Hernando de Soto on "Egypt's Economic Apartheid"


In 2004 the Peruvian economist Hernando de Soto conducted a study of the Egyptian economy, looking for evidence of "extralegal" economic activity, a condition he describes as individuals or businesses operating "without the protections of property rights or access to normal business tools, such as credit, that allow businesses to expand and prosper." He discovered that more Egyptians worked in this underground economy than were employed by either the government or the legal private sector. Writing in today's Wall Street Journal, de Soto revisits that study and considers its relevance for the crisis unfolding in Egypt right now:

The key question to be asked is why most Egyptians choose to remain outside the legal economy? The answer is that, as in most developing countries, Egypt's legal institutions fail the majority of the people. Due to burdensome, discriminatory and just plain bad laws, it is impossible for most people to legalize their property and businesses, no matter how well intentioned they might be….

All this helps explain who so many ordinary Egyptians have been "smoldering" for decades. Despite hard work and savings, they can do little to improve their lives.

Bringing the majority of Egypt's people into an open legal system is what will break Egypt's economic apartheid. Empowering the poor begins with the legal system awarding clear property rights to the $400 billion-plus of assets that we found they had created. This would unlock an amount of capital hundreds of times greater than foreign direct investment and what Egypt receives in foreign aid.

Leaders and governments may change and more democracy might come to Egypt. But unless its existing legal institutions are reformed to allow economic growth from the bottom up, the aspirations for a better life that are motivating so many demonstrating in the streets will remain unfulfilled.

Read the rest here. Read Reason's 2006 interview with De Soto here and De Soto's 2001 Reason article "Citadels of Dead Capital: What the Third World must learn from U.S. history" here.

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  1. dude kills all those Indians, now he wants to tell the Egyptians what to do. Not cool.

    1. Take your Thorazine… you’re due.

  2. The answer is that, as in most developing [all] countries, Egypt’s legal institutions fail the majority of the people.

    Fixed that for him

    1. “legal institutions fail”? 300+ convicted terrorists beg to differ…

  3. DeSoto’s work is really interesting. He largely focuses on an area of government where I think many libertarians could well support – the institutionalization and management of a robust system of property rights. His work suggests strongly that an adequate framework for managing such rights is a tremendous boon to development. Too bad, governments are too busy trying to save the world to actually do their job.

    1. I like DeSoto’s work, I think he is a great thinker and provides a valuable service with his studies. My only disagreement with him is that I do not see the government as either the only or the best way to ensure property rights.

      Historically we have seen that governments are more of a threat to property rights than even a common criminal. I do not think this is the best institution to trust with one’s property rights.

      1. What do you think is the best way to ensure property rights?

        1. Re: Night Elf Mohawk,

          What do you think is the best way to ensure property rights?

          Fences and shotguns. Works like a charm.

          1. Until the multiple guys with shotguns show up, I guess.

            1. Right. Then it’s time for the automatic shotgun!

          2. so how’d ur “fences and shotguns” work to stop govt transferring ur property tax $ to private, for-profit charter schools WITHOUT local voter approval?

            1. Is this an argument in favor of government playing the dominant role in securing property rights? I’m confused!

      2. I do not see the government as either the only or the best way to ensure property rights.

        With the caveat that I have not read everything the man has written, I think you are not stating DeSoto’s position correctly.

        My interpretation of his stance is that property rights are best transformed into capitalization when government rules and regulations are in tune with the property rights desires of its people. IOW, people DO recognize property rights without government formality, but using those rights for capitalization results in severely limited capitalization if government rules and regulations get in the way instead of enable.

        You can enforce your property rights with fences and shotguns, but good luck trying to capitalize it.

      3. I think Invisible Finger kind of hits on my response. There are recognized property rights, even in the “informal” sector. The problem is that, without the force of law, you don’t see those rights leveraged in a meaningful way. You might know you have a thriving business that rakes in money, but lots of luck proving that to a creditor, to a potential employee or a potential customer, unless you can establish that a bunch of guys with guns aren’t going to drop by and take it for their own.

    2. He also, however, shows how the introduction of private property rights is often done in a corrupt way that gives the elite de jure property rights that override long-standing de facto property rights of the commoners.

      This is valuable, insofar as it reminds us that opposition to privatization is not merely rooted in ideological leftism, but also in justifiable skepticism. The leftists are inevitably opponents, but the skeptics and cynics can not only be brought on board, but can serve as the conscience of a privatization movement.

  4. My wife is Peruvian.

  5. He discovered that more Egyptians worked in this underground economy than were employed by either the government or the legal private sector.

    That is true also with a lot of Mexican workers in Mexico – they work “under the radar”, especially because of the truly onerous payroll taxes businesses have to dole out, especially our version of Social Security (which used to include pension but now is practically only medical services.)

    Bad laws lead to bad results.

    1. I suspect this is also true in Greece and probably other EU states. You hold a job, sure, but spend most of your energy working off the books.

    2. Isn’t this the big thing in Cuba?

    1. Was that to me?
      The answer is, yes, for 2 dishes. Otherwise, I cook.
      Peruvian cuisine or anything else.

      1. Real men cook. I like making the dinner for my fiancee and I too.

      2. Lomo saltado and anticuchos, and of course ceviche are delicious
        Cuy and patitas de cerdo were one time things for me.

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