Informal Trade Booms : Business in Peru: Old Laws Failing

Eduardo Pena is the proprietor of a movable haberdashery. He sells T-shirts from a collapsible wooden tray in the shadow of Peru’s presidential palace. Low prices, no taxes, no receipt.

“It’s not much,” said Pena, “but it’s a living.”

Another entrepreneur, Hernando de Soto, stuck strictly to the law when he registered his new clothing factory here. In a U.S. city, the procedure would probably take about 10 hours. In Lima, it took him 289 days and 24 bribes to complete the 310 required steps. The paper work involved, pasted end to end, would stretch 100 feet.

The difference between Pena’s approach to doing business and De Soto’s helps to explain the astonishing and growing chasm between the laws that have been enacted in Latin America and the reality of daily life.

Control Undermined

In one country after another, desperate people turn to rebellious ingenuity to get around rigid rules. As a result, the authority of the governments, and their ability to control events, is everywhere undermined.

In Lima today, for example, the state electric company generates twice as much power as it can bill its customers for; the state water company is in the same position. The unaccounted-for half goes to people who have managed somehow to tap the utilities even though they can’t afford them.

In Santiago, Chilean street vendors without licenses or overhead undersell established shops, with one eye on the customer and the other watching for the neighborhood cop. In the bazaar that is Bogota’s streets, itinerant Colombians hawk toothpaste and coca paste, costume jewelry and smuggled emeralds, all with equal aplomb.

In Buenos Aires, where strict safety rules govern public transport, an Argentine housewife moonlights as owner-driver of an unauthorized school bus, piling as many as a dozen nursery school children into the family sedan. Three-year-olds are taught to scrunch below window level if a policeman is spotted.

Breakdown in Norms

Massive breakdowns of the traditional curb-your-dog, get-a-permit norms that Americans take for granted are endemic in Latin America. In large measure it is a result of quick, chaotic urbanization and of the accompanying population boom. The process has been aggravated, particularly in Peru, by the failure of successive governments to adapt old laws to new reality.

It has not been long since old, elegant Lima took pride in itself as “The City of Kings.” Now, people talk about the “Calcutta-ization” of Lima.

In a single generation, since 1958, the city’s population has exploded--from 1 million to more than 5 million and counting. Today, more than 300,000 people, among them the haberdasher Pena, scratch out a precarious living as street vendors, or ambulantes .

For each beggar on the streets, there are hundreds of sidewalk salesmen displaying wares that range from a fermented drink called chicha to black market dollars, bedraggled puppies to cigarettes sold one at a time from open packs.

“There can be no question of eradicating the ambulantes, but rather of organizing them and bringing some order to them as a necessary part of the city’s supply of goods and services,” said Guillermo Nolazco, 29, a Marxist city councilman who is himself an ambulante.

Repression Unthinkable

In Peru, where the national government is centrist and the Lima city government is Marxist, major repression would be unthinkable--even if it were possible. What is left in the lonely name of urban order is persuasion, which is apt to be as incomplete as it is humane.

“We have been able to persuade some ambulantes to move off the streets into special areas set aside for them,” said Elsa Guerrero, a City Hall specialist on the sidewalk entrepreneurs. “But if we do not make it profitable for the ambulantes in the new markets--say, by changing bus routes so that people can get there--they will not stay. What can also happen is that new ambulantes move into the same streets to replace the ones we have relocated, who in turn insist that we remove the newcomers who are bad for their business.”

The flood of immigrants to Lima, nearly all of them desperately poor Indians and mestizos (people of mixed race) from the Andean highlands, has changed the city’s very culture and color, from European coastal white to inland brown. And it long ago overwhelmed the ability of Peruvian governments to structure growth in the capital, leaving the immigrants to create their own parallel society, which is both utilitarian and profitable.

‘Informal Economy’

National attention has been focused on the “informal economy” by a two-year study by De Soto and his free market research center, the Institute for Liberty and Democracy.

According to the study, more than 60% of Peru’s workers earn their living today in an economic underground that functions outside government regulation. That includes 95% of Lima’s public transportation, 90% of the clothing industry--8,000 factories--and 60% of the construction industry.

More than half of Lima’s 5 million people live in houses built without regard to building codes or zoning ordinances. The overwhelming majority of householders in new, poor parts of the city have no legal title to the land on which they have invested most of their life savings. Getting title to land can literally take years, a luxury for people who must scramble full-time in a bewildering variety of enterprises just to make sure of eating.

“In Peru today, workers in informal industries assemble cars and make motors and bicycles,” De Soto said. “They can process food, build power lines, make furniture, lighting equipment, ovens and stoves. They even make precision instruments and tools for the air force.”

Back Door Business

So pervasive is Lima’s underground society, City Councilman Nolazco said, that even many legal factories sell a major part of their production out the back door to the ambulantes--no receipts, no taxes.

De Soto argues that Peru’s informal economy is an audacious free market response to the now irrelevant laws of a bygone mercantile society. In its 450 years, Lima has managed to build 55 municipal food markets, he said. Ignoring the law, ambulantes have built 196 markets.

In the city today, there are 1,450 municipal buses and 8,000 illegal buses. The owner of a legal bus company told De Soto’s researchers he spent 46 hours a month completing government-demanded paper work. The outside-the-law entrepreneurs who run 121 Lima bus routes do no paper work because, legally, they do not exist.

Underground bus owners say they spend an average of 15% of their take to encourage traffic policemen to look the other way. Still, they say, they take home more money than operators in the official system.

In De Soto’s view, the informal economy is not the problem but the solution. The problem, he says, is the government.

Most New Laws Ignored

In an average year, the Peruvian legislature churns out almost 20,000 laws, decrees and edicts. Almost all are ignored by people who do not have the time, the money or in many cases the ability to comply.

“If the legal system continues to push the majority of the people outside the law, there can be no end to Peru’s current social unrest and violence,” De Soto said. “There is also the risk that more and more frustrated members of the informal society will turn to violence. Today, 60% of the population openly disobeys the law, but nobody likes being illegal.”

Lima’s thriving underground society would seem to be vigorous testimony to the success of the free market system. If Eduardo Pena’s T-shirts are too expensive, Olga Olleros in the stand next to his has a great deal for you.

According to De Soto’s surveys, though, people involved in the informal economy do not consider themselves part of the capitalist private sector. That, they say, is something to which only “the ones on top” belong.

Marxist Entrepreneurs

The politics of the immigrant-entrepreneurs is mostly Marxist. On a stroll with Nolazco among his ambulante constituents, one hears much “comrade-this” and “comrade-that.” The Marxist parties, always good at organizing, are effective in winning reluctant government recognition of informal realities, whether it is water for an illegal settlement or lights for an illegal street market.

De Soto argues that the disparity between the two Perus--legal and underground--is too great to remain stable indefinitely. The challenge for Peru and other Third World nations hamstrung between law and reality, De Soto says, is to absorb the informal economy into the system through modernized law and a realistic government vision of a changed society.

In Peru, he said, a first step could be something as simple as directly consulting the people affected before new laws are decreed.

“If we don’t find a peaceful way to reform the outmoded structures,” De Soto warned, “we’re goners.”