Hernando de Soto

The Other Path

Each time the government grants a privilege or tax exemption, reduces prices, gives a certain type of worker permanent protection from dismissal, or grants an exclusive concession to a certain kind of business it automatically creates costs and benefits which deprive others of incentives and opportunities. For instance, if the state controls the price of bread and decides to fix its price at a level which allows a smaller profit margin than is available through other activities, it may bring about an immediate redistribution of money from producers to consumers, but it will also have created a disincentive for baking bread, causing many to desert the industry for a more profitable one.

In addition to its overall economic impact, however, the redistributive tradition has created in Peru a society where almost all the country's vital forces have organized in political and economic groups, one of whose main aims is to influence government in order to obtain a redistribution which favors them or their members. This competition for privileges through the lawmaking process has resulted in a widespread politicization of our society and is directly responsible for the existence of the bad laws which give rise to the costs of formality and informality.

This trend has reached such an extreme that organizing to obtain the unearned income which the state may hand out or transfer through the legal system, or at least to protect oneself from this process by forming what we call 'redistributive combines,' is not restricted to spheres traditionally associated with political activity—political parties, the mass media, or informal organizations—but extends to business corporations and even families. Changes in the composition and leadership of boards of directors can often be attributed to a change of government. Nor is it unusual to find families in which father and son, brothers and sisters, even husband and wife join or form ties with different political parties or the armed forces in order to get ahead. Another symptom of this need to form redistributive combines is the plethora of political newspapers and magazines in Lima. Many publications have been created specifically to safeguard their shareholders' interests.

These combines are always fighting to ensure that any new laws will not harm their interests and will, if possible, directly benefit them. As a result, the state legislates almost exclusively to distribute unearned income and has transformed us into a democracy of pressure groups. Businesses channel their natural competitive zeal into establishing close ties with the political and bureaucratic authorities instead of into a contest to serve consumers better. Established business owners fight to maintain the privileged situation they have managed to achieve over the years, while new owners, who also want a slice of the pie, fight to win partial advantages through political participation. A legal system whose sole purpose is redistribution thus benefits neither rich nor poor, but only those best organized to establish close ties with the people in power. It ensures that the businesses that remain in the market are those which are most efficient politically, not economically.

This politicization of Peruvian society means that all problems are handled primarily according to the procedures established by the government, rather than according to other standards such as economic efficiency, morality, or justice. Everything is left in the state's hands, and society inevitably becomes bureaucratized and centralized. Politicization, centralization, and bureaucratization can all be traced to the same source: redistributive laws.

The legal system changes as the relative position of those who manage to influence the government changes. This is why we often hear that our legal system lacks uniformity and stability, our laws are negotiable, there is legal anarchy, and what matters is not what you do or want but what politician or bureaucrat you know. Nor should it be surprising that bribery and corruption are characteristic results of a legal system in which competing for unearned income has become the predominant form of lawmaking. Both our traditional history and the history of the informal activities we described in earlier pages are replete with examples of this state of affairs.

However, each time an election takes place, voters assume that, if the electoral process is an honest one, the candidate who comes to power will not succumb to pressure and the technocrats responsible for carrying out the laws the victor proposes will be a group of untainted, disinterested individuals ready to achieve, through some mysterious process, the best and impartial results. All of this is an illusion. There is no established method or theory which enables a politician to decide in a vacuum whether middle-income housing or highways between the capital city and the provinces is needed more, how much emphasis to place on hydro-electric plants instead of refineries, or whether to give greater subsidies to those who work and invest in the region of Puno or those who export added value. All such decisions are in fact simply political value judgments.

And, as we shall see, none of these political judgments can be justified on the basis of pluralism or open debate. In Peru, 99 percent of the central government's rules, which are the means by which wealth is redistributed, emanate from the executive branch, which adopts them without public consultation or control. It is the executive's ability to legislate redistribution without any debate in Parliament or elsewhere that enables redistributive combines to interfere in lawmaking. This also explains why, in countries like ours, property rights are not protected against the political powers-that-be.

Thus, redistributive laws ultimately politicize all sectors of the population, which try to organize in order to live at other's expense. Consumers press for prices below competitive levels, wage earners press for wages above them, established business people try to prevent or delay any innovation that might damage their position, and employees exert pressure to keep their jobs and avoid replacement by more efficient workers. The system has forced all of us to become experts in obtaining protection or advantages from the state.

Laws designed to redistribute wealth to consumers do not do what they are supposed to do: quite the opposite. Attempts to reduce the price of essential goods ultimately cause prices to go up. Research carried out by the Institute Libertad y Democracia (ILD) showed that, between December 1980 and June 198S, prices of controlled foodstuffs increased 31.4 percent more than prices of uncontrolled foodstuffs. This is because any state-imposed price-control system necessarily involves politics and red tape and thus the possibility that, once they have been isolated from market forces, prices will in fact be controlled by redistributive combines. All this causes a tremendous waste of resources. Not only must redistributive combines and the state maintain an entire system for negotiating, creating, and administering redistribution, but society as a whole has to suffer the consequences of negotiation, increased bureaucratization, and a rigid institutional system.

Redistributive combines devote much of their efforts to directing their intermediaries and go-betweens, holding receptions, and using legal studies to win privileges, instead of improving their transactions. Some of the country's best talent and our business people's best hours are spent on waging redistributive wars instead of achieving real progress. Even elite provincial business people have to establish close ties with the redistributive powers in the capital. A significant proportion of the country's formal provincial firms have their managerial offices and executives in the capital rather than on site, simply because their executives can gain more by visiting politicians and bureaucrats than by concentrating on increasing their businesses' productivity. The redistributive legal system has thus helped to centralize economic activity in Lima.

Compared with business people in other developing countries, Peru's executives have to invest more effort in obtaining political information than technical information, something which calls for acquaintances in political and bureaucratic circles, in order to obtain the information needed to take the right decisions. The only winners are those who get the information. Competition for technical information, on the other hand, benefits not only the person who obtains it but also enables anybody to improve the quality or lower the cost of a product. The concept of an oligarchical society conjures up precisely the kind of society which encourages the creation of redistributive combines that take turns or share in controlling the functioning of the state but, in so doing, mismanage the country's resources because, instead of concentrating on production, they devote themselves to competing for the unearned income handed out by the state.