Patrice Riemens on Fri, 4 Feb 2011 14:59:43 +0100 (CET)

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<nettime> Hernando de Soto: Egypt's Economic Apartheid (WSJ)

Mr de Soto plugs here (some will say 'peddles') his usual 'make the
informal sector legit" message, yet it sheds an interesting light on teh
Egyptian regime's stagnation and cronyism which is now unraveling it in
popular revolution. It also illustrates an aspect less covered in media
and analyses: when the throne of a tyrant is under attack, the trickiest
party to deal with is not the tyrant him(her)self and immediate circle,
but the rather large (and fairly anonymous) group around him/her that
profits by its rule. Fisrt they thwart all reform - since it goes against
their interests - and when the day of reckoning arrives, they have nothing
to lose (unless they bolted to Abu Dhabi or the Bahamas, and had stashed
they loot away beforehand), and will go on the rampage.

original at:

Egypt's Economic Apartheid
WSJ (E) April 4-6, 2011

The headline that appeared on Al Jazeera on Jan. 14, a week before
Egyptians took to the streets, affirmed that "[t]he real terror eating
away at the Arab world is socio-economic marginalization."

The Egyptian government has long been concerned about the consequences of
this marginalization. In 1997, with the financial support of the U.S.
Agency for International Development, the government hired my
organization, the Institute for Liberty and Democracy. It wanted to get
the numbers on how many Egyptians were marginalized and how much of the
economy operated "extralegally"?that is, without the protections of
property rights or access to normal business tools, such as credit, that
allow businesses to expand and prosper. The objective was to remove the
legal impediments holding back people and their businesses.

After years of fieldwork and analysis?involving over 120 Egyptian and
Peruvian technicians with the participation of 300 local leaders and
interviews with thousands of ordinary people?we presented a 1,000-page
report and a 20-point action plan to the 11-member economic cabinet in
2004. The report was championed by Minister of Finance Muhammad Medhat
Hassanein, and the cabinet approved its policy recommendations.

Egypt's major newspaper, Al Ahram, declared that the reforms "would open
the doors of history for Egypt." Then, as a result of a cabinet shakeup,
Mr. Hassanein was ousted. Hidden forces of the status quo blocked crucial
elements of the reforms.

Today, when the streets are filled with so many Egyptians calling for
change, it is worth noting some of the key facts uncovered by our
investigation and reported in 2004:

? Egypt's underground economy was the nation's biggest employer. The legal
private sector employed 6.8 million people and the public sector employed
5.9 million, while 9.6 million people worked in the extralegal sector.

? As far as real estate is concerned, 92% of Egyptians hold their property
without normal legal title.

Editorial Board Member Matt Kaminski on the anti-Mubarak revolt

? We estimated the value of all these extralegal businesses and property,
rural as well as urban, to be $248 billion?30 times greater than the
market value of the companies registered on the Cairo Stock Exchange and
55 times greater than the value of foreign direct investment in Egypt
since Napoleon invaded?including the financing of the Suez Canal and the
Aswan Dam. (Those same extralegal assets would be worth more than $400
billion in today's dollars.)

The entrepreneurs who operate outside the legal system are held back. They
do not have access to the business organizational forms (partnerships,
joint stock companies, corporations, etc.) that would enable them to grow
the way legal enterprises do. Because such enterprises are not tied to
standard contractual and enforcement rules, outsiders cannot trust that
their owners can be held to their promises or contracts. This makes it
difficult or impossible to employ the best technicians and professional
managers?and the owners of these businesses cannot issue bonds or IOUs to
obtain credit.

Nor can such enterprises benefit from the economies of scale available to
those who can operate in the entire Egyptian market. The owners of
extralegal enterprises are limited to employing their kin to produce for
confined circles of customers.

Without clear legal title to their assets and real estate, in short, these
entrepreneurs own what I have called "dead capital"?property that cannot
be leveraged as collateral for loans, to obtain investment capital, or as
security for long-term contractual deals. And so the majority of these
Egyptian enterprises remain small and relatively poor. The only thing that
can emancipate them is legal reform. And only the political leadership of
Egypt can pull this off. Too many technocrats have been trained not to
expand the rule of law, but to defend it as they find it. Emancipating
people from bad law and devising strategies to overcome the inertia of the
status quo is a political job.

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.

The examples are legion. To open a small bakery, our investigators found,
would take more than 500 days. To get legal title to a vacant piece of
land would take more than 10 years of dealing with red tape. To do
business in Egypt, an aspiring poor entrepreneur would have to deal with
56 government agencies and repetitive government inspections.

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.

[Mr. de Soto, author of "The Mystery of Capital" (Basic Books, 2000) and
"The Other Path" (Harper and Row, 1989), is president of the Institute for
Liberty and Democracy based in Lima, Peru.]

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