Several years ago, I was invited to deliver a lecture in Porto Alegre, a beautiful city in southern Brazil. Before my lecture, I did a bit of window-shopping and visited a couple of computer supply stores. Everything in the store sold for two and three times the prices for the same items in the United States – computers, printer cartridges, fax machines, cables, etc.
In a dinner conversation with friends from Venezuela, I was told that it was cheaper to make a call from Caracas to Maracaibo, roughly 400 miles away, by using a credit card to call a telephone number in New York that would route the call through to Maracaibo. In the case of Brazil, the ordinary citizen was being ripped off through tariff restrictions written to protect local suppliers from competition. In the case of Venezuela, it was the state telephone monopoly that was ripping off the ordinary citizen. Prompted by these and similar observations, I felt compelled to comment to my lecture audience in Porto Alegre that the stifling economic measures imposed on Brazilian citizens couldn't happen by random; it must be design. There had to be a government office in Brasilia, the capital, whose members met at least once a week to figure out ways to deliberately make the country poorer. Hernando de Soto, in his "The Mystery of Capital," documents government-created barriers to upward mobility in poor countries. Clark S. Judge reported on de Soto's findings in "Cultural Power," printed in the December 2001 issue of Policy Review. It takes 168 steps and 13 to 25 years to gain a formal title to urban property in the Philippines; 77 steps and 6 to 14 years to do the same in the desert lands in Egypt; and 111 steps and 19 years in Haiti. If you wanted to open a one-worker garment shop legally in Lima, Peru, it would take you 289 days, working 6 hours a day, to obtain the business license. One result of these government restrictions is the development of a large, illegal underground economy, or what's sometimes called the "informal sector." In Venezuela, over 50 percent of the workforce is employed in the underground economy. In Brazil, 60 percent of new rental housing is in the underground economy. In Egypt, 92 percent of urban dwellers and 83 percent of rural dwellers live in homes without clear legal title. This large informal sector is good news in the sense that people are going out and earning an honest, albeit an illegal, living and consumers are being provided with valuable goods and services. Those goods and services come at a stifling cost, however. The very fact that people are engaged in illegal activity makes them subject to bribes and extortion by government officials. It makes it all but impossible for them to obtain insurance and hence increases the overall risk of capital formation. The fact that people go to such lengths to earn a living, in the face of oppressive government regulations, proves something that I've always said: If left to their own devices, people's natural tendency is to truck and barter, and become capitalists. Hernando de Soto estimates that the informal sector real-estate market alone in the Third World and former communist countries has a value of at least $9.3 trillion, or "very nearly as much as the value of all the companies listed on the main stock exchange of the world's 20 most developed countries." Once again, it's that same old tune: Governments are not only the enemy of personal liberty but economic prosperity, as well.