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Brooks Wilson's Economics Blog: De Soto on Egypt

Friday, February 4, 2011

De Soto on Egypt

Hernando De Soto, a Peruvian economist argues that the economic situation of the poor can be substantially improved by establishing and enforcing property rights for all citizens within a country.  His books, “The Other Path: The Economic Answer to Terrorism”, and “The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else” are important contributions to the economic literature.  He describes his involvement as an adviser to the Egyptian government and explains why the lack of property rights contributed to discontent in Egypt in “Egypt's Economic Apartheid.”

In 1997, the Egyptian government hired the Institute for Liberty and Democracy, De Soto’s think tank, to measure the size of the extralegal economy, those working and living without the protection of property through law and the institutions that enforce it.  Those living outside the boundaries of the property rights system define the economically and politically marginalized citizens.

De Soto led a team of over 120 experts who worked with over 300 local Egyptian leaders and interviewed thousands of marginalized Egyptians.  They issued a 1,000 page report in 2004 that estimated the underground economy hired 9.6 million people, 2.8 million more than the above ground legal private sector, and 3.7 million more than the public sector.  An astounding 92% of the population lives without legal titles to their homes.  De Soto’s team measured the value of extralegal businesses and homes at over $400 billion.  If afforded legal protection, the value of these assets would grow rapidly as would the Egyptian economy.The report was approved for implementation by Minister of Finance Muhammad Medhat Hassanein, but before the plan was to be implemented Hassanein was ousted and the reforms shelved.  Why would anyone oppose reforms that would directly improve the lot of the poor and contribute to the overall prosperity of Egypt?

North, Willis and Weingast suggest an answer in “Violence and Social Order.”  Governments in developing nations, termed limited access orders by the authors, trade economic rights to groups who can cause violence for a promise to maintain peace.  The marginalized citizens began a popular uprising that is at the point of turning violent as the powerful political insiders jostle violently or otherwise to establish a new political equilibrium that will maintain or enhance their privileged position in society.  The difficult to impossible task of democratic elements is to maintain the peace, disarm political insiders who can violently demand their privilege, and expand legal access to the economy to the marginalized Egyptians.

1 comment:

  1. James Emmele12/2/11 10:13 PM

    The amount of extralegal business in De Soto's study is jaw-dropping. For the Egyptian government, the "under-the-table" activities were obviously a hindrance with $400 billion worth of taxable assets.

    What was less clear was how the legal protection would allow the value of these businesses and homes to grow so rapidly. Obviously there would be the added benefit of legal ramifications for misconduct within a business: refusal to pay for services, refusal to provide services, etc. However, even with the added protections afforded by legal contracts and courts capable enforcing those contracts.

    As has been discussed, one of the most difficult phases of instituting economic reform is not analyzing the problem and forming a solution but rather convicing the leaders and the public that one particular answer is the most beneficial. With the current upheaval in Egypt, I can see maintaining enough control of the situation to make meaningful changes to be extremely difficult.

    On the other hand, what better catalyst for change than political instibility. With the plan hinging on improving property rights, gaining popular support can possibly be an "easy" endeavor.