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“Dead capital” in 12 Latin American countries worth $1.2 trillion, according to report

Dwellings, rural properties and businesses in the informal or “extralegal” sector of 12 Latin American countries are worth more than $1.2 trillion, according to a report presented today at a conference at the Inter-American Development Bank.

IDB President Luis Alberto Moreno said the study on informality in Latin America and the Caribbean, together with other research on poverty conducted or sponsored by the Bank, will help guide a new development initiative, Building Opportunity for the Majority.

In a speech at the opening of the conference, Moreno said 360 million people, or 70 percent of this region’s population, live with incomes with a purchasing power under $300 a month.

“While they may not fit within the standard parameters of poverty, this population lacks adequate access to economic opportunities and essential services such as housing and piped water, to say nothing of financial services,” he said.

Low-income people also pay a “poverty penalty”, Moreno added, a perverse tax measured in higher costs for drinking water, time wasted on deficient transportation systems and workdays lost due to preventable diseases.

“But these persons constitute the backbone of our societies and must be at the center of our efforts,” Moreno said. “Our challenge is to provide them opportunities and tools so they may take full advantage of their assets and improve their living standards.”

Under Building Opportunity for the Majority, the IDB will work with the private sector and civil society to support innovative and practical solutions to persistent problems such as access to housing, basic infrastructure, financial services, employment and entrepreneurship opportunities and modern technologies.

The initiative will also require close coordination with various levels of governments to establish adequate rules for markets to function properly and to eliminate bureaucratic barriers that prevent the poor from exercising full economic rights.

Pushed into informality

These obstacles were pointed out by Hernando de Soto, whose Instituto Libertad y Democracia (ILD) researched informality in Argentina, Bolivia, Colombia, Dominican Republic, Ecuador, El Salvador, Guatemala, Haiti, Honduras, Mexico, Panama and Peru.

De Soto discussed the preliminary results of the report, which will eventually cover all 26 member countries of the IDB in Latin America and the Caribbean and provide a roadmap for reform in the region.

In each country, ILD analyzed the characteristics of the informal or “extralegal” sector, access to property rights and business formalization, and the magnitude of so-called “dead capital,” assets that cannot be used in formal transactions, such as establishing collateral for loans, because they are not recognized legally.

“A lot of tools that are necessary to build the growth machine are not in place in Latin America,” said De Soto. “And that is certainly one of the most fundamental way to reach the majority.”

According to ILD, nearly 92 percent of businesses, 76 percent of rural properties and 65 percent of the dwellings in the 12 countries it has studied so far are in the informal or “extralegal” sector. This includes homes and land without valid title or registry, with legal irregularities, or restrictions for their transfer; as well as businesses that are not registered or that operate without full legal permits or without limited liability.

Regarding obstacles to formalizing property holdings, the study found that the process to buy, register, title and obtain building permits for a plot of land takes 101 days and costs $1,040 in El Salvador, which has a thriving market for urban lots accessible to low-income families.

In contrast, in Guatemala the same process can take 4,307 days (almost 12 years) and cost $9,312. Per capita income is $4,880 in El Salvador and $4,229 in Guatemala (measured by purchasing power parity).

Of the 12 countries in the study, Colombia has the quickest and least expensive process for registering a business (16 days and $555). In Haiti, the region’s poorest country, it takes 117 days and costs $2,902. Colombia’s per capita income is $6,904. Haiti’s is $1,166 (measured by purchasing power parity).

As for the process of establishing collateral and obtaining credit, it takes 251 days and costs $981 in Bolivia (GNP per capita $2,553), while in Ecuador (GNP per capita $3,758) it can take 1,454 days (nearly four years) and $2,195.

Due to these obstacles, most of the population in Latin America and the Caribbean is forced to live in the informal sector. Since they cannot legally protect their property or use it as collateral to obtain credit, low-income people invest less in their properties and businesses, missing opportunities to build up their assets.

To overcome these hurdles, ILD recommends a series of “legal shortcuts” that would help establish reliable records for “extralegal” assets, organize informal sector businesses efficiently to boost their productivity, and expand markets by identifying people, businesses and documents and making transactions traceable. People and businesses that now operate in the shadows would then be able to enter contracts, demand legal protection, obtain formal credit and expand the scale of their economic activities.

