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Episode 599: The Invisible Wall

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Episode 599: The Invisible Wall

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Episode 599: The Invisible Wall

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JACOB GOLDSTEIN, HOST:

Hey, NPR recommends that you check out Bullseye with Jesse Thorn. Every week, Jesse interviews musicians, writers and filmmakers about their creative work and lives. You can find his show on iTunes, Stitcher or wherever you get your podcasts.

DAVID KESTENBAUM, HOST:

You know how your parents are always going on about, like, sometime in the past they say was just perfect? For my mom, it was summer camp. She always told us these stories about summer camp.

GOLDSTEIN: I had this idea when I was kid that I'd missed out on the '60s.

KESTENBAUM: You did miss out on the '60s.

GOLDSTEIN: (Laughter) I did, and it seemed like this magical time, this perfect thing from, you know, back in the day.

KESTENBAUM: The guy you're going to hear about today - Hernando de Soto - the thing his parents used to talk about all the time was Peru.

GOLDSTEIN: The whole country?

KESTENBAUM: Yeah, he was born in Peru, but they had to move.

GOLDSTEIN: Right, there was a coup. They got kicked out of the country. He grew up in Switzerland, but the whole time he kept hearing about Peru.

HERNANDO DE SOTO: All the time in exile, the love of my country came through my ears, came through my parents telling me what Latin America was like. And to them, it was paradise. Of course, they'd been exiled.

KESTENBAUM: That's the way he thought about Peru for years. But eventually, when he was 38 years old, he decided to move back to Peru, back to this Eden he'd heard so much about.

DE SOTO: And I go back to Eden and find out it isn't Eden. There's a little bit of purgatory there.

KESTENBAUM: Purgatory.

GOLDSTEIN: De Soto knew, of course, that Peru was a poor country. But he didn't fully appreciate what that meant until he moved back. Where Switzerland was this place where the streets were clean and the trains ran on time and, frankly, almost everybody was pretty well off, Peru was a poor country. In the streets of the capital, de Soto saw people carrying stuff to sell on their backs or pushing stuff through the streets in tiny, little carts.

DE SOTO: In the streets, they sell everything from food to repair parts to motorcycles to bicycles. They sell everything.

KESTENBAUM: De Soto sees this - this poverty spread out all around him, and he wonders, why is Peru so much poorer than places like Switzerland?

DE SOTO: I had no idea. I mean, I didn't know where poverty came from. I had read Adam Smith. I had already started delving in Marx and all that, but they all had, you know, canned replies. I didn't understand why, with technology being what it is, why in the dickens aren't we now more developed? I mean - and I said, there's got to be an invisible wall some place. Let's find the wall. That's what I went to look for.

GOLDSTEIN: De Soto went to look for the invisible wall that was trapping poor people in poverty. And he found it.

Hello, and welcome to PLANET MONEY. I'm Jacob Goldstein.

KESTENBAUM: And I'm David Kestenbaum. Today on the show, what Hernando de Soto found, how it transformed Peru and poor countries around the world and also how it almost got him killed.

(SOUNDBITE OF SONG, "EASY TO LOVE")

IVAN AND ALYOSHA: (SINGING) When the sky turns black. We know it will from time to time. We've been through that.

GOLDSTEIN: The story starts right around 1980. Right around then is when Hernando de Soto moved back to Peru. And de Soto, he's a businessman; he's not an academic. But he keeps chewing over this really abstract question - what is holding Peru back? And at first, he's kind of working over this question on the weekends. He's actually walking around, talking to the guys selling stuff on the street.

DE SOTO: After a while, I found out that they were in the street, but they didn't like being in the street because he needs running water, he doesn't have running water. He wants to be away from thieves. And he wants to have stocks and refrigeration, which he can't have in the street.

KESTENBAUM: Basically, what these guys wanted was to move into a marketplace. You know, one of those places with some kind of roof and a cement floor. You got stalls on one side with people selling vegetables and spices, another set of stalls for butchers and for people selling clothes and shoes. That's what they wanted, so why weren't they there? There was an obvious answer.

GOLDSTEIN: I always figured they didn't have more space, they didn't have refrigeration because they didn't have the money 'cause they just couldn't afford to pay for those things.

DE SOTO: Here I am stalled with the same question you are, right? The same question - no, they don't have the money; they don't have this. But at the same time, since I'm befriending them, I'm walking them through their homes, right? I'm going to see where they live and what they do. Then I look at the roof, and it's flat. OK, so I look on top, and I see, my God, you got cement bags up there. And you've got bricks, and you got pieces of iron.

