors. The message the study conveys is one of pervasive informality as far as employment conditions are concerned and the ‘registered’ or ‘unregistered’ nature of enterprises hardly makes a difference.

The third study (by Anushree Sinha, N. Sangeetha and K.A. Siddiqui) is based on a social accounting matrix of the Indian economy disaggregated into formal and informal production sectors and formal/informal households. An informal household is one ‘if the major share of household income comes from activities that are informal.’ I did not find this study of much interest in terms of throwing up new knowledge. It says that a large section of the Indian population is involved in informal operations. And it also says that there are certain sectors, apart from agriculture and livestock, where the informal sector dominate in production. It also says that there are poorer households within the informal category.

The fourth study (by N. Lalitha) is on the growth of the unorganised manufacturing sector using the information collected by the National Sample Survey in its surveys on the unorganised manufacturing sector. What the study brings out is the need to improve the method to estimate the income contribution of the unorganised sector.

The fifth study (by Basanta H. Pradhan, P.K. Roy and M.R. Saluja) is concerned with the estimation of savings from informal households. The data source is the Micro Impact of Macro and Adjustment Policies (MIAMAP-India) Project of the National Council of Applied Economic Research covering 5,000 households. The main finding of the study is that of the total household savings, 60% is accounted by the informal households. Of the total households 82% are reported as belonging to the category of informal households. The savings rate in the informal households is around 18% while it is a little more than 25% in formal households. The implications of the findings are not discussed by the authors, but I suppose the intention is to show the contribution of informal (read poor) households to the savings in the economy.

The last study (by Anil Gumber and Veena Kulkjarni) deals with the issue of social security for informal workers by focusing on the health needs and health insurance availability of workers in Ahmedabad district. The households were divided into those with some health insurance cover and those without. The former included the health insurance scheme of the well-known Self Employed Women’s Association, popularly known as SEWA. The study reports that despite a higher net cost of treatment and also out-of-pocket expenses per house of the SEWA scheme (compared to the non-insured households), it is preferred by the households viz-a-viz other insurance schemes. The reasons cited are ‘low premiums’, maternity benefits and coverage of woman-specific issues. However, rural households report a higher level of dissatisfaction with the SEWA scheme compared to the urban ones.

The last paper in the volume is by Renana Jhabvala who is the National Coordinator of SEWA as well as the Chairperson of the SEWA Bank. She narrates through personal experience and observations how the discourse on the informal economy has come to the centrestage, a claim that I can partly understand if it is meant to convey the attention that the subject has received from national and international institutions as well as researchers.

This volume, no doubt, is a welcome addition to the literature that I think will also be of direct relevance to the work of many national and international institutions engaged in policy-making. The studies included are the outcome of careful research work. As the editors make clear, it is about measurement since they believe that numbers have great power in influencing thinking and lobbying for policies. I do share this view. However, I have felt uneasy on a couple of points. The attempt to define the informal economy and distinguish it from the informal sector and worker concepts is a bold one. But the application of this in some reasonable detail is mainly confined to just one study by Jeemol Unni and Uma Rani. Even there, the detailed disaggregation of the workers belonging to ‘own account’ and ‘wage work’ focuses attention on the mode of accessing income with special efforts made to measure the home-based and street workers. I am not sure that this gives one a reasonable understanding of what constitutes informality.

I think informality is to do with people’s work-station in life no matter what organisation of production they belong to. The core element of informality is vulnerability. That large numbers of people who use (or have to use) work as a means to maintain livelihoods find themselves without adequate or regular work, without protection in continuing the work and without security in the event of contingencies. When vulnerability is translated in these terms we are apt to find not a dualistic reality of ‘with or without’ but a continuum ranging from the most vulnerable to the least vulnerable.

A methodological study for the ILO conducted in the late eighties (Urban Labour Market Structure and Job Access in India by John Harriss, K.P. Kannan and Gerry Rodgers, published by International Institute for Labour Studies, ILO, Geneva, 1990) constructed at least seven types of ‘labour statuses’ in which only two could be associated with formal work status in terms of vulnerability. This included not only the salaried and protected (legally as well by organisational strength) workers in enterprises and establishments but also those who are so called self-employed but owned some capital. Those self-employed without any capital (e.g. street vendors) found themselves highly vulnerable along with the irregular (casual) workers without any protection.

From the point of vulnerability what follows is the issue of social protection or social security defined broadly. It is fine to establish the contribution of informal workers towards national income, savings and other macro economic aggregates but the tackling of the problems relating to informality in work calls for collective remedies to address the core issue of vulnerability. It is here the study on social security becomes important. However, the focus of the study is to emphasise the need for say, health care and the willingness of the poor workers to pay for it, if only suitable schemes are designed and implemented. What about collective responsibility of society to provide these workers – who no doubt contribute significantly to the income and savings of the economy – a measure of social security? The state as the agency of society is nowhere in the discussions in the studies as far as its responsibility to lift up the miserable working and living conditions of the informal workers who constitute the majority of the workers.

