Can Small Business Be Beautiful?
If you give the world’s poor legal title to their land – no mater how humble or how acquired – you could give them the collateral they need to start businesses and create jobs.
“I hate telling you this, but I don’t think your [foreign] aid really matters much,” influential Peruvian economist Hernando de Soto told a Canadian audience a few years back, during the taping of a talk for the CBC radio show Ideas. “You are a small part of [Developing World] economies. It just doesn’t matter. It’s too small.”
De Soto, consultant and author of The Mystery of Capital, is the man that politicians and key decision-makers – including Canadian Prime Minister Paul Martin – turn to when they want to get a handle on Third World poverty and the role of the private sector. A United Nations report released in March 2004 titled Unleashing Entrepreneurship: Making Business Work for the Poor, which Paul Martin co-authored with former Mexican president Ernesto Zedillo, was heavily influenced by the Peruvian economist’s writings.
De Soto says that foreign aid has more to do with the person doing the giving than the person receiving. “I know lots of people, including myself, that give resources to the poor so that they stop starving, but I know that I am not going to change the situation [in the long-term].” The crux of the problem, de Soto says, is that the poor need to start businesses, create jobs and earn a living.
But if you are living in poverty, getting the capital to start a business can be next to impossible. Few banks will open their vaults. De Soto believes the poor should be given title to their homes and land, no matter how humble or how acquired. This champion of property rights would give full legal protection to the de facto rights observed informally by millions worldwide, including so-called squatters. These impoverished citizens are sitting on billions of dollars of land and assets, which could be used as collateral to start or expand businesses. Or, land could be sold once its value increases, freeing up capital for a better life.
Streamlined legal systems would further help the budding entrepreneur. De Soto points to bureaucratic laws in many Developing Countries that slow down or impede the formal registration of business enterprises. This encourages the growth of black market or informal businesses, ranging from street hawkers of miscellaneous sundry to household-based manufacturing. In some countries, this informal sector counts for 50 percent or more of the total economy. The solution, according to the report by Martin and Zedillo, is to bring these unregistered enterprises out of legal limbo, give them mainstream protection and, presumably, tax them.
De Soto is a busy man, in demand as president of the Lima-based Institute for Liberty and Democracy. He works with governments in Mexico, Egypt, the Philippines, Honduras and Haiti. The charismatic consultant, whose has two pet dogs called Marx and Engles (they have little respect for private property, he has joked), led a pro-capitalist intellectual crusade against the ideological underpinnings of the Shining Path in Peru, an ultra-Maoist and ultra-violent guerilla army. He was on the top of their hit-list and survived three attempts on his life. He has been credited in part with the Path’s downfall.
Away from the radical fringe, de Soto’s answer to poverty has it mainstream critics too, including Roy Culpeper, the director of the Ottawa-based North-South Institute. He says that many urban dwellers across Latin America, Africa and Asia are too poor to possess sufficient living space to leverage bank loans. “These properties, perhaps as big as the office that I am sitting in, are just not enough.”
De Soto’s appeal stems from his ability to deliver “a simple message” for complex problems to an audience suffering from “development fatigue,” Culpeper argues. It’s understandably appealing when “someone comes along and says, well, you shouldn’t be taxing the honest taxpayers of the Developed Countries, because the answer is really that the poor are sitting on assets, so give them title and liberate that capital.”
But Hernando de Soto is “something of a hero” to business leaders in Egypt, says Fred Mooney, a Guelph-based Canadian consultant working in the city of Mansoura, in the Nile region of Daqahliya. Pre-1989 Soviet influence unrolled miles of red tape, and encouraged companies to be less market-oriented and more focused on bartering goods with the Russians. De Soto discovered that the process of gaining title to land in Egypt can take six to 14 years, and require as many as 77 bureaucratic steps with applications to 31 different entities, mostly public bodies.
Mooney is helping to strengthen small and medium-sized enterprises – which employ on average six to 50 employees each – active in metals, plastics, textiles and food processing. A project manager in the emerging markets division of Deloitte Touche Tohmatsu, a large international business consulting firm, Mooney is looking after a series of business services projects supported to the tune of $13-million by the Canadian International Development Agency (CIDA).
In co-operation with government ministries, non-governmental organizations (NGOs), women’s groups and academia, the firm of Deloitte Touche focuses on the development of local support networks and organizations to provide advice in areas like marketing, product quality control, business proposals and training. One major achievement is the establishment of ‘One-Stop-Shopping’ in partnership with the governorate of Daqahliya, where local entrepreneurs need only to go to one office to have their businesses licensed. In the past, this process involved an arduous journey through various government ministries.
“It used to take a year and some baksheesh to start a business,” says Mooney. “Now, on average, we are down to 19 days.” Mooney concedes that job creation is a longer-term goal of these enterprises. “Often, when we go into a place in the first year, or maybe the first two years, it doesn’t change the employment level because we have introduced efficiencies and …better quality control to help them find new markets.” The same service is being rolled out in other parts of Egypt.
While de Soto’s ideas are focused on slicing the bureaucratic red tape in the urban environment, do they have much relevance in the countryside of the South where many of the world’s people live in impoverished conditions – and where the issue of land reform is paramount?
