Chapter 18 – Mercantile Law Versus the People

Mercantile Law Versus the People

GOD WORKS IN STRANGE WAYS in Indonesia. He annuls property rights on whim, seizes the lands of indigenous peoples to place them at the disposal of modern conglomerates, and disbands traditional economies.

In Indonesia, God is a mercantilist, or so the central government believes. In 1967 it decided that “gifts from God,” such as minerals, belonged to the state. Through its Basic Mining Act, all natural deposits found in Indonesia’s mining areas thus became a national asset, to be controlled and utilized by the state to maximize the people’s welfare. With a government permit, local people could still mine their land — which was sometimes privately held, sometimes communally held — unless the state required the lands to be carved into concessions for large-scale exploitation.

Indonesia also passed the Agrarian Basic Act and the Forestry Basic Act, again to turn local assets into national ones, again for the presumed benefit of the people, again regulated nationally. But the benefits have been distributed unevenly, according to the governor of one of Indonesia’s remote islands.

“I am confused,” Governor H.M. Said of South Kalimantan told WALHI, a prominent Indonesian environmental group in 1987, two decades after the passing of the Forestry Basic Act. “I have to round up illegal loggers throughout Kalimantan. But I realize that many of them are local businessmen who have been producing lumber for the last 40 years. When the new regulation for forest exploitation required that all permits for timber exploitation be submitted to the Ministry of Forestry in the capital, they had no access to the bureaucrats in Jakarta. That is why they couldn’t get concession rights. Now they are considered illegal loggers. It’s very difficult for me to implement this order. They are my people, I have to protect them. The concessionaires are from Jakarta. So I am in a dilemma.”

Governor Said’s dilemma is shared by millions of his compatriots who have been deprived of their livelihoods through arbitrary government regulation. A parliamentarian who visited Central Kalimantan in 1990 found almost 2,000 Dayak craftspeople starving following a federal ban on the export of raw rattan, including webbing, which the government deems to be only half processed. The Dayaks — who before the ban exported their rattan products directly to Japan and other countries — now must sell their wares, literally for starvation wages, through the Indonesian Association of Furniture Producers.

According to WALHI:

The rattan ban is just one aspect of sacrificing grassroots people in attempt to raise national income by shifting exports from raw materials to finished products. The trend began in 1980, with a plan to gradually ban raw log exports and to build a plywood industry in Indonesia. First the log export tax was raised so that the trade was no longer profitable for small concessions. Then concessions were legally required to establish a wood processing factory to make plywood, veneer, or sawnwood. Small companies which were unable to build their own factories because of limited capital or expertise were urged to merge with bigger concessions or with several smaller concessions to establish a processing plant.

The latest policy bans sawnwood exports. In an attempt to stimulate the production and export of finished sawnwood products such as furniture and molding, the export tax for unfinished sawnwood has risen from $150 to $750-$1200 per cubic meter. Small-scale sawmills, unable to afford the export tax, will be forced to set up processing industries. Most, however, do not have the necessary capital, political support, skilled labor pool, and expertise to create a furniture industry that will be competitive in the international market, and are therefore forced to join conglomerates.

The Dayaks of North Kalimantan began their lumber trade with Chinese and Egyptian merchants 1,000 years ago. This trade, and the Dayaks’ low-impact kuda-kuda method of sustainable logging, are ending with the advent of the conglomerates, some 50 business groups that now control logging over one-third of the Indonesian land mass through their ability to convince the central government of the wisdom of one policy over another, or of the need for this regulation over that.

To accomplish such sweeping redistribution of logging rights in the fifth most populous country on earth required more than the favor of the ruling politicians; this feat required nothing less than the destruction of property rights, which had been upheld through Indonesia’s traditional adat laws until the 1960s.

Usurping the adat laws, which remain today mainly as an appendage, was new mercantilist legislation that imposed national policies over community or individual values. Property rights provide the best protection for indigenous people — or any people — to maintain their resource base, their economy, and their culture. For this reason, whenever newcomers have wanted to change the status quo, be it in Indonesia’s remote islands in the 1960s or in the USSR in 1917, in North America in the 17th and 18th century or in Latin America in the 16th century, indigenous property rights must be denied to impose a new order.

