AND ENTREPRENEURSHIP $
3. CALCULATING VALUE
We’ve learned how to calculate value going from country to country. The figures presented below have been published and announced by the gov- ernments of these two countries: Mexico and Egypt.
3.1. Mexico
In the case of Mexico, roughly 50% of the population is in the‘‘extralegal sector.’’ The Russians call it the ‘‘shadow economy,’’ in Kazakhstan they call it the ‘‘black market,’’ and many people refer to the ‘‘gray economy’’ or the ‘‘informal economy.’’ In Mexico that is approximately 50% of the pop- ulation working full time. Other people work in the extralegal sector part of the time and the legal sector part of the time, so about 80% of the Mexican population works at least part of the time in the extralegal sector. Thus, only 20% of the Mexican working population is fully legal. So if somebody asks whether the flow of Mexicans or Peruvians to the United States will go down in the near future, the answer is ‘‘no.’’ Why? It will keep going up because this is the only place nearby where you can make 48,000 pins with 10 people.
How important is this to Mexico, how valuable? There are 11 million buildings in Mexico – we’ve calculated them – which are not on the official records. There are about six million enterprises or families that are pro- ducing things that are outside the legal system. The total value of their assets, the slums, the little houses, and other things, is about $315 billion.
How much is $315 billion to Mexico? It is roughly seven times the value of Mexico’s total oil reserves.
In other words, the real capital, the real potential for Mexico is not its oil or natural resources, it is located in this ‘‘dead’’ capital.
Consider the Saudis. For the Saudis, the majority of the population is not participating in the division of labor, and they don’t have enough property rights. That is one reason why their GNP per capita is continually decreas- ing regardless of how much oil the Saudi’s have. On the other hand, some of the wealthiest countries in the world don’t have many natural resources.
Switzerland doesn’t grow its own cocoa and doesn’t produce most of its own
milk for its chocolates. Nor does it make the steel from which its watches and turbines are made. The same is true for the Japanese. Rather, their success is built upon their institutional system and good laws to enforce property rights.
3.2. Egypt
In the case of Egypt, when we were called by President Mubarak, we or- ganized a team of 120 people. We began by looking at their extralegal economy and its associated assets. We presented the Egyptian government with maps of all the buildings, and it turned out that 92% of all the real estate is outside the law. Ninety-two percent of all the buildings, and about 88% of Egyptian enterprises were outside the legal sector. In other words, only about 10% of Egypt was fully legal. What is the value of these assets for people outside of the law – about $248 billion, according to our cal- culations.
When the Egyptian government didn’t believe us, we took them to their own public housing system. They asked, ‘‘What is it about our public housing system that isn’t legal? After all, we built it.’’
Here we are in El-Nasser (Nasser City), with probably the largest and most generous public housing system for poor people in the world, and we look at it and say, ‘‘It’s absolutely true that you built it, but have you seen this photograph of the 1960s when it was inaugurated?’’
They take the early photograph and say, ‘‘Yes, I can see the buildings – all two stories of them.’’
Then we ask, ‘‘Then why do these buildings have seven stories. Who built the other five?’’
And then all of a sudden people started to realize what has been hap- pening over the last 40 years. It is what has happened throughout the de- veloping world and is now happening in the former Soviet Union, particularly when people have begun to migrate toward the cities.
3.3. The New Industrial Revolution
Oliver Twist has come to town. It’s the Industrial Revolution. For example, Algerian cities have grown 15 times in the last 35 years. The cities and towns of Haiti have grown 17 times in the last 35 years. Likewise, the cities and towns of Ecuador have grown 17 times. It’s the beginning of the industrial revolution in these countries. It’s not when industry comes, but rather when
people start getting together in sufficient masses to begin the division of labor. When it comes, all of a sudden, everybody will find how to become productive. But until then, people will keep flooding the cities. What is missing, however, is the legal system. And until these countries get their legal system into place so that people can cooperate, no longer at the village level or the family level but at the expanded level of dozens, or hundreds, or even millions of people, people will continue to come but not participate in this new industrial revolution. We need to trust each other by description, through passports, credit cards, and the whole legal and property rights system.
