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.