What WALHI describes in Asia for a rural setting, Hernando de Soto details for urban life in Latin America, where the legal system denies the poor or ill-connected access to the economy.

To demonstrate the hurdles involved in establishing a typical small business — a simple garment factory — de Soto’s researchers rented the premises of an existing factory on the outskirts of Lima, Peru, installed sewing machines and other equipment, and recruited four university students to comply with the Peruvian bureaucracy. Although an administrative lawyer guided them, the students handled all the necessary red tape themselves, going from government office to government office, filling out form after form, as would a person of humble origin.

To comply with the law took 289 days and 11 permits. Ten bribes were solicited by bureaucrats, eight were avoided and two paid to prevent the experiment from failing. The cost of the entire procedure amounted to $1,231, or 32 times the minimum monthly living wage.

In a different study, de Soto discovered that 83 months were required to deal with the red tape involved in acquiring an urban lot and obtaining permission to build a house. And in yet another, that 14½ years are required to establish an outdoor market — little wonder that people in Latin America operate illegally as street vendors, and build informal housing for themselves. Being “illegals,” with no security should some “legal” want their land or their business, little wonder they will not invest in their properties.

Mercantilism, whether in left- or right-wing regimes, whether in democracies or dictatorships, seeks to “regulate every issue, every transaction, every property,” says de Soto, and only impoverishes the nation by excluding the average person from the economy.

The powers which tradition and the legal system vest in our rulers, even if they are democratically elected, give them absolute authority over economic and social activities and make it illusory to think that there might be some property right or transaction which cannot be arbitrarily harmed by the state. The state has virtually all the legal instruments it needs to interfere in the institutions which are supposed to lend stability to business activities: it runs an administrative apparatus which expropriates or freezes private resources, has unrestricted rights over any property which has not been assigned to private individuals, and has central control of import and export tariffs and licenses, currency exchange, and prices, and most savings and credit. It also controls virtually all the imaginable — and apparently harmless — means of discriminating and redistributing the country’s resources according to arbitrary political criteria. All these powers are generally hidden behind the magic words “planning,” “promotion,” “regulation,” and “participation.” For all practical purposes, most of the people do not have rights that can be effectively defended against the state.

Access to the economy, in which the state routinely and arbitrarily intervenes, is soon restricted to those skilled in politicking and red tape. This grassroot view from WALHI and de Soto — that unchecked state intervention favors special interests at the expense of the general interests of society and the economy — has percolated up to the United Nations, which now rejects central planning and “the `platonic’ theory … that government would be an essentially benevolent guardian of the public welfare, acting in a disinterested manner.” In its Human Development Report 1991, the United Nations acknowledges: “Citizens use political influence to get access to government services. Politicians ensure that government resources are directed toward their supporters. And public officials exploit their official positions for personal reward.”

Dictatorships, even benign ones, don’t work, but yet neither do democracies when a vast voting commons results in a tyranny of the majority, a process that ultimately discriminates against the poor, as the U.N. illustrates through a simple example:

If everyone in a democracy voted exclusively in their self-interest, the poorest 49 per cent of voters would always lose out. The top 49 per cent need only bribe the middle 2 per cent to gain a majority. No group is ever so calculating, but there nevertheless is some evidence of a tendency for democracies to redistribute benefits to the middle-income groups rather than the poor.

The answer lies in entrenching minority rights within democracies, to ensure that the middle and upper classes cannot appropriate the poor’s resources, or deny them full access to the economy.

The state’s prime role, says the U.N., should be “to provide an enabling framework rather than try to do development itself, through public sector enterprises or the direct provision of social services.” While the state still needs to assure a social safety net, most decisions should be left “to the `invisible hand’ of the market place. The reason is that when political pressure groups intervene, they are liable to be an `invisible foot’ trampling on the finely wrought work of the other limb.”

The pressure groups’ interventions have been quantified in Peru. Of the country’s half-million laws only 1 per cent emanated from the body created to make them: the Parliament. The rest came from the executive branch of government without debate or criticism, and often without the knowledge of those affected by them.

People want deregulation, the U.N. is saying, leaving the state to administer justice rather than resources; and they want a decentralized system that transfers much lawmaking and decision-making to the local level, where governments can be better watched, and where feedback between the governed and the government isn’t hampered by distance and diluted by national constituencies.

