in Lagos: Grade A vs. System D

De Soto meets Fashola. Formalize the informal. That's what's going on in Lagos,Nigeria, as the state government has hired Hernando de Soto's Peru-based Institute for Liberty and Democracy (ILD) to conduct a census of informal businesses. This Day has the details.

It's understandable that government wants to come to terms with System D. As Wale Raji, the Permanent Secretary of the Ministry of Commerce and Industry, told the paper, 90 percent of the assets in the state are off the books. But where the Lagos government goes wrong is when Raji  suggests that this massive amount of capital --- the city accounts for more than 60 percent of Nigeria's industrial and commercial activity and 30 percent of the country's GDP -- is, in Raji's words, "not of many benefits to their owners apart from providing them accommodation. When it comes to business transaction, they have no value.”

The System D firms in Lagos do have value. And the big System D outfits are doing a massive amount of business. Five years back, when I was doing the reporting for Stealth of Nations, the bigwigs at Alaba International Market told me that their market's turnover was more than $3 billion a year. And that's just one Lagos market. In that context, de Soto's one-size-fits-all assertion that these markets constitute dead capital is simply wrong.

Businesses like those in Alaba don't need to become formal to gain access to credit. They do their own banking in their own way. Indeed, they have their own credit system. They have their own banks. If Fashola wants them to formalize and start paying taxes, they'll want to see a serious inducement--like an improvement in profit.

I hope to find out more about this when I'm in Lagos next week.