GOLDSTEIN: These vendors do have at least some money. They've saved enough to build a solid house. They're saving more so they can put another floor on that house. So money is not the thing keeping the vendors out of the market.

KESTENBAUM: And de Soto sees those bricks on the roof and realizes something else - people in Peru aren't saving the way people in wealthier countries save.

DE SOTO: Instead of saving money in the bank, what you're doing is you're saving in bricks and in cement bags.

GOLDSTEIN: These street vendors don't have bank accounts. And de Soto discovers poor people in Peru are missing out on all kinds of basic things we take for granted. They're basically living outside the system. They don't have a deed that says they own their house. They don't have a permit that says they can run their business.

KESTENBAUM: De Soto realizes he has to do more than just wander around and chat with people to really understand what's going on. So the next thing he does - the thing that makes him famous - is he does an experiment. He runs an actual experiment.

GOLDSTEIN: He wants to see what it would take to actually live inside the legal system, instead of outside of it. So he decides to set up a shirt factory, to get all the proper paperwork, all the permits. He rents space in a warehouse. He buys a few sewing machines and a knitting machine. But he has no plan to ever make a single shirt. He just wants to see what it would take.

KESTENBAUM: So he hires a lawyer and a few students, and he tells them go out and do everything you have to do to make this a fully legal shirt factory. Figure out how long it all takes.

DE SOTO: Here's a stopwatch - go. Get on a bus, find out what you have to do. So they went out, and they did the red tape. So they'd go to an office that they were told was an office that granted the license to operate a machine. And then they find that they were told, no, it's not here anymore. The address has changed, go elsewhere. So you got to take another bus. So they actually took the buses.

KESTENBAUM: They had to get 11 different permits from seven different ministries. They were asked for bribes 10 times, had to actually pay bribes twice. They had to do everything in a certain order. There were lots of delays. It took an incredibly long time.

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

GOLDSTEIN: And what do you get for eight or nine months of work of taking buses?

DE SOTO: You get the authority to open your little factory - just the cost of being able to open that, and a cop can't come in and close your factory down.

GOLDSTEIN: De Soto gets obsessed. He had set up a little nonprofit to do the fake shirt factory thing. Now he has his team talk to people in other businesses, has them study the rules, and he figures out setting up a shirt factory - actually one of the easier things to do. If you want permission for new bus route, it takes 26 months. To open a new, legal market - the kind of place all those street vendors want to move into - that takes 13 years.

KESTENBAUM: These numbers started to answer de Soto's question. If you scrape together enough money to start a little T-shirt factory, you got to start selling shirts right away. You can't afford to spend nine months getting permits. So you end up doing what everybody does - you open your factory illegally. You don't wait for the permits. You live outside the law.

GOLDSTEIN: And if you're outside the law, de Soto realizes, it's really hard to get ahead. It's really likely that you're going to stay poor. If you're running your business illegally, if you don't have a bank account, you're not going to get a loan to expand your business.

DE SOTO: You can't start a company. You can't raise capital. And if you can't raise capital, also - for the same reason, you can't raise credit. It means you can't expand. Or it also means another thing - you can't own things like a brand. I can't do any of the things that you've got. I can't own no brands, no nothing. It means the world before the rule of law.

KESTENBAUM: De Soto had found his invisible wall. Unfortunately, it was one of those problems that's really hard to solve. You're talking about trying to fix an entire dysfunctional system, trying to change laws, trying to change the culture of an entire country.

GOLDSTEIN: Faced with this monumental task, de Soto decides on the thing he knows. He's a businessman, so he launches an ad campaign.

DE SOTO: We did put up a lot of radio jingles, a lot of TV jingles.

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

DE SOTO: Yes, absolutely. One of them was called (singing in Spanish).

(SOUNDBITE OF AD)

UNIDENTIFIED BAND: (Singing in Spanish).

GOLDSTEIN: Title of the song, "What Would I Do If I Had Capital?"

(SOUNDBITE OF AD)

UNIDENTIFIED MAN: (Singing in Spanish).

GOLDSTEIN: The guy says, I'm going to tell you the story of a country that's doing really badly...

(SOUNDBITE OF AD)

UNIDENTIFIED MAN: (Singing in Spanish).

GOLDSTEIN: ...Because only a small group of people has access to capital.

(SOUNDBITE OF AD)

UNIDENTIFIED MAN: (Singing in Spanish).

KESTENBAUM: Jacob, can I give you my honest reaction when you told me that?

GOLDSTEIN: Tell me, tell me.

KESTENBAUM: There's no way this is going to work.

