Summer School 1: A government's role in the economy is to make us all richer

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Speaker 2 A quick reminder: Planet Money Plus subscribers get access to summer school episodes one week early. Sign up at plus.npr.org/slash planetmoney.

Speaker 2 This is Planet Money from NPR.

Speaker 2 That ring can only bring one thing. It's the Planet Money Summer School, your easy listening, hard-thinking, audio economics degree.

Speaker 2 And the only education you can get these days without putting on pants or taking on debt. I'm your host, Robert Smith.
This is the sixth year we've done summer school.

Speaker 2 Six years of taking the biggest ideas in economics and packing them up like a beach reed for your ears.

Speaker 2 If you've been enrolled with us since the very start, your parents might be wondering if you're finally a doctor yet. Soon.
Soon.

Speaker 2 Of course, you may be asking, Robert, we have already done whole summers on micro and macroeconomics. We've learned about investing, entrepreneurship, and the economic history of the world.

Speaker 2 What else is there? Well, this summer, we will tackle the biggest economic player of them all, the government.

Speaker 2 As you might have noticed, the biggest debates debates in our country right now are about how much government should be up in our business, in trade, taxes, immigration, healthcare, regulations, you name it.

Speaker 2 Every day, it feels hard to make any personal or economic decision until we can figure out what the government is going to do.

Speaker 2 So every Wednesday this summer, we will hear stories of how politicians sometimes make all of us richer. And yeah, sometimes screw it all up.
And we'll talk about the big economic question.

Speaker 2 What is the right amount of government in our lives?

Speaker 2 As always, we will have a final exam at the end of the season and a souvenir diploma, plus, and this is big, a live graduation ceremony in New York City in late August.

Speaker 2 Details in the show notes and at the end of this episode.

Speaker 2 So, government, the big G.

Speaker 2 I know we like to imagine the free market, the invisible hand, as being independent from political influence.

Speaker 2 But our guest professor today, Simon Johnson from MIT's Sloan School of Management, says that influence has been there since the birth of economics.

Speaker 5 So, Adam Smith and other early writers on economics did not see any separation between economics, how the economy functions, and politics, meaning who makes the decisions around the rule of law and markets and all the things that make the economy function.

Speaker 5 I mean, where do you think these decisions came from? They didn't descend from the heavens unassisted. Somebody wanted something to happen, right? Who was that person? What did they want to happen?

Speaker 5 What was the process there?

Speaker 2 Simon Johnson was one of those somebodies. Well, at least advising the big decisions.

Speaker 2 He was the chief economist of the International Monetary Fund and one of our first regular guests back when Planet Money started. Oh, we also won the Nobel Prize after those interviews.

Speaker 2 So, I don't know, causation, correlation.

Speaker 5 Well, I was disappointed the prize committee didn't cite those specific interviews, Robert. Actually, I bet that probably just an oversight on their part.

Speaker 2 Just an oversight. What we are trying to do this summer has a big fancy name, a degree in political economy.
Simon, why don't you help us define that?

Speaker 5 I think what political economy is, at its best, is an attempt to reintegrate economic elements with political decisions.

Speaker 5 And the political decisions, of course, take into account who's got power, who's got money, who wants what kind of outcomes.

Speaker 5 So politics and economics, which are taught separately, they shouldn't be separated at all, I think, Robert. We have to understand one to really appreciate the other.

Speaker 2 Who's got the power? Who's got the money? That's what we'll be talking about over the next eight weeks.

Speaker 2 In a few weeks, we'll talk about taxes, for instance. Not as this annoying thing we always have to pay, but as a magic wand the government can use to change our collective behavior.

Speaker 6 If you want the biggest bang for the buck, you send everybody a check in terms of political bang, right? There's nothing like a good check in your hands.

Speaker 2 Also, this season, we'll have a whole class on how the government regulates every little part of our lives, sometimes for good and sometimes for reasons that no one can figure out.

Speaker 7 American regulations require that the windshield wipers capture a larger part of the windshield versus European ones.

Speaker 8 A tip.

Speaker 2 But I mean what is the even logic behind that?

Speaker 7 You know,

Speaker 7 I guess Americans might be taller on average, therefore they would be looking at a different part. I mean I'm struggling here.
I agree with you to come up with a rationalization.

Speaker 2 We'll also have a lesson on how the government encourages innovation by protecting our property and our inventions, even when those inventions don't seem all that innovative.

