The Mystery of Cannibal Capitalists and Ecuadorian Entrepreneurs

By William K. Black

This column was prompted by an unusual source for me.  Cuenca High Life is a site for ex pats living in Ecuador.  It often discusses serious issues of national importance.  The three issues a recent volume discussed are all important economic issues and they have prompted a fourth economic issue I will discuss in this column.

My overall theme is that Ecuador’s President Correa is a serious economist and that this makes him unpredictable for those who assume that ideology determines his policies.  Paradoxically, it is the apex American parasites – the largest financial institutions and their lawyers – who have cannibalized capitalism by becoming ideologues.

Opening the Yasuni Preserve for Oil Exploration

The neoclassical economic response to environmental problems is to create tradable credits that will generate a market.  Ecuador has substantial oil reserves in the Yasuni preserve.  Ecuador is a developing nation that could use the revenues from developing that oil.  As I have explained in prior columns, Correa’s budget priorities are precisely those recommended in the Washington Consensus – education, health, and infrastructure.  The resultant economic growth, reduction in poverty and inequality, and reversal of Ecuador’s substantial loss of population to emigration has made Correa the most popular head of state in the Americas.

The Yasuni preserve is a terrible place to produce oil.  It is an environmentally sensitive area that will suffer serious damage if things go well and horrific damage if there are serious oil leaks.  It is an indigenous area and oil development will cause serious problems with indigenous peoples even if things go very well.  Correa is not merely an economist, but a creative one.  He came up with the optimal solution – the rich nations should pay Ecuador to never produce oil in the preserve.  The rich nations would get tradable credits in return.  Naturally, though almost everyone agrees that it is a great idea that should be adopted in many parts of the world the richer nations refused to agree to the plan.

Correa Champions Ecuadorian Entrepreneurs

“Continuing a theme he began a week earlier, Rafael Correa said bureaucractic requirements for starting a business in Ecuador are overly burdensome and that the process needs to be streamlined.

He made the comments during his weekly television broadcast on Saturday. Last week, he said that excessive requirements in all areas of government were an attack on the rights of Ecuadorians and announced plans to reduce paperwork and put more official interaction between citizens and the government online.

Correa showed a chart showing that it takes, on average, 56 days to start a business in Ecuador compared to three in Chile. Another graphic showed that starting a business in Ecuador requires 13 steps while it only takes five in Chile and seven Uruguay.

‘This is outrageous and needs to change,’ Correa said. ‘We need to get beyond the mentality of a bureaucracy that wants to control everything and that puts up unnecessary obstacles for citizens who want to invest in their country. We need to see how other countries do this and follow their good examples.’

He said that he has asked Ecuador’s minister of production Richard Espinosa to develop streamlined rules for new businesses and to work with the national assembly to develop laws to implement the changes.”

The economist who is best known for championing these ideas is Hernando de Soto of Peru.  De Soto has students who study how long (and how many approvals) it takes to start a small business without bribery.  The results have often been horrifying.  By reducing burdens to joining the conventional economy Correa will spur growth and employment and reduce corruption if his government delivers on his promises.  (I am proposing means an Ecuadorian university could champion (and measure) to deliver such improvements.)  De Soto is a conservative economist best known for his book The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else.  I highly recommend the book.  Correa’s enthusiasm for entrepreneurs is a product of good economics and common sense, not an ideological betrayal.  

Alleged Anti-Employee Control Fraud by a Chinese Firm in Ecuador

Anti-employee control frauds fail to pay employees their full compensation and/or subject them to harmful work conditions.

“A court in Manabi Province has impounded 28 dump trucks and tanker trunks belonging to a Chinese company in a labor dispute. According to the judgement, Tiesiju Corporation failed to fully compensate employees when it abandoned work on a Chone River water project last month.

Santiago Vera, union leader for Tiesiju workers, says the management refused to work with the union to find solutions to problems. ‘They are very anti-union and prefer that workers have no organized protection,’” he said. ‘Ecuador needs to be very careful about bringing Chinese companies into the country. They have a culture of not respecting the rights of workers.’”

The reason that “culture” exists is that the lack of law enforcement in China produces a “Gresham’s” dynamic in which cheaters gain a competitive advantage which makes markets perverse and drives good ethics from the marketplace.  Ecuador’s crackdown on such practices, therefore, is not anti-business.  Regulatory cops on the beat are essential to the success of honest businesses.  De Soto has emphasized this point in a 2011 article.

“Markets were never intended to be anarchic: It has always been government’s role to police standards, weights and measures, and records, and not condone legalized sleight of hand in the shadows of the informal economy.”