(LAUGHTER)

GOLDSTEIN: Does it change your opinion if I tell you that badly and capital rhyme in Spanish? Mal capital.

KESTENBAUM: Doesn't change my mind at all (laughter).

GOLDSTEIN: I mean, one of the problems is something he mentions in the song, right? There are a small number of people who do have access to capital. Those people don't want things to change. I mean, you've got corrupt officials, right? They all like collecting bribes. You've also got a bunch of rich people who already have businesses. They're well-connected. They like the fact that it takes someone else a year to get the permits to open up their business because it benefits them, less competition. There are so many things set up for the system not to change. And on top of all this, de Soto has one other problem.

DE SOTO: The Shining Path was a terrorist movement of Peru, ideologically a Maoist movement.

GOLDSTEIN: Maoist as in Chairman Mao. These are communist guerrillas. They're waging a civil war in the countryside. And as communists, they have a very different view from de Soto about what is holding the country back. For the Shining Path, the reason people were poor wasn't these obstacles to capitalism that de Soto had discovered. For the Shining Path, the problem was capitalism itself.

KESTENBAUM: De Soto sees this ideological divide, and when he writes a book as part of his big marketing campaign, he makes the title an attack on the Shining Path. He calls his book "The Other Path." It becomes a best-seller.

GOLDSTEIN: In the book, he describes his findings - the fake shirt factory, all the facts and ideas about rules and businesses and poor people. And he says what Peru's poor need is not Maoist revolution, just simpler, more rational rules to bring poor people into the system. The Maoists were not pleased.

DE SOTO: I wake up one day, and they say the clandestine newspaper the Shining Path says that you are going to be punished because you've brought down their recruitment because of the fuzzy ideas that you're propagandizing with the jingles, with the book, etc., and they're going to punish you. That's what I wake up - one day.

KESTENBAUM: The attack came soon after that.

DE SOTO: There's a park in front of our offices, and they get into a dirt mound in the back of it and they start machine-gunning the place.

GOLDSTEIN: They shot a security guard, and then the attackers pulled a car up in front of the building.

DE SOTO: The car that's loaded with about - I don't know - 200, 350 kilos of dynamite. And they light the fuse, and there's a getaway car. They all get back into the getaway car and leave the car to explode.

GOLDSTEIN: Three people at de Soto's office were killed. A while later, the Shining Path tried again. They machine-gunned de Soto's car, but it was protected by bulletproof glass and a reinforced gas tank.

KESTENBAUM: Eventually, the Maoists lost. The leaders of the Shining Path wound up in jail. And de Soto's moment finally came. He'd become famous - the jingles on the radio, the best-selling book. And he was providing proof of what everyone had suspected for a long time. No one was playing by the rules because the rules were a mess. The rules needed to be fixed.

GOLDSTEIN: De Soto gets the ear of Peru's president, and the president launches a campaign to simplify the rules, to make it easier for poor people to get titles to their homes and legal ownership of their businesses.

KESTENBAUM: To accomplish this, de Soto needs more than some clever radio jingle; he needs a TV show. So they launch one. It's a TV show about cutting through bureaucratic red tape, starring the president of Peru himself. On the show, the president hears about the problems people are having - problems getting paperwork for a business or applying for university or even getting a marriage license. And then the president actually does something about it.

DE SOTO: The president would say, well, this is terrible. And then he would say, now, who's the head of the office that would be ultimately responsible for this? And then my guy would tell him, well, it is office such and such. OK, well, if he doesn't solve the next five days, he's fired. And then he signs a little decree, and then a guy with a nice, blue, shiny uniform takes it into his hand, gets on a motorcycle. The TV camera follows him, and he delivers it to the political appointee who's told he's got five days to solve it.

GOLDSTEIN: So you're basically turning this wonky thing you're doing into reality TV?

DE SOTO: Yes (laughter) that's it. Yes, I never thought of it that way. It was reality TV. And it worked.

GOLDSTEIN: It worked. The rules in Peru actually got simpler. It got easier for poor people to have a title to their home or to start businesses or to move into those markets where all the vendors wanted to be.

KESTENBAUM: To be clear, Peru is still a poor country and there are couple critiques of de Soto's work. One is just that poverty is more complicated than this simple story. The second critique is that changing the rules is great, but it doesn't help the poorest people. It doesn't help the people at the very bottom.

GOLDSTEIN: Still though, people around the world start taking notice. De Soto's phone starts ringing a lot. He gets a call from the president of Colombia. He hears from other leaders in Latin America.

KESTENBAUM: And Tanzania.