Speaker 9 There's patents for people for walking dogs while holding onto a leash on a bicycle. There's patents for dumping the remains of a cremated body from an aircraft.

Speaker 2 But all this is just the syllabus. After the break, we will pick up our first lesson with Simon Johnson.

Speaker 2 And it's one of the biggest questions of all: why are some countries rich and some countries poor?

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Speaker 2 Okay, class, I know you're excited, first day and all, but it's time to sit down. Summer school is in session.
And we are lucky to have Professor Simon Johnson with us for our first lesson.

Speaker 2 What can governments do to make a country rich or poor?

Speaker 2 Simon, you won the Nobel Prize last year along with Daron Asimoglu and James Robinson for work that looked at the role of institutions in countries around the world.

Speaker 2 When we think of institutions, we might think of, oh, I don't know, the Supreme Court or Congress. But what are some of the institutions we might not think of?

Speaker 5 Yeah, so when you make comparisons across countries, Robert, you look at things like rule of law. You know, can contracts be enforced?

Speaker 5 If you go to court as a regular person, do you get a fair hearing? Or, you know, are there issues of bribery, corruption? Is all the power in the hands of a few families, for example?

Speaker 5 Is this country a place where most people have equal protection before the law? Or is it a place in which a few people, whatever their job titles or family ancestry, a few people have all the power?

Speaker 2 Yeah, and that has a big effect on economics.

Speaker 2 If I wanted to start a business, say, I need to know that the rules are fair, that I'm competing on the value of my intellect and my products, and I need to know that if my business is successful, it's not going to be suddenly taken away away from me.

Speaker 5 Well, we don't think enough about expropriation and extraction, which means somebody can steal your stuff.

Speaker 5 And the way that happens in many places is that some powerful person says, look, you're in violation of this rule, or I've just decided my son-in-law wants to live in this house, or something like that.

Speaker 5 And then you could go to court, but you would lose because the court system is massively biased against ordinary people.

Speaker 5 We just assume in the United States that powerful people can't come and take our stuff away. We tend to assume it's a level playing field for most people, which it is a lot of the time.

Speaker 2 And that's a perfect lead-in to our first case study of the season. We're going to look at a place without a level playing field and see how it affects a particular business on the island of Jamaica.

Speaker 2 In 2010, Alex Bloomberg and Hanna Jaffe Walt brought us this story that starts with three women selling fruit alongside a road outside of Kingston, Jamaica.

Speaker 11 You know, Alex, normally when reporters go abroad, they hire translators.

Speaker 6 Right. Well, she's speaking Jamaican patois, but she also speaks a little English.

Speaker 6 And so here's the scene: this woman, I never got her name, she's one of three women and they're all selling fruit out of boxes on the side of the road, right outside this mall.

Speaker 6 So you you're selling these things right here? Yeah, right here. What do you tell me what you're selling?

Speaker 10 Breadfruit plantain, gunga peas, plantain, plantains, gunga peas,

Speaker 10 night,

Speaker 10 and no buyer. See, all of it there.

Speaker 6 So how long have you been out here selling this?

Speaker 12 Road 20 years.

Speaker 10 Not gonna make it.

Speaker 6 20 years. Yes.

Speaker 6 So this is your business, right? All of you?

Speaker 12 Share the business.

Speaker 11 So this is like on the side of the road somewhere, three women sitting on the side of the road with fruit?

Speaker 6 Right, and just in cardboard boxes. They don't even have chairs for themselves.
There's no stand or anything, but they're just like, they've got these boxes, they're selling this fruit.

Speaker 6 But it is their workplace. I mean, you heard she's been doing this for 20 years, the three of them.

Speaker 6 Every day they go to this big market in the center of town, they buy their their produce, then they set up here and they sell it. So here's the thing, though.

Speaker 6 Even though they do this every single day and they've been doing it for 20 years, it is totally informal. Their business does not have a name.
They have never filed any paperwork with the government.

Speaker 6 And they definitely do not pay taxes.

Speaker 6 The government

Speaker 6 collecting tax from you.

Speaker 10 No, but we pay the taxes and if we want to buy in the supermarket. Right, right.

Speaker 4 Yeah.

Speaker 6 You hear what she's saying. This is something that people say a lot in Jamaica.

Speaker 6 She's saying, I don't pay taxes on the income I get from my business, but you know, I do pay taxes when I buy the stuff that I'm selling in my business.

Speaker 6 Everything I have here, I pay taxes.