The same thing happened in the United States. For example, consider the California gold rush. Americans invaded California in search of gold, three million big Americans with their big guns. They immediately created mining claim associations, about 800 associations throughout California. Each as- sociation had a different legal system, just like the shantytowns in devel- oping countries, just like guys who move onto the land in Colombia or Sudan. Until you pull it all together so that you have the same standards, the same‘‘Uniform Commercial Code,’’ there will be problems. The Rule of Law means no anarchy, no different legal systems.
Until you were able to create a uniform legal system in the West, you didn’t have the growth in the United States, no manicured lawns, and no landscaping of highways. It was a very, very violent place up until 1870, west of the Mississippi. There was no Standard Time, the sheriffs gave the time.
So it could be 2:00 PM in Twin Rivers with Hopalong Cassidy and another time two miles south. It took effort and time to bring these standards together. A couple of hundred years ago, there were 700 currencies – the yellow back, the brown back – now there is one.
The same thing happened in Germany. Before the Napoleonic Wars, there were about a hundred different property systems across the numerous German principalities. Then Napoleon defeated the King of Prussia, and the King subsequently tried to raise more armies among the German princes and the free cities to fight this wave of revolutionary fervor coming from France. But he couldn’t recruit. The farmers now wanted to participate in the new system. So they started with the Stein–Hardenberg reforms and proceeded through a later second phase in the 1870s with Bismarck until they had created one system, one Rule of Law, and a nation that guaranteed access to property. Then they got organized.
The same happened in Switzerland. Up until about 1908, Switzerland was one of the poorest countries in Western Europe. Today it’s one of the most prosperous in the world. What happened? They got organized in such a way
that they were able to give the country one property law, one company law, and they brought it all together in a complete system. And today the prop- erty is so secure that not one Latin American dictator puts his savings anyplace but Switzerland.
3.4. The Common Link
So the history of the West is the history that we in developing countries are living today. In the 1930s and early 1940s, lots of poor Japanese started migrating toward Latin America. There were two countries that were ab- solutely open to Asian migration. These countries had always welcomed immigrants and were multiracial. One is Brazil, and the other is my own country Peru. As a result, about one million Japanese families came to live in Peru and Brazil. The Fujimori family came to Peru, for example, and the Yoshiyama family went to Brazil. The Fujimoris later had a son called Alberto who became president of Peru. An interesting question, the real issue, is why did the Fujimoris and Yoshiyamas come to Peru and Brazil?
Why didn’t the Toledos and the Lulas go to Japan, the other way around?
The reply to that is very simple. In the 1940s, the gross national income per capita in Peru and Brazil was twice as high as Japan’s. Japan may have had a huge army in the 1930s and 1940s, but it’s like Saddam Hussein. One can have a powerful army and still be a poor country. Japan during this time, was, in fact, a poor country. But why did it change? One reason was that certain Japanese officials wanted it to change from its feudal past. In the 1940s, Japan was really a feudal country, with feudal lords like in Af- ghanistan today. In fact, much of the world is still being run by feudal lords.
3.5. U.S. Policy
While preparing to invade Japan, General MacArthur put together a team to study the problem. They concluded that the solution was to get rid of the feudal class. Get a property system into place. This was even more urgent after Japan surrendered, because Mao was starting to march down from Manchuria to the south and eventually beat Chiang. Mao’s army swelled, because he started a property revolution. He started titling people as he marched south. He did it simply by giving them collective title. It’s not private property, but it gets you closer to your assets when you previously had nothing. And all people, just like the immigrants flowing into Rio de Janeiro or other places today, want to hold onto something.
And MacArthur did this in Japan. By providing the possibility for private property and private corporations, he basically created a huge constituency for the market economy and fueled economic growth.
I never understood why Americans always talk about the Marshall plan.
It was peanuts compared to what the United States did in Japan. In the Marshall plan you already had Germany, a prosperous country at one time and one that was rebuilding. But Japan was not prosperous. In fact, they were all migrating to my country, which is still poor. Ultimately, the region got so organized and so prosperous that by 1978, Deng Xiaoping couldn’t resist it anymore and had to start the march toward a market economy.