GOLDSTEIN: Tanzania and other countries in Africa and in Asia - this becomes, like, a big deal.

KESTENBAUM: And the World Bank in Washington, D.C., also took note and thought, you know, maybe there is some way we can apply this stopwatch thing to the whole world, to every country.

GOLDSTEIN: They didn't do the full on fake factory experiment thing, but they started sending surveys out to people all over the world and asking, how long does it take to do these really basic things?

KESTENBAUM: Like how long does it take to get a permit to start your factory? How long does it take to fill out your taxes? How long does it take to get electricity turned on?

GOLDSTEIN: They call this thing the Doing Business report. They do it every year now. And it actually gets a lot more attention than, you know, your sort of standard, boring World Bank report.

KESTENBAUM: And one of the reasons is that they rank the countries from, like, best to worst based on these surveys. And so people pay attention. You know, people love lists, like the U.S. News and World Report ranks colleges, and colleges are always trying to move up the list. It is the same with this list. Rita Ramalho is the head of the World Bank group that puts out the rankings.

RITA RAMALHO: Once you start keeping scores, people actually start getting competitive and care about it, and no one wants to be last. That's probably the powerful (laughter) - the power of rankings lies on the fact that no one wants to be last.

KESTENBAUM: No one wants to be Eritrea. Eritrea is No. 189 on the list. In case you're curious, No. 1 is Singapore. U.S. is No. 7.

GOLDSTEIN: Countries want to beat out their neighbors. Governments start to worry that a bad showing in the rankings might hurt them with the voters back home.

RAMALHO: We met with the delegation, and their first question was, when is the report coming out? How does that match with our election time? (Laughter) That was the first thing they wanted to know.

GOLDSTEIN: Has anyone ever rescheduled an election because of your report?

RAMALHO: No, not that I'm aware of.

GOLDSTEIN: Some countries look at the report and decide, hey, we can use it to our advantage. The Republic of Georgia, for example, used to be part of the Soviet Union. It made moving up in the rankings part of a plan to modernize its economy. Countries shot up from deep in the list to No. 15 in just a few years. They took out ads in The Wall Street Journal and The Economist bragging about how they'd moved up the list.

KESTENBAUM: Countries start reviewing rules that have been on their books forever. In Suriname, for instance, it used to take a really long time to start a business for a kind of strange reason.

RAMALHO: Suriname used to be the longest because you actually had to have permission from the president to start a business.

GOLDSTEIN: President personally had to approve that?

RAMALHO: Yes, but that has changed.

KESTENBAUM: Not everybody likes the rankings. Labor groups complained a few years back because one of the ways you could move up the rankings was by making it easier in your country to fire workers. The World Bank actually changed that one. Rules about firing workers no longer go into the calculations about the rankings.

GOLDSTEIN: As for de Soto, he's all for the World Bank report.

DE SOTO: I think they're great. I think it's great.

KESTENBAUM: He's glad it exists, but if you ask him if the world is a better place because of the counting and the numbers, he answers you with numbers. He's a numbers guy. He's still out there with his stopwatch.

DE SOTO: We've done it in Egypt for a bakery. It's 548 days.

GOLDSTEIN: 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.

GOLDSTEIN: Recently, de Soto's been hearing a lot from presidents and prime ministers in the Middle East. They have a new sense of urgency about these questions. The Arab Spring after all started with a street vendor in Tunisia. It started with a guy like the people de Soto talked to in Peru decades ago. The guy in Tunisia was selling fruit in the town square. And he was upset about the very same problems. The cops kept stealing his fruit, kept interfering with his business. To protest this, the vendor set himself on fire in the town square.

(SOUNDBITE OF SONG, "EASY TO LOVE")

IVAN AND ALYOSHA: (Singing) When the sky turns black. We know it will from time to time. We've been through that.

GOLDSTEIN: Special thanks today to Michael Klein, one of the co-founders of the Doing Business report, and Sam Schueth, who spent a lot of time in the Republic of Georgia.

KESTENBAUM: Our show today was produced by Jess Jiang - thanks Jess. NPR recommends checking out Bullseye with Jesse Thorn. Every week, Jesse interviews, musicians, writers and filmmakers. You can find it on iTunes or Stitcher or however you get your podcasts. I'm David Kestenbaum.

GOLDSTEIN: And I'm Jacob Goldstein. Thanks for listening.

(SOUNDBITE OF SONG, "EASY TO LOVE")

IVAN AND ALYOSHA: (Singing) And you know I try most of the time. And we've been through that. And we came out on top because you're really easy to love.

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