Speaker 11 Would not be a very persuasive argument here with the IRS.

Speaker 6 No, it would not.

Speaker 6 Okay.

Speaker 6 Ready? Let's go somewhere else.

Speaker 4 How many?

Speaker 4 One.

Speaker 2 One? One?

Speaker 2 Oh, I sell grapes, apple, orange, banana.

Speaker 14 Ed so.

Speaker 11 So where are we now, Alex?

Speaker 6 Now we're in New York. We're right outside our office, actually.

Speaker 6 You know that guy who sells fruit right down the street on 40th Street? Oh, right downstairs. Yeah, I buy fruit from that guy.
Right. His name is Mehdi.

Speaker 6 He's originally from Bangladesh and he's been here in this country for just six months. But he's working at this fruit stand, which has been there for a long time.

Speaker 6 And this fruit stand, you'll be happy to know, totally legal. Do you have to have a permit to sell here? Oh, yeah.
I have a permit. Oh, do you have the permit? Yeah.
Oh,

Speaker 6 oh, can I see it?

Speaker 6 Oh, yeah, and you're showing it to me right now. This is my permit.

Speaker 6 This is the honor permit. And this is the pushcart permit.
And the push cart permit.

Speaker 3 Yeah.

Speaker 6 So there's all these permits that you have to do. Yeah, yeah.

Speaker 6 And the guy who owns the business,

Speaker 6 he pays taxes on his business, right?

Speaker 13 Yeah, yeah, yeah.

Speaker 11 So he has three permits?

Speaker 6 Right, he has three permits to sell fruit on the side of the road in New York versus zero permits to sell fruit on the side of the road in Kingston.

Speaker 6 And this tale of two sidewalk fruit vendors is the tale of two very different economies. In the United States, most people are like this fruit seller that you just heard from.

Speaker 6 They work in the formal sector. The businesses have been registered, they have a legal status, and the owners pay taxes.
In the Jamaican economy, it's largely informal.

Speaker 11 But if you think about like those three ladies selling fruit on the side of the street, like it, I'm not sure that it really makes sense for them. Right.

Speaker 6 I mean, we were joking that they're tax cheats, but their lives are really hard. They're just barely scraping by as it is right now.
And how would paying taxes help them?

Speaker 6 And, you know, well, obviously, first of all, they're probably not making enough money to actually pay taxes in the first place.

Speaker 6 But the second thing is, just because you're in the informal sector does not mean that you're not paying taxes. You're just not paying taxes to the government.

Speaker 6 You are paying taxes to criminals, like these ladies do. They corrupt cops come by, they call them the Metro Man.
They come around and steal their fruit and lock them up. And they told me about it.

Speaker 10 Sometimes when the Metro Man come up, everyone's talking about them.

Speaker 12 They

Speaker 12 take away all our stuff and lock me up. Yeah.

Speaker 10 Yes, they carry down our jail. I have to go to court and pay.

Speaker 6 Wait, the police come and take away your stuff?

Speaker 10 Yes.

Speaker 10 We pay attack.

Speaker 6 So you pay taxes. You pay tax.

Speaker 6 Protection racket.

Speaker 6 Yeah. And

Speaker 6 when did that happen?

Speaker 4 Last month.

Speaker 6 Last month? Yes. Last month the police came, they beat you, took your food.

Speaker 10 Bring the bun. To ban.

Speaker 6 And then you had to go back and buy your food back from them?

Speaker 10 We have to beg and go back and buy.

Speaker 8 You don't get it. You get it back.

Speaker 10 Sometimes we cry.

Speaker 6 Yeah.

Speaker 12 Hungry, you know?

Speaker 11 God, that's horrible. So there's like police walking around that they're afraid are gonna come and steal their fruit and beat them up while they're selling?

Speaker 6 Yeah, or sometimes it's somebody else. I mean, it just, I got the sense that it happened fairly regularly and that from various different people.

Speaker 6 Like they're sort of defenseless, you know, on the side of the road there.

Speaker 11 So we're talking about taxes, like that, that is a barrier to economic growth.

Speaker 6 Yeah, absolutely. And that's a big problem in Jamaica.
I mean, there's like, you know, those criminal gangs that, you know, extort, you know, protection money from people. And

Speaker 6 so you're in the informal sector, you're still paying taxes.

Speaker 2 Alex Bloomberg and Hannah Jaffe Walt from 2010.

