Egypt's Economic Apartheid

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Hernando de Soto's article on Egypt in the Wall Street Journal tells you a lot about what is really driving the Egyptian revolution--even if the protesters themselves don't fully grasp the (economic) forces they are contending with.

De Soto of course is the preeminent authority on property rights and development (The Mystery of Capital, The Other Path). Egypt perfectly illustrates his case that weakly protected property rights tend to create a vast extra-legal economy, in which growth is stifled for lack of capital. He and his institute reported to the Egyptian cabinet on the state of the economy in 2004. The country's underground economy was the biggest employer, he explains. Less than 10 percent of the Eyptians who "owned" real estate had legal title to their property.

The capital Egyptian enterprises control "cannot be leveraged as collateral for loans, to obtain investment capital, or as security for long-term contractual deals." He calls it "dead capital".

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.

Egypt needs a legal system that provides economic freedom in the sense de Soto describes. Let us hope that political reform delivers it.

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