The Other Path—Twenty-One Years Later

I have been reading The Other Path by Peruvian economist Hernando De Soto over the past few weeks.  This is not my first encounter with the book; in grad school it was a ‘must read’ and I did check it out of the library, only to stop well before page 50, lost and bored by the excruciatingly detailed research into informal housing and business in Lima.  The book’s main message—that the informal sector was poor people’s answer to an overly bureaucratic state and that property rights for poor people would unleash positive market forces—was well-known and accepted wisdom by the time I was in grad school in the late 90’s (the book was published in 1986).  So, as often as I heard the book mentioned, I felt like I had a handle on what it said and I never got around to reading it.

However, reading it now, as a resident of Lima for the past two and a half years, has been a totally different experience.  Being here makes one see what it must have been like back then, in part, simply because it is the same city and you can picture what it must have been like then, in the 80’s, vividly.  But also because, in many ways, Peru appears to be dealing with the same issues of informality and how the state should respond.  When one sees that context first hand, the originality of the thinking and clearness of the concept really stand out.

This first struck me in the book’s description of the informal street vendors.  DeSoto explains, based on interviews with all sorts of informal traders, histories of street vending organizations, and primary research into what it takes to become formal, the evolution of the typical street vendor.  At first, many street traders begin as itinerant vendors selling ice cream, sharpening knives, and selling fruit.  (I can relate to these examples because all of these vendors pass my house every day, each with their own special whistle or call.)  Next, they stake out some small area of the sidewalk to sell from a semi-permanent location.  Here is where the potential confrontation with the state comes, because a private individual is taking over part of the public thoroughfare.  The next step comes as a group of vendors form an organization to buy land to build a market, off of the street.  Markets are a common sort of construction in Latin America; basically a high roof with rows of stalls and wide aisles to permit shoppers to pass through.  The construction of the market is done informally, i.e., without proper land titles, zoning, building permits, architectural plans, etc.  Because all of this is done informally, members of the organization lack the security of possessing a title and face potential hassles from the state, because technically their market is an illegal business.  Thus, to increase the security of their investment, the organization of vendors ultimately aspires to become formal, a process DeSoto says, in the case of informal markets, takes an average of about 17 years. 

DeSoto chronicles the pendulum swings in regulating street vending since the 1600s (!), from a permissive, laissez-faire attitude to a zero tolerance policy as police sweep all street vendors out of a neighborhood and regulations become more stringent.  Over these 400 years the pendulum swings back and forth every few decades.  This history of trying to regulate street vending is fascinating.  In the 60s and 70s, militant Marxist-led organizations defended vendors ability to sell in the street.  Yet, fascinatingly, in at least one case, when these same leaders enter municipal government, they are faced with the same dilemmas of responding to the legitimate complaints of residents about noise, traffic, and health concerns, complaints from formal vendors about the unfair competition, and from pedestrians and others who cannot use the thoroughfare.  And, logically, these same leaders push the pendulum back to regulating street vending. 

What is clear in all of this history is that there was no easy solution.  Consistently, fair-minded people that tried to find a solution to the problem—on one hand sympathetic to the plight of poor migrants trying to make a living, on the other, cognizant that some limits needed to be imposed for the public good and safety and health concerns—concluded that there was a “structural” problem of too many migrants without opportunities in the countryside coming to Lima to make a living any way that they could.  In other words, this was a problem that went far beyond their ability to address within Lima municipal government.

The brilliant insight DeSoto has is to say that the solution is not contained in either of the two apparent alternatives—regulation or no regulation.  In contrast, he says that street vendors do not aspire to stay as street vendors—they aspire to get off the street and ultimately have a formal stall, with legal title, and no problems with the state.  Thus, the root cause of the problem of too many street vendors is that the laws and the legal system do not work well—it simply takes too long to negotiate the extremely bureaucratic and complicated procedures to build a formal market.  Therefore, due to the overly bureaucratic system of permissions and processes leading to the building of a formal market (i.e., those compliant with all regulations and with fully transferable and legal property titles), too few markets are built to satisfy the demand and would-be off-street vendors stay as street vendors. 

DeSoto summarizes the situation as follows:  “A particularly good example of this tendency is the regulations on street vending…which Lima’s municipal government, controlled by the Marxist left wing, enacted in 1985 through Ordinance 002.  If, instead of overregulating the street vendors, the authorities had removed the obstacles to their activities and made it easier for them to form business organizations and obtain formal credit so that they could build more markets, by 1993 all of today’s street vendors would be off the streets.”

This insight and history leads one to interpret day-to-day events and experiences in a whole new light.  For instance, just in the past month, during the Christmas shopping season, the front pages of Lima’s newspapers have covered stories balancing regulation of informal vendors with the need for public safety.  A front-page article in Lima’s El Comercio on the subject begins by saying, “Despite police patrols, the invasion of “pullers,” itinerant sellers and stevedores in the zone of Gamarra has become uncontrollable.  According to the Seventh Region of Lima, the risky conditions advised in October have not been corrected.  Abundant inflammable material is in the shopping halls of Mesa Redonda.”  This last sentence refers to a shopping district fire  the previous month due to informal electrical connections and lack of regulation. 

It would be difficult for me to say, with my lack of perspective, whether or not Peru has substantially changed its approach to what DeSoto sees as the root causes of informality, bad laws and the legal system, or whether it continues in its pendulum swings of regulating the symptoms.  Certainly, however, DeSoto’s ideas are now conventional wisdom in development thinking worldwide and the lens DeSoto brought to bear on 1980’s Peru has become a basic one to analyze a country’s laws and regulations.  

For example, Peru and most countries in the world are measured annually by the number of days to register a business.  Peru has improved somewhat in recent years and in 2006, the World Bank measured that it took 72 days for one to start a new business in Peru.  For comparison sake, note that the number of days for OECD countries is 15 days and the average for Latin American and the Caribbean (which is the highest for any region in the world, including Sub-Saharan Africa) is 68. 

Too much should not necessarily be read into Peru’s performance on the days to start a business indicator.  As Peru and the United States have just signed a free trade agreement, there is a wide recognition that for the agreement to meet its potential, small and micro businesses need to become part of the export economy.  Informal businesses have a tough time doing so–while Peruvian businesses may be able to buy from informal businesses, foreign buyers need formal business partners with receipts and legal incorporation.  Thus, Peru’s current administration debates a law for Micro and Small Businesses  which would allow graduated standards, making it easier for such businesses to comply with the law and be formal.  Nevertheless, it’s hard not to sense, as someone said to me recently, that Hernando DeSoto is a perfect example it being impossible to be a prophet in your own land.

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