Speaker 2 We're listening along with our professor, Simon Johnson, who has done a lot of research on the ways basic rules like paying taxes and private property can make the difference between rich and poor nations.

Speaker 2 Simon, this was about Jamaica, but we could have told this story anywhere in the world, including the United States of America, where oftentimes there are businesses who operate off the books.

Speaker 2 I live in Brooklyn. I know there's arbitrary enforcement of rules all the time.

Speaker 5 You found a helpful way of looking at this across countries by asking what kind of institutions do they have in their economy yeah so the terminology that we settled on and a lot of people have started using is extractive versus inclusive institutions so the inclusive one i think is what i would start with because it's the easy place to understand this which is do these institutions allow you to build a company do they allow you to own a house do they allow you to drive your car around without being hit by extra fees or demands for bribes or outright confiscation honestly so all of these different kinds of rights that you have as a person, as an economic actor, if they're inclusive, it means you have the same rights as everybody else.

Speaker 2 So in the case of the Jamaican women, if there were inclusive institutions, should have had the right to their products, not to be hassled by the police and that sort of thing.

Speaker 5 That's right. I mean, there would be rules.
You might need to have a permit, but the permit would cost you five cents and you'd get it automatically.

Speaker 5 You know, when you register a car in the United States or get a driver's license, you do have to go to the DMV. Nobody loves that experience.
But it's relatively straightforward.

Speaker 5 And hopefully in the modern United States, you don't have to pay bribes to anybody to get your license or get your car registered and so on.

Speaker 2 So that's inclusive institutions. The other thing you said was extractive institutions, which is sort of the opposite.
What does that mean?

Speaker 5 So extractive institutions means that a few people have established the means to take anything and everything that they want. So think, for example, about North Korea, which is a very extreme case.

Speaker 5 It's run by a dictatorial family and some allies. They actually, by all accounts, live reasonably well.
Most people in that country are immensely poor and sometimes actually starving.

Speaker 5 And so the ruling elite in a place like North Korea extract all the value from people.

Speaker 5 And anytime something good happens to an entrepreneur or somebody tries to build something, if the ruling elite wants it, they just take it. And there's no recourse.

Speaker 5 There's no court system you can go to. In fact, I'm pretty sure that if you appealed against the actions of anybody in that ruling elite in North Korea, you would never be heard from again by anyone.

Speaker 2 And what are the results of having inclusive rather than extractive institutions? I mean, does this result in a richer country or more social mobility or

Speaker 2 less inequality?

Speaker 2 What would we look for?

Speaker 5 So I think the case studies are very good on this. So think about Jamaica and the women who are selling the fruit.

Speaker 5 So they can make a living on a good day, but they have no way to invest, no way to build a business, no way to borrow money, no way to get a return on capital, because they could get wiped out at any moment.

Speaker 5 In fact, if they are successful and do build something that catches the attention of anybody powerful, they will get expropriated, right? That's exactly how it works.

Speaker 5 So then you think about it from the view of those women, and they're saying, you know what, I just need to make enough money today. I'm not going to invest.

Speaker 5 If I make an investment, I'm creating a vulnerability for myself.

Speaker 5 If I make any extra money today, I'll hide that. So in the worst case, Robert, you don't make investments.
The private sector doesn't grow.

Speaker 2 So why do some countries end up with inclusive institutions and others have these extractive institutions?

Speaker 2 I know in your work, you've talked about the historical context, how colonialism in some places was very extractive. They would steal gold and send it to Europe.

Speaker 2 They would kidnap indigenous people for slavery. But then in other places, they would create these inclusive institutions because they were going to settle there, right?

Speaker 2 They were focused on keeping some of the riches in their colonies. So what lesson can we learn from that different history?

Speaker 5 I do love history.

Speaker 5 And I think, in a nutshell, the answer is that you have to build up a sufficiently strong group of people, some people would call it middle class, that really wants that stable property rights and rule of law.

Speaker 5 So, if you get a middle class that says, hey, let's have stronger, better rule of law, less extraction, that's not necessarily good for the elite.

Speaker 5 So, I think that actually a lot of places, Robert, don't grow as fast as they could because the elite likes the current arrangements just fine.

Speaker 5 And that's a major impediment to shared prosperity around the world. If the rich, powerful people don't want it, you're not going to get it.

Speaker 2 But one of the nice things about your work, Professor, is that you've shown that countries can change and that institutions can actually get better.

Speaker 2 We'll have a story about that from the country of Peru after the break.