Moral dimension, concrete cases

The IDB conference also included a series of keynote presentations. In his address, the archbishop of Tegucigalpa, Honduras, Cardinal Oscar Andres Rodriguez Maradiaga, underscored the moral imperative of attending the needs of the poor.

Jamaican Prime Minister Portia Simpson-Miller highlighted the electoral repercussions of the lack of tangible progress for the region's disadvantaged citizens.

“The plight of the poor has led to notable political changes in many countries of the region. There is a growing discontent which is at the base of these actions and an increase in the demand for inclusiveness and a better life,” she said in a luncheon address.

“For [the poor], their lives have remained untouched by many of our lofty policies and good intentions. They are now forcing us to deal with their concerns frontally,” added Simpson-Miller, the first woman to lead her country's government.

To address those challenges, the new prime minister intends to pursue sound macroeconomic management and to implement measures to ensure that the benefits of growth and development reach the people at the base of Jamaica’s social and economic pyramid. She recently proposed budget reallocations to increase investments in early childhood education, basic shelter and job training.

Mexican business leader Carlos Slim, chairman of Telmex, argued that the best way to create opportunities for the majority was to generate sustainable economic growth. But to achieve higher growth rates Latin America would have to increase its investments in infrastructure and education, he added.

Since governments face fiscal constraints to boost spending, Slim called for more public-private partnerships to develop infrastructure, where the private sector can provide the needed financial resources. Mexico, he added, should invest some $65 billion in infrastructure every year – roughly 8 percent of its gross domestic product – but still needs $30 billion more.

Slim also called for more support for microenterprises and small businesses and the elimination of legal and regulatory obstacles to entrepreneurship. “Just as we have decreased infant mortality rates, we need to lower enterprise mortality rates,” he said.

In a message to the conference, President George W. Bush encouraged the IDB to continue working for sustainable social and economic development in Latin America and the Caribbean.

The conference’s panel discussions will cover the key sectors included in the Building Opportunity for the Majority initiative. Participants will analyze the major issues of each sector and present concrete examples of businesses and organizations that are meeting the needs of low-income people in the region.

The panel on financial democracy will explore the lack of access to formal financial services for the vast majority of people in Latin America and the Caribbean. Although microcredit has proven that the poor can be good credit risks, only a fraction of all microenterprises have obtained loans.

Nicholas Negroponte, Massachusetts Institute of Technology and chairman of the One Laptop per Child foundation, will speak ahead of a panel on access to information and communication technologies. Negroponte has proposed a massive distribution of $100 laptops to students around the world.

The last panel of the first day of the conference will look at the problem of low productivity in informal businesses, which is seen as one of the principal factors limiting the generation of new sources of employment.

The conference will resume on Tuesday at 9 a.m. with a speech by Bill Clinton, who has persuaded business leaders to become personally and financially involved in programs to address global issues such as poverty and HIV/AIDS.

Following the former U.S. president, World Resources Institute President Jonathan Lash will discuss the results of an assessment of the purchasing power of Latin America’s low-income population. The Washington, DC-based WRI has also studied the “poverty penalty,” the additional costs poor people face in their daily lives.

Panels on the second and last day of the conference will cover:

  • Latin America’s “invisible population,” the millions of people who lack birth certificates and other legal documents essential for full participation in social and economic progress.
  • Access to housing, a key dimension of families’ assets and a mayor means for generating employment and stimulating local development.
  • Access to basic infrastructure and public services (running water, sanitation, urban transport and rural roads), fundamental investments for increasing productivity and improving living standards for low-income people.

Complementing the conference, a technology fair will be held in the atrium of the IDB’s main building (1300 New York Ave, NW) on Tuesday 13 and Wednesday 14 of June. Businesses, nonprofit organizations and government agencies will showcase products and services designed to serve low-income clients. Among the exhibitors will be providers of microfinance, solar energy systems, water and sanitation services, popular housing, job placement services and telemedicine.