When Peruvian businessman and economist Hernando de Soto looks at the shanty towns that dot Lima, he sees more than the abject poverty.
De Soto says that hidden amidst the shanties is a vibrant market economy that is mainly independent of the formal Peruvian economy and that has grown so fast that today it produces as much as $11 billion in goods and services--almost none of which is counted in the official $22 billion Peruvian gross domestic product.
It is peopled by Peruvians, many of them Indians, who fled rural poverty in search of a better life in the city. Lima, like many Latin American cities, grew quickly in recent decades because of rural immigration. Peru's most important city had about 1 million inhabitants in 1958; today it has 5.5 million people.
Peru's underground economy is complete with manufacturing facilities, retail outlets (street vendors) and its own legal system, de Soto said.
If he is correct, then Peru is a far wealthier country than official statistics portray. Like many Latin American nations, Peru is mired in foreign debt that economists, bankers and Peruvian officials say is bigger than Peru's economy can handle.
De Soto said that the study he directed as head of a Lima think tank, the Institute for Liberty and Democracy, should cause economists and government officials to re-evaluate the standard belief that cultural and social factors in most of Latin America preclude the development of a private, market economy along the lines of those in the United States and much of Western Europe.
He said Peru's informal economy developed despite the terrific handicap of being illegal. In the future, he said, officials should consider whether to redirect development efforts toward the private sector rather than the state sector (which in nearly all Latin American debtor nations owes most of the debt).
He said it is impossible to determine without further studies whether the same can be said about other Latin American nations like Brazil where conditions appear to be similar, de Soto said in an interview here.
De Soto assembled a 55-person team to explore Peru's "informal" economy. He said the informal or underground economy has mushroomed in Peru because the rural immigrants found it nearly impossible to establish themselves in businesses in the above-ground economy.
It could take a poor person in Lima six months or more to get government approval to set up a simple business, approval that would take only hours or days to get in the United States, he said.
The think tank's team was comprised of anthropologists, economists, lawyers and others with a more direct knowledge of underground operations, including one police officer with a doctoral degree. De Soto said that the investigators are of all political stripes, from avowed Marxists to free-market exponents like himself. All were surprised at the large number of entrepreneurs that people the shanty towns of Lima and other Peruvian cities, he said.
De Soto said the study estimates that the underground economy accounts for 90 percent of Peru's garment industry, 75 percent of its furniture industry, 60 percent of housing construction, and even a good part of the automobile and truck industries.
The informal economy in Peru not only satisfies the needs of those who live in the shanty towns, it competes in some ways with the legitimate economy and has grown so important in some areas--most notably public transportation--that it has achieved a quasi-legal status.
Nevertheless, most of the underground economy survives by staying out of the sight of some authorities and by bribing others to look the other way.
There are many factories in Peru's informal economy, but to remain hidden from official eyes most have fewer than 15 workers. In one five-square-block area in Lima, automobiles are assembled, de Soto said. But the various key components of the cars are assembled in stages by secretly shuttling them from one small factory to another. There are few economies of scale in Peru's underground economy, according to de Soto, who was in Washington to present the results of the study to a State Department conference.
Peru's underground economy has grown so large and complicated that it has developed its own legal system as well, de Soto's investigators discovered. In any underground economy, whether it is in Lima or Chicago, a person's "word" is crucial where there is no formal law to enforce agreements or protect rights. Not unexpectedly, contract and property law in Peru's underground economy is well developed, he said.
For example, he said that Lima's 300,000 street vendors (who are a major sales outlet for much of the informal economy) have developed elaborate "property" rights for the two square yards or so of public space each of them occupies for eight hours. The "owner" of a space can sell it for about $750 (the exchange is in U.S. dollars), and the rights of the new owner will be respected.
When the economy's underground bus drivers--who de Soto said carry about 85 percent of Lima's public transportation passengers--began to import buses in the early 1970s, some of the contracts were secured by "deeds" to property the importers owned in the eyes of the informal economy, although the ownership was not recognized by formal Peruvian law.
He said the informal bus system began in much the same way gypsy cabs began in New York City or Chicago: to fill a need. Gypsy cabs ply the ghetto streets in Chicago or the outer boroughs in New York where people want taxi transportation but most medallion cabs refuse to go.
The underground bus system in Lima, for example, began with vans or microbuses that picked up passengers in areas that Lima's tiny public transportation system did not serve. Today, that informal bus system regularly plies more than 160 routes in the city and its suburbs, and drivers, who own their buses and collect their own fares, use vehicles that will hold 100 persons, he said.
The drivers have organized themselves into about 120 committees (for the most part there is one committee for each route), and the committees decide which driver covers the route at what time. All committees are part of a syndicate that negotiates with the government over fares (about a dime) and safety regulations, even though officially the government does not recognize the informal bus system's existence.
But de Soto said that the underground economy is far from perfect, and that it would be far preferable for the government to find a way to integrate it into the above-ground economy.
Despite the success of many entrepreneurs, much poverty remains in Lima's shanty towns, and there is no "redistribution of income" from wealthier residents to the poor. Furthermore, he said, the costs of doing business in the informal sector are high and the risks are great.
Like underground economies everywhere (including what he calls the "marginal" one in the United States), nearly all transactions are in cash. The entrepreneurs cannot protect themselves against Peru's 130 percent inflation rate as de Soto can by investing in securities and bank deposits.
There is no insurance in the underground economy and, unlike the well-developed contract and property law system, a tort system (which deals with injuries) is poorly developed. If a bus is stolen or destroyed, the driver looses his livelihood. If a factory is discovered by authorities and shut down, the owner goes out of business and the workers lose their jobs.
He said interest rates in the underground economy reflect those risks. A lender knows he cannot be repaid if a driver's bus is stolen or a factory's inventory is seized. As a result, interest rates average between 250 and 300 percent.
De Soto, who returned to Lima four years ago after managing a major Swiss construction firm for a decade, said his study is sure to cause controversy in Peru, where the existence of the informal economy either is ignored or underestimated, at least in his eyes. CAPTION: Picture, A street scene in Lima, where the underground economy is said to generate $11 billion. By Bill Sokol for the Washington Post