The three case studies are from Gujarat, well known for the ‘capital-friendly’ nature of its government. But it is important to investigate the response of the state to its workers, especially those in the informal economy. The available literature on the conditions of work and living of the informal workers (see the numerous studies authored by the well-known Dutch sociologist Jan Breman) point to the increasing marginalization of not only those in the informal economy but also those who were in the formal economy till the other day (remember the large scale retrenchment of the mill workers and their consequent informalization). Rapid industrialisation in Gujarat seems to go along with equally rapid informalization, something that one may characterise as one of predatory capitalism.

Gujarat is not an isolated case in India or in many parts of the so called developing countries. The informal economy is expanding and here to stay, as the latest World Employment Report of the ILO shows. It already has a large presence on the stage. We need to bring the state centrestage and force it to act.

K.P. Kannan

 

POLITICAL PARTIES AND PARTY SYSTEMS edited by Ajay K. Mehra, D.D. Khanna and Gert W. Kueck. Sage, New Delhi, 2003.

THE book under review draws our attention to two notable developments in the nature of the party system and the polity in India over the last two decades. First, there has been a dramatic change in the social composition of voters and active participants in politics in the sense we are witness to a democratic participatory upsurge among the peripheral masses, whether seen in terms of caste hierarchy, economic class, gender distinction or the rural-urban divide. Second, party politics has undergone a process of federalization at the national, state and local levels. Among the related developments one can refer to changes in the support bases of ‘historic parties’, an increase in the number of both ‘splinter parties’ as well as ‘relevant parties’, and so on. All these and other developments have led to a cataclysmic change in the nature of political parties – their ideology, strategy, leadership and support base thereby indicating not only a ‘power shift, but also assertions of a federal society over a centralized polity.’

Among the above developments the essays in the edited volume primarily focus on the federalization of Indian politics at three levels, namely, ‘the status and strategies, interaction patterns and processes of India’s innumerable political parties; the texture and pattern of political alliances from the national perspective – particularly, how alliances with regional parties are viewed and made by national parties; conversely, the perspective of the regional parties in making these alliances.’

What have been the features of a federalizing party system in India? Mehra refers to them as follows: organizational and ideological decline of Congress, introduction of conflictual mode of politics, resembling of the national parties in several respects, dramatic change in the social composition of voters and active participants in politics, the failure of the ‘third front’ to consolidate in the face of a resurgent Hindutva ultra rightist forces. The last, namely the rise and fall of the third front, comes up for critical examination in the papers by Bidyut Chakrabarty and Muchkund Dubey.

While referring to the decline of the third front and the emergence of BJP in recent years, Balveer Arora argues that newly emergent ‘bi-nodal’ party system is becoming highly competitive mainly due to the democratization as well as fragmentation of voters and political parties. He bases his arguments on the official data of the 1996, 1998, 1999 Lok Sabha elections. In another empirical study related to the nine Hindi speaking states, Partha Ghosh traces the emergence of a ‘bi-nodal’ party system to the decay in the Congress organization as well as leadership, and also to the challenge posed by a resurgent Hindu nationalist Jana Sangh. It was compelled as early as in the sixties to ‘trip from the razor-edge balancing’ it had done to maintain the support of a rainbow social coalition thus paving the way for the BJP, successor of the Jan Sangh.

In a national election survey data based study of the three elections mentioned above, sponsored by CSDS, Amit Prakash attributes the decline of Congress and the emergence of BJP in the newly emergent bi-nodal system to ‘a greater voter preference for regionally based socio-culturally located parties with mobilization base in a distinct economic grouping in the society.’ The assertion of regional socio-cultural or economic interests is evidenced in the form of the emergence of coalition politics. Reflecting on the regionalization of the Indian party system, Pradeep Kumar refers to the misleading nature of the often emphasized dichotomy between the national and regional parties as ‘not only are the former regional in their support bases, even the latter are sometimes non-regional in their ideological or programmatic make up.’ Both Pran Chopra and Suhas Palshikar consider such regionalization/federalization of party politics as a positive development as long as it does not lead to a politics of divisiveness and a ‘weak centre’ respectively.

Showing concern with the working of the procedural form of democracy, Madhav Godbole suggests the incorporation of ‘a proper constitutional and legislative framework’ for ever-increasing number of political parties in the face of the rising distortions both in the electoral and organizational framework of the parties. In this context he refers to the role of money, crime, electoral manipulation and muscle power on a massive scale. As for the lack of democracy in its substantive form, S.K. Chaube argues that it is reflected in an increasing incongruence between the imperatives of power politics and civilized social ethos.