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Speaker 2 Okay, students. Eyes forward, or I guess I should say ears forward in this case.
Listen carefully now to our second case study.

Speaker 2 This one was done by David Kestenbaum and Jacob Goldstein in 2015 as a profile of Hernando De Soto.

Speaker 2 De Soto is a businessman in Peru who saw these extractive institutions we've been talking about and decided to do something about it.

Speaker 5 The story starts right around 1980.

Speaker 14 Right around then is when Hernando de Soto moved back to Peru.

Speaker 2 And De Soto, he's a businessman. He's not an academic, but he keeps chewing over this really abstract question.
What is holding Peru back?

Speaker 5 And at first, he's kind of working over this question on the weekends. He's actually walking around, talking to the guys selling stuff on the street.

Speaker 13 After a while, I found out that they were in the street, but they didn't like being in the street because he needs running water. He doesn't have running water.
He wants to be away from thieves.

Speaker 13 And he wants to have stocks and refrigeration, which he can't have in the street.

Speaker 14 I always figured they didn't have more space. They didn't have refrigeration because they didn't have the money because they just couldn't afford to pay for those things.

Speaker 13 Here I am installed with the same question you are, right?

Speaker 13 The same question. Now they don't have the money, they don't have this.
But at the same time, since I'm befriending them, I'm walking them through their homes, right?

Speaker 13 I'm going to see where they live and what they do. Then I look at the roof because it's flat.

Speaker 13 Okay, so I look on top and I see, my God, you got cement backs up there and you've got bricks and you've got pieces of iron.

Speaker 14 These vendors do have at least some money. They've saved enough to build a solid house.
They're saving more so they can put another floor on that house.

Speaker 14 So money is not the thing keeping the vendors out of the markets.

Speaker 18 And DeSoto sees those bricks on the roof and realizes something else. People in Peru aren't saving the way people in wealthier countries save.

Speaker 13 Instead of saving money in the bank, what you're doing is you're saving in bricks and in cement bags.

Speaker 14 These street vendors don't have bank accounts. And DeSoto discovers poor people in Peru are missing out on all kinds of basic things we take for granted.
They're basically living outside the system.

Speaker 14 They don't have a deed that says they own their house. They don't have a permit that says they can run their business.

Speaker 18 DeSoto realizes he has to do more than just wander around and chat with people to really understand what's going on.

Speaker 18 So the next thing he does, the thing that makes him famous, is he does an experiment. He runs an actual experiment.

Speaker 14 He wants to see what it would take to actually live inside the legal system instead of outside of it. So he decides to set up a shirt factory, to get all the proper paperwork, all the permits.

Speaker 14 He rents space space in a warehouse. He buys a few sewing machines and a knitting machine, but he has no plan to ever make a single shirt.
He just wants to see what it would take.

Speaker 18 So he hires a lawyer and a few students and he tells them, go out and do everything you have to do to make this a fully legal shirt factory. Figure out how long it all takes.

Speaker 13 Here's a stopwatch. Go, get on a bus, find out what you have to do.
So they went out and they did the red tape.

Speaker 13 So they'd go to an office that they were told was an office that granted the license to operate a machine. And then they find that they were told, no, it's not here anymore.
The dress has changed.

Speaker 13 Go elsewhere. You got to take another bus.
So they actually took the buses.

Speaker 18 They had to get 11 different permits from seven different ministries. They were asked for bribes 10 times, had to actually pay bribes twice.
They had to do everything in a certain order.

Speaker 18 There were lots of delays. It took an incredibly long time.

Speaker 13 In total, you would take at least 278 days working eight hours a day to get the permit to operate, to do business with a small little factory.

Speaker 14 And what do you get for eight or nine months of work of taking buses?

Speaker 13 You get the authority to open your little factory. Just the cost of being able to open that, and a cop can't come in and close your factory down.

Speaker 14 DeSoto gets obsessed. He had set up a little nonprofit to do the fake shirt factory thing.

Speaker 14 Now he has his team talk to people in other businesses, has them study the rules, and he figures out setting up a shirt factory, actually one of the easier things to do.

Speaker 14 If you want permission for a new bus route, it takes 26 months. To open a new legal market, the kind of place all those street vendors want to move into, that takes 13 years.

Speaker 18 These numbers started to answer DeSoto's question. If you scrape together enough money to start a little t-shirt factory, you got to start selling shirts right away.

