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Wrong Way
| Article
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16146 |
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Section : |
BOOK WORLD
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| Issue
Date : |
6 / 1989 |
2,227 Words |
| Author
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Eliana A. Cardoso
Eliana A. Cardoso is associate professor of international
economic relations at the Fletcher School of Law and Diplomacy
at Tufts University and is the author of Inflation, Growth and
the Real Exchange Rate (1987). Editora Brasiliense will
publish her new book, A Macroeconomia da Divida Externa
Brasileria, coauthored with Albert Fishlow, in May 1989. |
At six o'clock on a chilly morning in Lima, Lucito gets up, drinks his breakfast tea, and is off to work. Barely seven years old, he collects plastic scraps from a garbage heap close to the squatter settlement where he lives. Lucito belongs to the informal market. He will never learn to read and write. If he is lucky, when he grows older, he will buy and sell black-market dollars on Lima's streets. If he is unlucky, drugs will kill him. He and his mother work for a small workshop that melts and recycles plastic. The workshop's owner recently got a one hundred-dollar loan from a U.S. private voluntary association to start his business.
Money from the International Development Bank (IDB) reaches "informals" through local banks, cooperatives, and charities. IDB decided to establish itself as the bank for Latin America's informal sector after Hernando de Soto's book The Other Path advertised a new way to make poor countries rich. De Soto believes the informal sector can create more wealth if only policymakers would reduce state intervention and give free rein to businesses. Like most good stories, de Soto's narrative is also sheer fiction. The informal sector has always been around: It is a manifestation of poverty, not an outbreak of free enterprise. What Latin America needs is investment in education, not legalized tax evasion.
What is the informal sector?
Informal markets have always existed in poor countries that grow too slowly to create good jobs for their fast-increasing and ill-educated labor force. Shops and curbside establishments compete with larger enterprises and fill market niches that larger, formal firms consider unprofitable. Migrants can enter the informal sector easily. Even if they lack the twenty or so dollars of capital needed for self-employment, they can work for others as domestic servants or hired hands.
Scholars acknowledged the existence of an informal sector long before de Soto's literary debut. In the early 1970s, Michael Todaro's research helped explain why massive influxes to the urban labor force failed to show up in unemployment statistics. The informal sector provides incredible amounts of low-wage employment. In the early eighties in Djakarta, the capital of Indonesia, drivers of tricycles used for public transportation numbered almost 400,000.
De Soto, however, leads us to believe that the informal sector has developed a new internal dynamism. For him, someone who does not pay taxes, no matter
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