Cannibal Capitalists, MERS and Foreclosure Fraud

In contrast to Correa’s embrace of sophisticated economic policies that defy typical ideological labels, which produce many cases of de Soto and Correa agreeing on policies, apex American capitalists have become so ideological and parasitical that they have put at risk one of the great triumphs that de Soto has argued explains America’s historic success.  It was this primitive capitalist cannibalism that prompted de Soto’s 2011 article: “The Destruction of Economic Facts.”  The unforgivable sins of this great success – our public system of record of title and property descriptions – are that the system is successful, efficient, and public.  That is unforgivable because it falsifies their ideologies.  You can feel de Soto’s pain as he is staggered by the stupidity of the cannibals.

“The result was the invention of the first massive ‘public memory systems’ to record and classify—in rule-bound, certified, and publicly accessible registries, titles, balance sheets, and statements of account—all the relevant knowledge available, whether intangible (stocks, commercial paper, deeds, ledgers, contracts, patents, companies, and promissory notes), or tangible (land, buildings, boats, machines, etc.). Knowing who owned and owed, and fixing that information in public records, made it possible for investors to infer value, take risks, and track results. The final product was a revolutionary form of knowledge: ‘economic facts.’

Over the past 20 years, Americans and Europeans have quietly gone about destroying these facts. The very systems that could have provided markets and governments with the means to understand the global financial crisis—and to prevent another one—are being eroded. Governments have allowed shadow markets to develop and reach a size beyond comprehension. Mortgages have been granted and recorded with such inattention that homeowners and banks often don’t know and can’t prove who owns their homes. In a few short decades the West undercut 150 years of legal reforms that made the global economy possible.”

So I ask again, why do the U.S. and U.K. media label the highly successful and pragmatic Correa a “leftist” (and assume that “leftist” views should be dismissed) while treating the vastly more ideological and self-destructive cannibals as if they were ideology-free technocrats?  It’s bad journalism that reveals the media’s ideological blinders.  The media are blind to their blinders. Correa continues to display his mastery of real economics while the ideologues worship dogmas that have been repeatedly falsified.

5 Responses to The Mystery of Cannibal Capitalists and Ecuadorian Entrepreneurs

  1. milford bateman

    Great post Bill. As I saw on a consulting visit there last year, Ecuador is indeed lucky to have an economist as President for whom ethics, fairness and social justice appear to drive forward his policy agenda, not crude ideology. However, on one issue I fear he, and you too, are wrong: this is to do with the myths and legends spun by the inexplicably high-profile Hernando de Soto. De Soto has actually been dead wrong about virtually everything he has argued for this past 30 years, and really the only reason he remains in the limelight, one must surmise, is that he is supremely useful to the neoliberal establishment: he popularises their most important concerns in everyday economic life in such a way that it seems ‘common sense’ for the poor and everyone else to support the neoliberal policies that he is pushing on behalf of the international development institutions.

    De Soto was wrong, first of all, on his El Otro Sendero (1986) ‘big idea’ that the informal sector, once given proper backing and significant freedom, would rapidly transform Latin America with new jobs, income and prosperity. The informal sector has indeed been given much greater freedom and financial support since the 1980s, as he wanted, and it has indeed boomed, as he indeed predicted would happen, but this informal sector expansion is actually linked to the massive INCREASE in poverty and insecurity and social violence that took place in Latin America over almost exactly the same time period. Poverty reduction and ‘bottom-up’ development simply do NOT follow on from an expanded microenterprise sector, as De Soto would happen. I explain why in this paper for the Mexican journal, Ola Financiera.