Speaker 18 You can't afford to spend nine months getting permits. So you end up doing what everybody does.
You open your factory illegally. You don't wait for the permits.
You live outside the law.

Speaker 14 And if you're outside the law, DeSoto realizes, it's really hard to get ahead. It's really likely that you're going to stay poor.

Speaker 14 If you're running your business illegally, if you don't have a bank account, you're not going to get a loan to expand your business.

Speaker 13 You can't start a company. You can't raise capital.
And if you can't raise capital, you can't also, for the same reasons, you can't raise credit. It means you can't expand.

Speaker 18 DeSoto had found his invisible wall. Unfortunately, it was one of those problems problems that's really hard to solve.

Speaker 18 You're talking about trying to fix an entire dysfunctional system, trying to change laws, trying to change the culture of an entire country.

Speaker 14 Faced with this monumental task, DeSoto decides on the thing he knows. He's a businessman, so he launches an ad campaign.

Speaker 13 We put up a lot of radio jingles, a lot of TV jingles.

Speaker 14 Jingles like ads, like too hard to start a business.

Speaker 13 Yes, absolutely. One of them was called, it was, uh, one of them was called.

Speaker 14 Title of the song, What Would I Do If I Had Capital?

Speaker 14 The guy says, I'm going to tell you the story of a country that's doing really badly.

Speaker 14 Because only a small group of people has access to capital.

Speaker 18 Jacob, can I give you my honest reaction when you told me that?

Speaker 14 Tell me, tell me.

Speaker 13 There's no way this is gonna work.

Speaker 14 Does it change your opinion if I tell you that badly and capital rhyme in Spanish?

Speaker 6 Mal capital.

Speaker 3 Doesn't change my view at all.

Speaker 18 I mean, one of the problems is something he mentions in the song, right? There are a small number of people who do have access to capital. Those people don't want things to change.

Speaker 18 I mean, you've got corrupt officials, right? They all like collecting bribes. You've also got a bunch of rich people who already have businesses.

Speaker 5 They're well connected.

Speaker 18 They like the fact that it takes someone else a year to get the permits to open up their business because it benefits them, less competition.

Speaker 18 There are so many things set up for the system not to change.

Speaker 14 And on top of all this, DeSoto has one other problem.

Speaker 13 The Shining Path was a terrorist movement of Peru, ideologically a Maoist movement.

Speaker 14 Maoist, as in in Chairman Mao. These are communist guerrillas.
They're waging a civil war in the countryside.

Speaker 14 And as communists, they have a very different view from De Soto about what is holding the country back.

Speaker 14 For the Shining Path, the reason people were poor wasn't these obstacles to capitalism that De Soto had discovered. For the Shining Path, the problem was capitalism itself.

Speaker 18 DeSoto sees this ideological divide. And when he writes a book as part of his big marketing campaign, he makes the title an attack on the shining path.
He calls his book the other path.

Speaker 18 It becomes a bestseller.

Speaker 14 The Maoists were not pleased.

Speaker 13 I wake up one day and they say the clandestine newspaper The Shining Path says that you are going to be punished because you've brought down their recruitments because of the of the fuzzy ideas that you're propagandizing with the jingles, with a book, etc.

Speaker 13 And they're going to punish you. That's what I wake up one day.

Speaker 18 The attack came soon after that.

Speaker 13 There's a park in front of our offices, and they get into a dirt mound in the back of it and they start machine gunning the place.

Speaker 14 They shot a security guard and then the attackers pulled a car up in front of the building.

Speaker 13 The car that's loaded with about, I don't know, 200, 350 kilos of dynamite and they light the fuse and there's a getaway car. They all get back into the getaway car and leave the car to explode.

Speaker 14 Three people at DeSoto's office were killed. A while later, the Shining Path tried again.
They machine gunned DeSoto's car, but it was protected by bulletproof glass and a reinforced gas tank.

Speaker 18 Eventually, the Maoists lost. The leaders of the Shining Path wound up in jail.
And DeSoto's moment finally came.

Speaker 18 He'd become famous, The Jingles on the Radio, the best-selling book, and he was providing proof of what everyone had suspected for a long time.

Speaker 18 No one was playing by the rules because the rules were a mess. The rules needed to be fixed.

Speaker 14 DeSoto gets the ear of Peru's president, and the president launches a campaign to simplify the rules, to make it easier for poor people to get titles to their homes and legal ownership of their businesses.

Speaker 18 To accomplish this, DeSoto needs more than some clever radio jingle. He needs a TV show.
So they launch one.