It was a brilliant strategy. Itisa brilliant strategy even if most people don’t realize it. You’ve taken one of the most powerful Communist countries in the world and turned it to a market system. They started the march, and they’ve now got the same problems that Western Europe and the United States had in the 19th century; that is, about 150 million Chinese now have property title and enterprise. At the same time, China is struggling to reach the other 1.1 billion. The distance between the most powerful Chinese, the richest, and the poorest is wider in China than anywhere else. All the same, there is no way they can stop the march, and that was brilliant U.S. policy.
But that policy was forgotten in Vietnam, and it was forgotten in Iraq. So it’s important for us to imitate the United States, but mostly the American great-grandfathers and what they did in the 19th century. It’s also important for the United States to remember its own history, because people have a tendency to forget, and that’s very dangerous. It’s very dangerous, because it is easy to forget what the genesis of one’s own system is. This history should not just be an academic subject; it should also be a policy that is applied in the modern world.
3.6. Why Do People Forget?
Nobody knows why people forget these things. But I like what Karl Popper, an Austrian philosopher who became British due to persecution by the Nazis, used to say when it came to forgetting. He tells about his experience with a celebrated violinist, Karl (Adolf) Busch. Once when Popper was going to go see him at the theater, a friend of Popper’s said,‘‘Oh, if you’re going to see Karl Busch, please take me along. I’m an incredible fan. He’s a maestro.’’
So they went together and they listened to him. I forget if the violinist was interpreting Bach or Vivaldi, but when he went from the third to the fourth
movement, it was absolutely the finest spectacle you’ve ever seen or heard.
And Karl Popper’s friend was moved to tears. Afterward they went behind the stage to talk to the maestro. Karl Popper introduced his friend, and the friend asked the maestro how he did that transition. And Karl Busch said,
‘‘As you know I’m an old man so I don’t mind giving away trade secrets. It’s rather simple; let me tell you how it’s done.’’ So he put his violin to his neck, took out his fiddlestick, and showed the trick. And he was never able to play the transition of the third to the fourth movement again.
Here is another example. The spider has got eight legs, and it’s got trouble managing the eight legs, and so it goes to the centipede and says, ‘‘I’ve got real trouble managing these eight legs. How do you manage a hundred legs?’’ The centipede says, ‘‘It’s actually quite simple. You take the front 20 legs and move them like this,’’ and he’s never been able to move those 20 legs again.
In other words, once we solve a problem, like when we learn to walk as children, we pass the knowledge on to our motor system. And we have to make an intellectual effort to remember what it is we did that actually got us where we are today.
This is what we are trying to do. The system in the United States is an example to all of us all over the world, and we’re trying to imitate it. Look at the impact of American culture, the inventions, and products.
In a way, it is what Darwin would have called adaptation. He refers to adaptation as to those things that one does but not necessarily consciously. I believe that when one builds property systems and a system of ownership, one actually builds a much bigger edifice, and that is something that people are not very aware of. It’s not really in your foreign aid, and it’s not really being exported right now. Why not? Because the United States has forgotten the ‘‘consciousness of MacArthur.’’ But the United States got it right in the past, and it’s very important to remember it.
It’s much easier for me to embody the 18th- and 19th-century history of the United States in my approach to economic development, and I don’t even know that history that well. I just find little spots in places that put the whole picture together for me, because that is when the United States really became great. The United States built a great nation, and it is in a position to help the world immensely, but unfortunately that is not always being picked up in theory.
We have come to the conclusion that the power of man goes way beyond manpower. It’s not only how people work, but also how people get organ- ized. It’s how people get into the market, and that is simply not a pure economic theory.
That’s the reason we like to study other countries; that’s the reason we bear ourselves in a certain way to reflect our heritage. But those are really the leaves of the tree that we are all a part of. The basic trunk of the tree is our human capacity to absorb knowledge in pretty much the same ways. So I believe that though there are differences, what we have in common is much greater than what separates us.
Why should we care what Americans think? For a very simple reason – because the United States has most of the money in the world. So, when the United States decides that it is going to do a road development program instead of helping build a legal system, all the economists in our country study road building rather than legal and economic institutions. The mod- ern U.S. sets the trends, the music, the dance, and the fashion.
But what about the historical system of laws and property rights? If the developing countries learn only about how the United States lives today and not its fundamental history of economic success, then more and more poor people in my country will do two things. Some will dislike you immensely, and others will come to the United States to visit and work.
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