THE CHALLENGE of CONNECTING INFORMAL and FORMAL PROPERTY SYSTEMS SOME REFLECTIONS BASED on the CASE of TANZANIA / Hernando De Soto
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Realizing Property Rights page / 18 THE CHALLENGE OF CONNECTING INFORMAL AND FORMAL PROPERTY SYSTEMS SOME REFLECTIONS BASED ON THE CASE OF TANZANIA / Hernando de Soto Introduction Since independence, Tanzania has come are not held accountable for their commit- a long way in its efforts to empower its ments; assets are not liquid and cannot people. Tanzanian citizens now have the be used to create credit or capital; people right to own things, to operate business- are not interconnected, and transactions es, and to reside wherever they wish. They cannot be tracked from owner to owner; have been emancipated by policies and business organizations do not have stat- laws that bring management down to the utes that allow members to work under village level, allowing people to make deci- one point of control; they do not have the sions for themselves. In the last four dec- means to divide labor and control risks ades legislation has been reengineered through limited liability and asset par- and written law has been thoroughly mod- titioning, or associate in standard forms ernized. Nevertheless, President Benjamin such as corporations, cooperatives, and Mkapa has recognized that there is still other collectives; people cannot be iden- much to be done to unleash Tanzania’s tified, and contracts are unable to reach economic potential. Poverty still prevails. a market outside the limited confines of The legal tools created to enable citizens family and acquaintances. to cooperate on a nationwide basis are not Under these conditions of widespread being used: assets cannot be fixed in such extralegality, wealth continues to elude a way as to be economically useful or be the majority of the nation’s people; women pulled together from their dispersed local have yet to be empowered. How to change arrangements into one consistent network that? To find the answers, President Mkapa of systematized representations; people decided to reach into the grassroots of The Challenge of Connecting Informal and Formal Property Systems page / 19 Tanzania to find out what obstacles re- (and do not connect) with the government mained and what tools were available for – the basic stuff of economics. My under- Tanzanians to lift themselves out of pov- lying assumption is that it is impossible to erty. To that end, the Government of Tan- build a modern economy without includ- zania commissioned me and my not-for- ing most of the nation’s economic activity, profit organization, the Instituto Libertad and in Tanzania we found that well over y Democracia (“ILD”) based in Lima, Peru, 90 % of economic activity takes place out- to shed light on the shadows of Tanzania’s side the law. There is no way that Tanza- extralegal economy to learn as much as nia can escape poverty if the overwhelm- possible about the many local, informal ing majority of its citizens do not have the practices that people use to do business legal tools to create wealth: organizations among themselves. The Government felt that enable them to cooperate productively that among those informal rules might lie with each other, a property system to pro- the building blocks of the kind of formal tect their assets and build capital if they so legal system required to build a prosper- wish and legalize identity and contracts, ous modern economy, rooted in the beliefs allowing people to gain access to all the of the majority of Tanzanians and, there- markets in their own country. fore, legitimate and enforceable. What my team of 42 Tanzanians and From October 2004 to October 2005, 20 ILD researchers – with the help of 932 ILD researchers traveled deep into the key informants throughout Tanzania and world of extralegality in Tanzania in an Zanzibar – found is nothing short of ex- all-out effort to trail, find, compile, and traordinary. First (what Tanzanians them- diagnose the kinds of documents, rules, selves are generally not aware of) is that in and other social devices that Tanzanians the process of creating solutions for oper- have spontaneously generated for organ- ating outside the law, they have built their izing their production and assets. We al- own economic model. This model is under- so tried to identify the legal and admin- pinned by 17 solid and welldocumented istrative obstacles that uselessly get in- “archetypes” – patterns of social interac- to people’s way. Our overriding goal was tion whose further development is funda- to get as complete as possible a picture of mental to the creation of a legal economic how Tanzania’s extralegal economy actu- order rooted in Tanzania’s indigenous cul- ally operates and how the official legal sys- ture. Second, we have identified what are tem interacts