    http://www.olafinanciera.unam.mx/new_web/15/pdfs/BatemanOlaFin15.pdf

    The English language version is here

    http://www.oefse.at/Downloads/publikationen/WP39_microfinance.pdf

    De Soto was also wrong on his second ‘big idea’ – Mystery of Capital (2000) – that ‘more secure property rights leads to more credit for the poor’. Independent researchers have been unable to find any genuine evidence to link the two issues. Pointedly, in his native Peru, where the World Bank (who else?), financed a massive program to register informal property, no link was found. On this, I was on a panel of four ‘experts’ debating De Soto in Copenhagen a few years back at a Danish Ministry of Foreign Affairs event. De Soto said then (completely ignoring the evidence) that microcredit for the poor was now very easy to obtain in his native Peru, since the poor simply bring with them their property titles and they get a microcredit right away. There was an audible gasp. As several people at the meeting, and I, quickly responded, this is utter rubbish: the Peruvian microcredit sector, as virtually everywhere else, achieved its fame because it is a ‘no collateral’ system. One person at the back of the audience had just returned from Peru and working in one of the major Danish government-supported microfinance institutions, and she said she had never heard of ANY institution in Peru asking for a title when disbursing microcredit. To repeat, the whole selling point of microcredit in its early days (before we found out that it is a disaster for the poor, but that another issue!) was that it asked for social collateral in the form of mutual guarantees, and so on, not any form of physical collateral. Another Professor taking part in the debate, from Roskilde University if I remember correctly, then brilliantly took De Soto to task for making the bold claim that secure property rights causes economic development, when, he said, the historical evidence overwhelmingly shows that it is actually sustained economic development that leads to pressure from emerging businesses and individuals for more secure property rights. De Soto had got the causation the wrong way around!

    Finally, on the specific issue of the ‘barriers to entry’ argument, as a consultant and researcher working on SME development policy for more than 25 years, I have always found that the key thing anyone really cares about is actually finding someone to buy your product or service on a regular basis (i.e., demand). Once you can locate this factor, you can pretty much overcome all the other barriers quite easily. In reviewing over the years so many ‘business simplification’ programs that aim to cut the time it takes to register your business, I have never seen a meaningful relationship emerge, and certainly not one anywhere near strong enough to justify the huge time and effort put in to making it possible to register your business a few days earlier than before. Maybe you get a small blip at the start, as people take a punt that a registered business might lead to some new work opportunities: but overall the fact remains that if you can find people willing to buy what you are selling, then you get going and oftentimes simply register your business later on. Of course, no-one likes to wait around for your registration papers, and governments should make an effort to simplify the whole procedure, but this is NOT the same as saying that somehow, compared to lots of other things that need to be done (invest in poor infrastructure, provide capital on affordable terms and maturities, deal with monopolies, invest in R&D projects targeted at small businesses, etc), the inability to quickly register your business is but a tiny problem. Ease of registration, and other such fluffy concepts, only become a problem if you are trying to discredit and dismantle state pro-activity, as neoliberals are wont to do, and if you are unwilling to make the effort to address the main structural concerns of small business. Better to have poor people and governments focus on reducing the paperwork and other minor issues slowing down new and existing business activity, than identifying the real issues here – especially the sheer lack of demand – and thereby perhaps inadvertently giving rise to a challenge to the entire free market capitalist business system…

    Finally, note also the interesting fact that potential entrepreneurs are typically very vocal in demanding low interest, if not interest free, credit to help them get started or expand their enterprise. Almost all surveys of business report this fact. But because no-one is willing to listen to this specific non-neoliberal demand (it would mean having to raise taxes on business elites, and it goes against market logic), these people have to be fobbed off with other things: so you get to register your business in 10 days instead of 30 – now just be happy with that. The overriding fear on the part of neoliberals, of course, is that if the lack of demand becomes accepted as the principle barrier, then poor people might start demanding answers to why there IS a lack of demand? What can we do about it, especially when there are so many things needed to be done in the community? Following the ridiculous amount of attention given to the microcredit concept as some sort of miracle cure for European unemployment, I had this to say:

    http://www.social-europe.eu/2012/05/creating-jobs-in-recession-hit-communities-in-europe-why-microcredit-will-not-help/

    You said, that ‘Correa’s enthusiasm for entrepreneurs is a product of good economics and common sense, not an ideological betrayal.’ I fully agree. But by misunderstanding, as De Soto clearly did, not just the key binding constraints to sustainable enterprise development but also what sort of enterprise development is associated with genuine economic development and poverty reduction, I fear Correa runs the risk of slowly driving the Ecuadorian economy into a Bangladesh-style brick wall.

    Milford

    • Charles Fasola

      Sorry Milford. I have been to Ecuador on more than a few occasions and considered retiring there. Recently, I have developed severe reservations about following through with that move. I have noticed a shift toward neo-liberal ideologies within the government. Many of those who supported Correa are now questioning the direction he is leading the nation. Many do not wish to have a more western style of life; controlled by corporate interests and wealthy elites. The election of Correa was a reaction against wealth for the few and slavery to corporate interests for the many.

  2. Very interesting.

    “Knowing who owned and owed, and fixing that information in public records, made it possible for investors to infer value, take risks, and track results. The final product was a revolutionary form of knowledge: ‘economic facts.’”

    In a word, “transparency.” Which, of course, is inversely correlated with “margin.” Couple barriers to entry with opacity, you get, well, economic cannibalism.

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