The decline in poverty is inevitably had through economic development based on formal entrepreneurship. It is indeed only by a system enabling a greater division of labor and specialization, driven by innovative entrepreneurs, that rich countries have experienced a growth of productivity and income, and thus a decline in poverty.
Unfortunately when business climate amounts to a series of very costly administrative barriers (licences, permits, various taxes and long procedures) for almost all potential entrepreneurs, very few formal businesses are created - and thus very few formal jobs. The logical consequence of this lack of solid businesses, is misery for a large part of the population.
Governments in sub-Saharan Africa often give the impression to purposefully prevent their people from creating wealth, by making the creation of companies an almost impossible task (except for those who are politically “connected”).
Take the Democratic Republic of Congo, probably the country with the richest geological wealth but the poorest in terms of GDP per capita. It is ranked 144th out of 152 countries in terms of economic freedom according to the Fraser Institute for 2011. Its rank in terms of business climate in the Doing Business report of the World Bank for last year is 181st out of 183. In neighboring Congo Brazzaville, the cost to import a container is seven times higher than the average of OECD countries.
Should we be surprised by the misery of these countries, paradoxically sitting on vast natural resources ? While Africans are full of energy and initiative, and that Africa is teeming with informal entrepreneurs, with the cities and roads of the continent full of “markets”, formal businesses are rare. The “curse of the informal” is actually due to the prohibitive cost of formal activity, in turn caused by a dysfunctional governance.
An important part of the “institutional” framework reform deals with defining and securing property rights. As Peruvian economist Hernando de Soto noted, without a recognition through formal titles (due to an inefficient, corrupt administration) the capital of individuals and families remains “dead”: it can not be exchanged, mortgaged, and invested to grow. When it comes to agricultural land, the issue of property rights is obviously crucial: it is at the heart of the food problem. More generally, there is the need for the “rule of law”, implying a functional judicial system, which is fundamental for the stability of the expectations of economic actors: without any functional justice, how can one contract on a safe basis?
Those who fight for the Eradication of Poverty should be concerned with the institutional reforms essential for formal entrepreneurship - the only long term recipe to alleviate poverty. Without such pro-entrepreneurship reforms, preaching the Eradication of Poverty will only amount to wishful thinking.
Emmanuel Martin is the director of the Institute for Economic Studies – Europe. October 17.