The edited volume, consisting of original articles especially written for the volume, is welcome as academic writing illustrating the effects of social and electoral change upon the nature of parties and party systems in a post-Congress Indian polity is not easily available. It goes without saying that political parties, unlike in the West, remain central to Indian political life. On a personal note, the volume is dedicated to the late Pradeep Kumar, a colleague at Panjab University who, to recall Paul Baran, was an intellectual in a true sense and not merely an intellect worker that most of us in the university systems are.

Ashutosh Kumar

 

TRACKING GENDER EQUITY UNDER ECONOMIC REFORMS: Continuity and Change in South Asia edited by Swapna Mukhopadhyay and Ratna M. Sudharshan. Kali for Women, New Delhi, and IDRC, Canada, 2003.

‘Our modest attempt here has been to clear up some cobwebs that we feel have gathered over the years around the issue of the identification of gender bias. We examine issues that depend critically on the analysis of the quantitative indicators of such biases… An analysis of gender bias, especially in complex socio-economic situations, must [therefore], pay close attention to context. We attempt to do this exercise within a context that has both a relatively static and a relatively dynamic dimension. The static aspect is that of South Asian societies, stratified by class, caste, ethnicity, religion and location. The relatively dynamic aspect within which these structures are located for the purpose of this set of research is defined by the processes of change that have been put in place in the macro economic policy regimes in these countries through recent economic reforms programmes…(p. 2)

Overall [then] this book hopes to supplement the already rich literature on gender by attempting to put in place a consistent framework for gender analysis, by demonstrating the importance of identifying the context of such analysis, and by highlighting the necessity of differentiating "gender" per se from its various "indicators’. It also seeks to put in place a new agenda of gender research by expanding the existing set of gender indicators to include those such as gender-related stress, anxiety and violence. The viability of such an approach is demonstrated through a coordinated set of household surveys designed for inter-country comparisons. The meso and macro level studies serve to complement the household surveys in an attempt to close the loop. Although it has not been possible to do this here, it is our hope that together, the various components of this body of research will provide the body of ingredients for integrated household and macro level gender analysis in the future ’ (p. 4).

Against the above backdrop, my discussion is confined to a few select papers. As indicated in the title of the book, as also some of the papers, one overarching theme of the book is ‘Reforms’, variously designated as ‘economic reforms’, ‘structural reforms’, ‘adjustment policies’, and so on. The anxiety here is to trace the impact of changes in economic policy at the macro level onto gender relations in society, an exercise involving a two-way tracking of how macro concerns play themselves out at the micro level and conversely, attempting a fit of the micro evidence into the macro picture – both strategies being informed from a gender perspective. While in the Introduction, the first author has admitted upfront that, with the current state of model building and data availability, such two-way tracking is not possible, it is not clear to the reviewer why the editors have persisted with the ‘Economic Reforms’ part of the title for the book as a whole as well as in the title of some of the individual contributions since, throughout, the inability to weave together the three big concerns, namely, ‘Gender, Equity, and Economic Reforms’, sticks out like a sore thumb. It also detracts from other more interesting details and arguments that the book has to offer. (Surprisingly, the theme of equity is not discussed either as a concept or as an analytic category though mentioned in the title. And again, overtly and covertly, gender has, more often than not, got conflated with women).

The paper entitled ‘Non-Conventional Indicators of Gender Disparities under Structural Reforms’ by Shobna Sonpar and Ravi Kapur is a brilliant state-of-the-art paper mapping a range of issues, not all of them amenable to ‘measurement’ but nevertheless extremely significant for our understanding of the ideology governing gender relations of power that structure the construction of gender identity. The authors in their conclusion opine that, ‘[T]he socioeconomic changes wrought by structural reforms have the potential to disrupt existing notions of gender in ways that could be threatening, demoralizing and oppressive for men and women in some contexts and empowering in others’ (p. 56). Except for mentioning the term ‘Reforms’ in the title and the conclusion, throughout the discussion, there is no analytical engagement with why or how reforms will have the said impacts mentioned in the quote. Again while the paper is high on the manner in which it has synthesized issues from a number of studies, it is extremely short on explicating how these concerns may lend themselves/translate into indicators, which in turn can be mapped onto the larger agenda of integrating macro and micro concerns.

Coming to the country papers, the Bangladesh and Nepal papers are extremely weak in content and analysis. In the Bangladesh paper, the survey discussion is interesting in itself. However, it does not add anything extra to existing knowledge on gender disparities; despite the emphasis on context by the editors, what is surprising is the complete lack of contextualization in this case. The paper begins and ends with the survey in the two EPZs of Bangladesh. There is no attempt to situate the study in the rest of Bangladesh economy or from any other perspective, macro or micro. The Nepal paper is more in the nature of a government report with short paragraphs under different headings with no attempt to weave a cogent story linking different variables. It is difficult to make sense of statements such as: ‘On the other hand, there are negative outcomes, some of which are direct outcomes of the process of liberalization. These include the work burdens of women in the areas from where male migration has been stepped up; the alleged increase in violence and depression, and in the number of women going into commercial sex work due to a lack of opportunities’ (p. 151), particularly in the absence of discussion relating to whether such incidence was less at some period in the past, what is it about liberalization that has increased such incidence, what trajectories they follow, and so on.