with it. probably the most important bottlenecks We focused on how Tanzanians in the in the legal system – 67 of them that are extralegal economy connect with each responsible for the exclusion of the poor other, how they cooperate and collabo- and account in part for their inability to rate, how they make their deals and se- create wealth. The ILD then put together cure their contracts, how they organize some preliminary indications as to what themselves inhouse and between sepa- the Government of Tanzania might do to rate organizations, and how they connect integrate its enormous extralegal economy Realizing Property Rights page / 20 under a single rule of law – based on ex- isting Tanzanian practices and beliefs that will create immediate benefits for all Tan- zanians and not only the small minority al- ready using the present legal system. The results of the year’s work were as- sembled in a 1,700 page report present- ed to the Government of Tanzania in Sep- tember 2005, “The Program to Formalize the Assets of the Poor of Tanzania and Strengthen the Rule of Law: Final Diag- nosis Report.” This article is based on that ILD report. The situation The Government of Tanzania has contin- ued to make significant progress in terms of macro-economic indicators: annual GDP growth rates are over 5 %, inflation is down to a single digit, and international reserves have been rising for a number of consec- utive years. Tanzania has also designed most of the policies and laws that are required to build a market economy. Norms are in place to allow Tanzanian entrepreneurs to register and incorporate a business, es- tablish guarantees (using movable or im- disputes through appropriate institutions. movable assets), obtain credit (at micro- In short, the legal mechanisms needed to finance institutions or commercial banks), start up, operate, expand, and eventually carry out international trade, participate close a business appear to be in place. in public procurement tenders, advertise, Unfortunately, most Tanzanians do take out insurance, resolve disputes, and not use this legal system: 98 % of all busi- withdraw a business from the market vol- nesses operate extralegally (a total of untarily or through bankruptcy. On the 1,482,000); 89 % of all properties are held property front, citizens have legal access extralegally (1,447,000 urban properties to rights over land and buildings in urban and 60,200,000 rural hectares, of which areas, as well as access to occupancy only 10 % is under clan control – mainly rights in rural areas. Also, the law provides Massai pastoral land), and the rest is pri- that they can inherit these rights and resolve vately held. The Challenge of Connecting Informal and Formal Property Systems page / 21 The crucial question then is: Why don’t economy has assets worth US $ 29 bil- Tanzanians want to benefit from all the se- lion. This is 10 times all foreign direct in- curity, organization, information, finance, vestment accumulated since Independ- capital, and the expanded national mar- ence and 4 times the net financial flows ket that Tanzanian law can provide? The from multilateral institutions in the same usual Western explanation refers to a period. Putting it simply: what the poor of general defect in the culture of Africans. Tanzania already have is much more than The academic commentators in the “cul- what foreigners can ever give them. ture counts for everything” camp, such as Huntington, Landes, and Harrison, say 2. It is virtually impossible for 90 % of that African societies are “steeped in tra- Tanzanians to enter the legal economy. ditional cultures and are unsuited to mar- The obstacles that Tanzanians would have ket-oriented development and are, thus, to overcome to access the legal system and fundamentally hampered in their pursuit obtain organizational structures, credit, of growth.”1 A number of academics “as- sign hopelessness to countries that are seen as having the ‘wrong’ kind of cul- ture for development.”2 Some have char- acterized African cultures as “regressive and tribal.”3 Others are kinder and blame it on Europe: “Africa’s traditional struc- tures were destroyed by colonialism.” 4 And while many do not dare to say it out loud, they are still stuck on prejudices as old as David Hume, who, in the 18th century, declared that the main problem with the Africans is that they don’t have what it takes to get organized. “There never was a civilized nation of any other complexion than white … no ingenious manufacturers amongst them, no arts, no sciences …”5 The findings What we have found in Tanzania totally contradicts all of the above contentions. Here are three massive facts for why that is so: 1. The Tanzanian poor know how to cre- ate value on their own: Their extralegal Realizing Property Rights page / 22 Registry Clerk Registrar of High Court/Respons. Magistrate