Most existing laws and regulations — being self-serving, remote, and impediments to feedback — could simply be abolished. Without foreign exchange controls, for example, most private enrichment at public expense would cease while the day-to-day fluctuations in exchange rates would provide governments, corporations, and individuals with feedback to better conduct their affairs. Without tampered prices, sometimes to inflate the cost of products, sometimes to subsidize them, prices would rise and fall with demand and supply, continually informing people of purchases to make or to postpone, businesses to start up or to close down, services to sell or to seek. Without the World Bank and other international institutions in the business of converting dynamic economies into mercantile bureaucracies, most of the environmental and economic damage slated by these behemoths to occur would vanish.

Paralleling these calls for a shrunken, more responsible state are calls for environmental accountability. Environmentally damaging development projects usually cannot proceed without government financing or guarantees for foreign loans, and other subsidies which give them a façade of economic viability. These subsidies, being hidden from the people who pay for them, allow these projects to proceed at everyone’s expense but the proponent’s.

To empower those affected, 300 citizens groups in Asia have drafted a Charter on Environmental Rights and Obligations of Individuals, Groups and Organisations — a modern-day environmental version of the Bill of Rights. Their charter spells out broad rights and obligations of man and the state based on secure property rights, access to information, due process in law, and user fees to attack the environmental commons. “While information, education, and regulations are important, appropriate market signals are necessary to bring about structural adjustment all across. Governments should change their tax, excise and levy systems to secure the ‘polluter pays principle,’” they said, and cease state subsidies to industry, agriculture, forestry, mining, and transport that have promoted the wasteful use of natural resources.

Good laws improve accountability by eliminating unmanageable commons and impediments to feedback. Laws that govern public finance, the Third World’s public is saying, should do likewise.

Sources and Further Commentary

For insight into Indonesian policies that affect traditional property rights and the environment see Environesia, the newsletter of Friends of the Earth Indonesia. In particular, see “Consolidation of Power in the Forestry Industry” in vol. 4, no. 2, April/August 1990, for the quotations cited. Also see “Who Is Violating Whose Law?” in the same issue, which further explains the subjugation of adat law by the national law.

Hernando de Soto’s remarkable book is called The Other Path: The Invisible Revolution in the Third World, Harper & Row, New York, 1989. Also see “Informals key to Third World growth” by Hernando de Soto, in The Toronto Star, June 30, 1990; “A Latin American view of the Brady Plan” by Hernando de Soto, in The Wall Street Journal, May 19, 1989; “Peru’s Informal Sector” in Swaps: The Newsletter of New Financial Instruments, Washington, D.C., vol. 3, no. 11, November 1989. See the transcript of an interview with Hernando de Soto and Gustavo Esteva, “The Informal Economy,” on IDEAS, Canadian Broadcasting Corporation, November 27 and 28, 1990.

The United Nations Report referred to is Human Development Report 1991, published for the United Nations Development Programme, Oxford University Press, New York and Oxford, 1991.

On the need for better laws and better government also see the recent statements of Pope John Paul II: “Profitability over people decried in encyclical” by Jack Kapica, in The Globe and Mail, Toronto, May 2, 1991; “Guatemalans chastised for making up their own minds” by Mart Altolaguirre, in The Wall Street Journal, August 10, 1990; “Central America moves toward capitalism” by David Asman, in The Wall Street Journal, March 25, 1991; Economic Reform and Democracy in Latin America and the Caribbean, Proceedings of The North-South Institute Seminar held in collaboration with the Inter-American Development Bank, March 31, 1990, Montreal, Quebec, 1990; Land and People, a newsletter of the Society for Participatory Research in Asia, New Delhi, India. The lead story of the no. 6, July-September 1989 issue, “The Right To Know,” is about the need for access to information legislation in India.

The Charter on Environmental Rights and Obligations of Individuals, Groups and Organisations, drafted by 300 citizens groups in Asia, is contained in An Agenda for Common Future, and published in Pakenviron, Special Issue, Environmental Management Society, Friends of the Earth — Pakistan, 1990. It lays out the incentive structures and mechanisms for bringing about developments such as sustainable energy use, industrial activity, and natural resources management. It also examines the economics of sustainability, and recommends reforms to guarantee access to information, legal protection and compensation for environmental damages, and public participation in government policies and projects.