Speaker 18 It's a TV show about cutting through bureaucratic red tape, starring the president of Peru himself.

Speaker 18 On the show, the president hears about the problems people are having, problems getting paperwork for a business or applying for university or even getting a marriage license.

Speaker 18 And then the president actually does something about it.

Speaker 13 The president would say, well, this is terrible. And they would say, now, who's the head of the office that would be ultimately responsible for this?

Speaker 13 And then my guy would tell him, well, it is office such and such. Okay, well, if he doesn't solve the next five days, he's fired.
And then he signs a little decree.

Speaker 13 And then the guy with a nice blue, shiny uniform takes it into his hand, gets on a motorcycle.

Speaker 13 The TV camera follows him, and he delivers it to the political appointee who's told he's got five days to solve it.

Speaker 14 So you're basically turning this wonky thing you're doing into reality TV.

Speaker 13 Yes, that's it. Yes, I never thought of it that way.
It was reality TV. And it worked.

Speaker 3 It worked.

Speaker 14 The rules in Peru actually got simpler. It got easier for poor people to have a title to their home or to start businesses or to move into those markets where all the vendors wanted to be.

Speaker 2 Jacob Goldstein and David Kestenbaum from 2015.

Speaker 2 Eventually other countries adopted the techniques of Hernando de Soto and it led to a very clever international movement. The World Bank started compiling things like permit times and tax complexity.

Speaker 2 They called it the cost of doing business report.

Speaker 2 After the break, we turn our gaze back to the United States of America. What would other countries say about our extractive institutions?

Speaker 1 Support for NPR and the following message come from Edward Jones. What does it mean to live a rich life? It means brave first leaps, tearful goodbyes, and everything in between.

Speaker 1 With over 100 years of experience navigating the ups and downs of the market and of life, your Edward Jones financial advisor will be there to help you move ahead with confidence.

Speaker 1 Because with all you've done to find your rich, they'll do all they can to help you keep enjoying it. Edward Jones, member SIPC.

Speaker 2 We are back in summer school with Professor Simon Johnson. Professor, what lessons can we learn from Hernando De Soto's story?

Speaker 5 I think Hernando De Soto's work, which impressed me when I first heard about it a long time ago and impresses me to today, Robert, was was that he identified the problem.

Speaker 5 He spent a lot of time talking to people and he also figured out a route forward, something you could actually do and make operational. And

Speaker 5 I think he had a lot of impact, certainly in Peru and other places, because he showed people that if you just reduce the number of steps, reduce the number of days, simplified basic processes, that you could actually help a lot of poorer people help themselves.

Speaker 2 And DeSoto did it by getting regular people on board with his advertising campaign. He essentially shifted who has the power, right?

Speaker 2 Which is one of the big questions questions we talked about at the beginning, who has the power.

Speaker 2 So are countries with, shall we say, more equitable power dynamics, democracies, are they necessarily richer countries?

Speaker 5 Personally, I think democracy is absolutely essential for shared prosperity, Robert, because if power isn't widely shared across society in any kind of authoritarian system, you're going to have a situation where, you know, you might have a good ruler or a pro-growth ruler for a while, but then they're going to get cranky.

Speaker 5 They're going to die and pass it on to somebody else who's really not good for growth. So, authoritarian rulers are highly unreliable in terms of sustained prosperity.

Speaker 5 What you need is a democracy, and the democracy shares prosperity, and that shared prosperity with what we call in the United States hard-working American families.

Speaker 5 I think that's the current term of art. Those people want their rights to be protected, and they get really angry if they feel that there's an encroachment on their economic and political rights.

Speaker 5 And it's that political support for the economic rights that is the foundation for inclusive institutions and what makes it possible to have business investment, growth of the private sector, and strong employment, rising productivity, and rising wages.

Speaker 2 So essentially a strong middle class, a lot of people with at least some power standing up for a level playing field.

Speaker 2 Now, of course, there are podcast hosts in Jamaica and Peru who could come here to the United States and do the exact same trick that we did at Planet Money.

Speaker 2 They could shake their heads at our failing institutions and say, America, you you know, you have some problems with your middle class versus your ultra-rich.

Speaker 2 The playing field in America is not as level as perhaps we'd like to think.

Speaker 5 Yes, absolutely, of course. I mean, you could deal with

Speaker 5 rising prosperity, massive fortunes. I mean, these have been features of the American system always.

