How Corruption Affects The Time It Takes To Do Business

Transcript

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Our next story follows one man's quest to answer this question - what traps poor people around the world in poverty? His answer transformed Peru and is changing poor countries around the world, and it almost got him killed. Here's Planet Money's Jacob Goldstein.

JACOB GOLDSTEIN, BYLINE: Hernando de Soto was born in Peru, but he grew up in Switzerland. And when he moved back to Peru around 1980, he was shocked by the poverty. In the streets of the capital, De Soto saw people carrying stuff to sell on their backs or pushing stuff along in tiny little carts.

HERNANDO DE SOTO: Everything from food to repair parts - they sell everything.

GOLDSTEIN: De Soto was a businessman himself, so he started talking to the street vendors about their businesses.

DE SOTO: And then after a while I found out that they were in the street, but they didn't like being in the street.

GOLDSTEIN: The vendors wanted to have a little shop somewhere, a roof, running water, and De Soto discovered many of the vendors actually had enough money to move into a shop. Their problem was they didn't have bank accounts. They didn't have the permits they were supposed to have. They were living outside the law. De Soto wanted to understand why it was so hard to start a legal business in Peru. So he did the thing that wound up making him famous - he did an experiment. He tried to set up a little business, a small shirt factory, entirely inside the system. He hired a lawyer and a few students and told them go out and do everything you have to do to make this a fully legal factory and figure out how long it takes.

DE SOTO: Here's a stopwatch, go. Get on a bus. Find out what you have to do.

GOLDSTEIN: They had to do a lot. They had to get 11 different permits from seven different ministries. They were asked for bribes 10 times, had to actually pay bribes twice, there were lots of delays.

DE SOTO: In total, it would take you at least 278 days working eight hours a day to do business with a small, little factory.

GOLDSTEIN: If you're starting up a little factory, you probably can't afford to spend nine months getting permits. So you open your factory illegally, and when you do this, De Soto says, it's very hard to prosper. It's very likely that you will stay poor.

DE SOTO: You can't start a company, so you can't raise capital for the same reasons you can't raise credit. It means you can't expand. It means the world before the rule of law.

GOLDSTEIN: De Soto had figured out the problem. Now he wanted to solve it. So he did what business people do when they want to change the world - he launched an ad campaign.

DE SOTO: We put up a lot of radio jingles, a lot of TV jingles and I published...

GOLDSTEIN: Jingles, like ads, like (singing) too hard to start a business.

DE SOTO: Yes, absolutely. One of them was called (foreign language spoken).

(SOUNDBITE OF AD, "WHAT WOULD I DO IF I HAD CAPITAL?")

UNIDENTIFIED PEOPLE: (Singing in foreign language).

GOLDSTEIN: Title - "What Would I Do If I Had Capital?"

(SOUNDBITE OF AD, "WHAT WOULD I DO IF I HAD CAPITAL?")

UNIDENTIFIED PEOPLE: (Singing in foreign language).

GOLDSTEIN: Because I'm going to tell you a story about a country that's doing really badly because only a small group of people has access to capital.

(SOUNDBITE OF AD, "WHAT WOULD I DO IF I HAD CAPITAL?")

UNIDENTIFIED PEOPLE: (Singing in foreign language).

GOLDSTEIN: Of course, that small group of people with access to capital, Peru's elite, they liked things the way they were. They didn't like De Soto's big plan. On top of this, De Soto had another problem - communist guerrillas who were waging civil war in Peru at the time. Needless to say, they didn't like his ideas. They didn't like his little jingle about the wonders of capital, so they attacked his office with a car bomb.

DE SOTO: A car that's loaded with about - I don't know - 200 kilos of dynamite. They light the fuse and leave the car to explode.

GOLDSTEIN: Three people at De Soto's office were killed. Eventually, though, the communist guerrillas lost. And De Soto got a call from the president of Peru. All that research he had done, the stopwatch, the jingle, it was supposed to change the way people thought, maybe even embarrass the government.

DE SOTO: And it worked.

GOLDSTEIN: It worked. Poor people started getting titles to their homes. It got easier to start small businesses. There was even a TV show where the president of Peru himself heard the problems people were having and ordered them fixed on the spot. Peru's economy has improved, but of course it remains a poor country. And De Soto's critics say his ideas are just too simpleminded or that his fix doesn't help the poorest of the poor. Still, De Soto's work got noticed outside Peru. He started getting calls from presidents and prime ministers in other countries. The World Bank in Washington, D.C., used De Soto's ideas to create this annual report - it ranks countries all around the world on how easy it is to start and run a business. For his part, De Soto is still traveling the world with a stopwatch, figuring out how long it takes to start a business.

DE SOTO: In Egypt, for a bakery, it's 548 days.

GOLDSTEIN: (Laughter) So it takes a year-and-a-half to open a bakery in Egypt.

DE SOTO: It takes a year-and-a-half to open a bakery in Egypt. And I've got every photograph of every document of what you do with the photograph to seal everything.

GOLDSTEIN: De Soto's been getting lots of calls from the Middle East and North Africa lately. The Arab Spring, after all, started with an unlicensed street vendor in Tunisia. The cops kept stealing his stuff, interfering with his business. In protest, the young man set himself on fire in the town square. Jacob Goldstein, NPR News. Transcript provided by NPR, Copyright NPR.