People, not governments, will end poverty

Bookmark and Share Economics & Deregulation | Peter Gregory
New Vision Kampala 23rd April, 2015

It is currently fashionable among the international community to claim they need to help countries like Uganda prevent multinational corporations from engaging in ‘profit-shifting' and ‘tax minimisation'. This has the reform agenda back to front.

If developing countries like Uganda want to fight poverty, they should fix the institutional malaise that prevents billions of individuals and small businesses globally from entering the formal economy.

The thinking behind the campaign to help countries in Africa and elsewhere to collect more tax from multinational companies is straightforward.

According to some estimates, profit-shifting and tax minimisation by multinational corporations cost developing countries between $35b and $160b annually.

Given that global foreign aid totals to $135b a year, it is thought that helping developing countries tighten tax loopholes will provide them with increased funding. It will also enable developed countries reduce foreign aid spending.

Putting aside the questionable logic of increasing taxation on a valuable source of jobs and income in developing countries, tackling profit-shifting is far from being the top reform priority. Indeed, developing countries and the development community should be looking down, not up.

According to the Institute of Liberty and Democracy (ILD) in Peru, two thirds of the world's population is excluded from the formal economy as a result of not possessing adequate formal property rights.

This means they own assets such as houses or operate businesses that are undocumented and not legally recognised.

Laws and records that document property rights enable human beings to form more valuable economic aggregations.

They allow people to trade, exchange, combine and share with others beyond their family or local community.

Without a formal property right that is documented and legally recognised, entrepreneurs cannot borrow money from banks. Families cannot buy or sell a house with any certainty.

And yes, opening the gates to the formal economy will expand the tax base of developing countries.

According to the ILD, the world's poor own $10 trillion worth of assets and enterprises, currently outside the formal economy.

The economic potential of unlocking this value by bringing it ‘onto the books' is almost unimaginable.

As Peruvian economist Hernando de Soto argues, poor people are not the problem, but the solution to poverty.

Typically, private property rights exist in developing countries, but the process to acquire them is too complicated, expensive and corrupt to be worth the while of those in the informal economy.

In Uganda, it takes 32 days and costs almost two thirds of an average yearly salary to register a business. The result is that Uganda has 1.8 million informal businesses. This means millions of small Ugandan entrepreneurs have difficulty acquiring in bank loans, selling or expanding their businesses.

It would be achievable and inexpensive for the Ugandan Government to streamline this process.

The benefit for those living and working in Uganda's extra-legal sector - which the World Bank estimates makes up 20% of Uganda's GDP, would be enormous.

In Hanoi, Vietnam, a sample and cheap form of property titling has meant that it is one of the few towns in the developing world without slums.

This system could be easily replicated in Kampala and other Ugandan cities, where approximately five million people live in slums. Indeed, researchers are only just beginning to quantify the benefits of opening up the formal economy.

The international community's call to prevent profit-shifting is a product of the prevailing philosophy that the solution to poverty is enlarging and empowering developing world governments.

The development community and the developing world must divorce themselves from this notion. It is people, not governments, that will end poverty.

Formal property rights just document the relationships between human beings. Once these relationships are documented in a simple and stable environment, poor people will work with each other to lift themselves, their families and their communities out of poverty.