Speaker 5 And sometimes we've had more equality and higher taxation and more support for lower-income Americans than over the past 40 years, we went in a different direction.

Speaker 5 And then, you know, I think the key point, and this is why political economy matters, Robert, is it's not just about a few people getting rich.

Speaker 5 It's about those very rich people taking their money and putting it back into politics and saying, aha, you know what? I got these billions of dollars.

Speaker 5 I can put $100 million into an election campaign because it's not a lot of money for me. And I can tilt it this way or that way.

Speaker 5 And I can get some outcomes for myself.

Speaker 5 For example, if my businesses are highly regulated, because I don't know, I run a space business, or maybe I run an electric car business, or maybe I run a satellite business.

Speaker 5 So government contracts, government regulation, really important, all those things. Of course, I would like to have a government that's favorable to me.
And you know what?

Speaker 5 I actually have some specific people, Robert, I would like you to appoint as head of the FAA, head of NASA, head of the DOD, to award me contracts or otherwise tilt the playing field in my direction because I can make more money.

Speaker 5 And I think that's good for me and good for the future of humanity and good for the future of Mars or something like that. I'm just all hypothetical.
I'm making it all up, of course, Robert.

Speaker 2 As a Nobel Prize winner, you would not call that inclusive.

Speaker 5 I don't think anybody on the planet of the Earth would call it inclusive, Rob.

Speaker 2 Now, students, before you upload this episode to your artificial intelligence chat bot and ask for a cheat sheet, we are ready with a human-made one.

Speaker 2 In summer school, we always have a few audio vocabulary words at the end to help you remember the concepts.

Speaker 2 So let's begin with the way that many people deal with bad government institutions, the informal sector. What does that mean, Simon Johnson?

Speaker 5 So informal sector means something that is operating outside of the registered formal economy. You don't pay taxes and you're not declaring any of your activities to the officials.

Speaker 2 Next up, one of the things that can help make a country rich, inclusive institutions.

Speaker 5 Inclusive institutions means institutions that are the same for everybody. So it's a level playing field with respect to the rule of law, how the courts operate, how contracts are enforced and so on.

Speaker 2 And in your Nobel Prize winning work, you also add that inclusive institutions invest in their people, they educate them, they help them succeed.

Speaker 2 And then there is the opposite, extractive institutions.

Speaker 5 Extractive institutions means that a few powerful people can steal your stuff. They are able to use economic, political, other means to take what they want.

Speaker 2 Just a reminder to all of you students, yes, it's going to be on the test. There is a big test at the end of summer school.
And if you pass, you will get a lovely diploma.

Speaker 2 Not an actual diploma, but but a diploma-looking digital file nonetheless. Simon Johnson, thank you so much for joining us.

Speaker 5 Thank you.

Speaker 2 That's going to do it for today. But if you are eager to hear more episodes now, this very minute, well, you can.

Speaker 2 If you're signed up for Planet Money Plus, we're giving our Plus supporters early access to summer school this season, so you will get each episode before everyone else.

Speaker 2 That's just more time to study. You'll also get sponsor-free versions of regular Planet Money episodes and the indicator.

Speaker 2 Joining Planet Money Plus is one of the best things you can do right now to show your support for our journalism and for the work of NPR. So go to plus.npr.org slash PlanetMoney to join.

Speaker 2 Also, don't miss this. One big difference this year in summer school is that we will be having a live graduation ceremony and party in Brooklyn on August 18th.

Speaker 2 Start to press those robes and get ready to flaunt your newfound knowledge on stage at the Bell House in Brooklyn. Check the show notes for a link to let you buy tickets or go to npr.org slash money.

Speaker 2 Just a warning, it will sell out.

Speaker 2 Summer School is produced by Eric Mennell and edited by Alex Goldmark. It was fact-checked by Emily Crawford and Sierra Juarez.

Speaker 2 Devin Miller is our project manager and the show was engineered by the legendary Neil Rausch.

Speaker 2 Thanks to Juwan Ricardo Guette, a professor at Loyola University, Maryland, who inspired us to do this season on political economy. I'm Robert Smith.
This is NPR. Thanks for listening.

Speaker 1 Support for NPR and the following message come from Edward Jones. What does it mean to live a rich life? Maybe it's full of brave first leaps, tearful goodbyes, and everything in between.

Speaker 1 And with over 100 years of experience, your Edward Jones Financial Advisor can help. Edward Jones, member SIPC.
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