Hernando de Soto on Egypt’s Extralegal Economy

In yesterday’s Wall Street Journal, world-renowned Peruvian economist Hernando de Soto penned an op-ed revisiting his 2004 study on Egypt’s extralegal economy and how the events unfolding today could have been shaped by the government’s failures to act on key policy recommendations that would have brought Egypt’s citizens and businesses into the legal market.

In the article de Soto notes the 2004 study found:

    • 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.

    • …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.)

He then goes on to explain:

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 Property Rights Alliance is honored to have the privilege of offering an annual fellowship named after de Soto to a graduate student interested in the areas of intellectual and physical property rights and global affairs.

Each year the fellow produces the annual International Property Rights Index, a comparative study that measures the significance of both physical and intellectual property rights and their protection for economic well-being. In order to incorporate and grasp the important aspects related to property rights protection, the Index focuses on three areas: Legal and Political Environment (LP), Physical Property Rights (PPR), and Intellectual Property Rights (IPR). The 2010 study analyses 125 countries around the globe, representing ninety-seven percent of world GDP.

In the 2010 edition, Egypt ranked 67th with a score of 5.0 out of a possible 10.0. Egypt’s LP score remains fairly low with an outcome of 4.7 with the report noting, “While the other sub-components of the score increased, overall positive change was hampered by a diminution in the Control of Corruption sub-component.”

The entire WSJ article is worth a read. I also encourage you to visit de Soto’s organization, the Insitute for Liberty and Democracy’s website to check out his, as well as the ILD staff’s great work in empowering the world’s poor through property rights.

The 2011 edition of the IPRI will be released on March 22.