The most cogent country paper in the volume is on India by Swapna Mukhopadhyay, which has striven to forge links between macro and micro concerns and between conventional and non-conventional indicators. More important, there is also an attempt at a realistic assessment of what inferences are generalizable and how far one can go with or read into data, macro or micro. Her discussions of the field surveys are especially rich for the nuances that they offer and for the manner in which they qualitatively enrich inferences based on secondary data. Thus for example, the methodical manner in which she has arrived at the conclusion that, ‘[T]he perceptional differences that are emerging between the men and women in Sonepat seem to indicate that while gender differences in "conventional" indicators may be closing ,the non-conventional indicators of gender bias may be poised for a worsening phase’ (p. 117), is extremely interesting and worthy of application in a whole range of contexts and studies.

The country papers relating to Pakistan and Sri Lanka though informative on a range of issues are low on analysis and linkages. Often they contain loaded but unsubstantiated statements. For example, on page 157, we have a full paragraph on the impact of trade liberalization, particularly on women in Pakistan. There are any number of statements that indicate a worsening of the employment situation for females in Pakistan. But in the absence of references or figures indicating the dimensions of the problem being alluded to, they do not rise above journalistic pronouncements. Similarly, in the case of Sri Lanka, the survey mode of presentation of data and arguments has robbed the paper of its sharpness, focus and connectivity between different points and indicators. There is, as it were, everything but nothing seems to be cogently connected or related.

The Kerala paper stands quite apart from the rest of the papers in the volume. In itself it is very interesting, outlining the progressive decline in the underlying social base that had in a large measure earlier contributed to strengthening women’s position in society. The paper effectively revisits from a gender perspective the debate surrounding the celebrated ‘Kerala model of Development’, indicating in the process the inability of the model to account for the rising violence and mental ill-health among women, the high incidence of reported suicides, and the increasing evidence of families mediating education and employment decisions of women in such a manner so as to facilitate the ‘marriageability’ of girls. The paper, however, approaches the issues of gender bias and gender equity from a very different perspective; it does not refer to the theme of reforms at all. Within the paper itself there is a disjuncture in the structure of the paper in that the discussions on inheritance and women’s property rights are not organically linked to the subsequent discussion on violence against women or the work participation rates of women.

Manju Senapaty’s paper again is extremely interesting for the insightful details that it provides, particularly on the impact of trade liberalization on employment. More important, the manner in which she has analyzed available secondary data on manufacturing to place women’s employment in context calls into question the repeated but unsubstantiated statements constantly made of ‘increasing feminization’ of particular segments of industry. What Senapaty’s paper does not make explicit but which Ratna Sudarshan in her concluding chapter has effectively brought out is the need to officially visibilize women’s work. The other crucial point in Senapaty’s paper is the politics of international trade that works towards keeping ‘effective’ market access for developing countries very low despite talks of liberalization and opening up of developed country markets. If there was one paper that should have formed the backdrop to the theme of tracking gender equity under economic reforms, it should have been Senapaty’s.

Ratna Sudarshan has competently pulled together the main points emerging from the book and even more effectively mapped the research agenda emanating from the different papers. She also candidly notes the difficulties of attempting clear policy recommendations given the nature of enquiry.

Overall, the editors have attempted an extremely difficult exercise. While I maintain that the attempt at weaving together the themes of Gender, Equity and Reforms has not been very successful, the significant contribution of the book lies in the manner in which it has demonstrated how non-conventional indicators can be usefully deployed along with conventional indicators to enhance our understanding of well-being; more important, such conjoint deployment is essential to pronounce judgment on the impact of particular policies, whether at the global or domestic level, on different segments of the population. The second important contribution is the emphasis throughout on the contradictory paths that these two indicators may take; it is this that makes it difficult to come out with straightforward policy statements since the contexts in which particular policies work themselves out could lead to the two sets of indicators showing very different results. The field-study based papers in the book bear this out very clearly.

Padmini Swaminathan

 

WORKING IN THE MILL NO MORE by Jan Breman and Parthiv Shah. Oxford University Press, Delhi, 2004.

THE MAKING AND UNMAKING OF AN INDIAN WORKING CLASS: Sliding Down the Labour Hierarchy in Ahmedabad, India by Jan Breman. Oxford University Press, Delhi, 2004.