In her travels to Ecuador, where large estates and “servile social relations” are often the norm in rural areas, York University political scientist Lisa North has watched firsthand how title and ownership can have a powerful impact on people’s livelihood and sense of economic independence. Yet she is critical of de Soto’s support for the push by large lenders of capital (for example, the World Bank and International Monetary Fund) on client states to open up their markets to competition, as well as deregulate and privatize public services.
North says it the ‘rough justice’ nature of capitalism and lack of subsidies for local enterprises that has hurt the kind of small businesses that de Soto, and for that matter Martin and Zedillo, want to foster and nurture. “Many of the policies that are being pursued actually undercut the possibility of developing entrepreneurship on a widespread scale,” says the co-editor and contributor to Rural Progress, Rural Decay: Neoliberal Adjustment Policies and Local Initiatives.
Between 1997 and 2001, North made annual visits to the Ecuadorian community of Pelileo, population 38,000, to follow the progress of some of the most successful household-based enterprises in the canton. In many of these businesses the women take a leading role as owners or partners. “The women never took a back seat,” North notes.
The political scientist says that this Andean highland community – which includes both a village and the surrounding rural area – is an ideal scenario for de Soto’s theories. As a result of broad distribution of land dating back to the 19th century, many small farmers enjoy title to their own parcels of property. Starting around the Second World War, many leveraged this land and diversified into the manufacture of clothes, particularly blue jeans for local markets. Employing three to seven people, mostly other family members, these Andean enterprises maintain farming links to the land as an “insurance policy” against market fluctuations in demand for their clothing.
The initial successes of the businesses led to a more prosperous community where people could afford to improve their houses – many of which are now brick – and to develop new skills. What is noteworthy, says North, is that while these people had better access to credit because of land ownership, they mostly used it in their business dealings with wholesale distributors. Very little assistance was requested from NGOs or international donor agencies, she reports. “We are not talking about people who are millionaires. But we are talking about a situation in which there was a lot of employment, something above minimum wages.”
Unfortunately, this combination of farming and clothing manufacturing could not save between a quarter to a half of the 700 such enterprises that had been active at their height in the 1980s, from closing their doors a decade later in face of competition from cheaper imports. Food and garments flooded in from Peru, Columbia and China. The adoption of the U.S. dollar by Ecuador made its products increasingly uncompetitive. “Neighbouring countries were devaluing [their currencies] and producing the same kind of things [for less],” says North.
What also did not help was the weakening of local consumer markets in Ecuador. The loss of jobs in metal and mechanical industries in the nearby provincial capital of Ambato, the result of competition from foreign imports, meant that fewer people could afford to buy new jeans. By the third year of her journeys, North saw the first signs of outmigration from Pelileo, which until then had never experienced such flight in a substantial way. “People were debating which member of the family should go abroad [to earn income and send back money],” North recalls.
The political scientist has seen estimates that about a million Ecuadorians have left since the late 1990s to work in Spain, Italy and the U.S. – particularly New York City and Los Angeles. “Some of the textile industries in New York have got incredibly well-trained people from the Ecuadorian communities that have been devastated by liberalization policy.”
North admits that she fell in love with “the hardy and resourceful” people of Pelileo. “And when I saw what was starting to happen to them, it broke my heart.”
Development experts are divided on whether aiding small businesses in Developing Countries is a worthwhile goal. The North American-European model of the isolated individual creating a business out of a great idea is difficult enough in the North, especially in the absence of support from banks or government, says Daryl Reed, an assistant professor and coordinator of the business and society program at York University in Toronto. It’s even harder in the South. “Is that a realistic model for success?” he asks. “[The United Nations report and de Soto] don’t ask the question because that is the only way they can think about [development].”
And, Reed adds, the UN report on entrepreneurship ignored the success of many “community and co-operative” based enterprises that can, with technical and financial support, generate as much or perhaps more employment than corporations focused on short-term profits.
In Africa, where subsistence farming is the norm, it makes more sense to encourage the development of community-based enterprises where all of the profit is plowed back into ongoing projects, says Winston Johnston, a retired Charlottetown-based plant pathologist and president of the PEI non-profit Farmers Helping Farmers. “We work with groups of people. We don’t work with an individual entrepreneur who is making money out of it.”
Since 1997, his organization has helped the 7,000 inhabitants of Nyeri and the surrounding rural district in Kenya set up the Wakulima Self-Help Group Dairy with the assistance of about $154,000 from CIDA. At the centre is a bulk-cooling tank, which facilitates the safe storage of locally generated milk. In the past, farmers were only able to sell their morning milk from the cows because they had no means to refrigerate milk overnight from afternoon milking. With increased production and a higher quality product, the dairy tank has led to the doubling of sales and increased income for the community.
The Wakulima co-op has expanded with the addition of a feed store, a credit union, a hardware store and some veterinary services for artificial insemination. Members can now afford school fees and medical bills for their children. “It’s the biggest thing in town,” boasts Johnston. The direction of the co-op, which employs about 60 people, is set by an elected board of directors.
One interesting perspective of the Kenyan farmers is that they do not like to use their land as collateral to borrow money. Johnston says that the credit union, which all the farmers belong to as members, relies more on trust and personal references from each other to guarantee loans.
It’s a different relationship to land then the one de Soto advocates using to bankroll a better future. “Their whole life depends on the land,” says Johnston. “It is too valuable to let anyone take it away.”