‘Just Call Me Poor’
Want to work an economic miracle in Egypt? Hernando de Soto has some ideas.
In 2004, Peruvian economist Hernando de Soto and his think tank, the Institute for Liberty and Democracy, were asked to come up with ideas for revitalizing the Egyptian economy. In an interview with FP’s Christian Caryl, he argues that those ideas remain more topical than ever.
Foreign Policy: Not many economists have been targeted by terrorists. Why did the Peruvian insurgent group Shining Path put you and your colleagues on its hit list?
Hernando de Soto: What happened in Peru at that time was like what happens in other countries that suffer terrorism. The terrorist groups identify an underclass that considers itself oppressed. They target it and offer it services. In the case of Peru what they offered this underclass was protection of assets that weren’t protected by the law. When we drew up plans for bringing these unrecognized assets into law, Shining Path saw this reform would take away their constituency. Today, for example, women own close to 56 percent of the real estate assets that were previously informal in Peru. Back then it was less than 30.
So they decided to do what terrorist groups do: to resort to force. They set up a hit squad that was supposed to target me. They were unsuccessful but unfortunately some colleagues and bystanders were hurt during their attacks.
FP: When you made proposals for economic reform in Egypt back in 2004, the resistance came from rather different quarters. Can you tell us what happened and why?
HD: We determined that close to 8.2 million people were employed by the extralegal economy. In other words, these are people who don’t have formal title to their property or legal protections for the assets they control. That’s an awful lot of people and a lot of assets. We estimated that 82 percent of entrepreneurs operated extralegally and 92 percent of the population held their real estate assets extralegally. If you formalized the Egyptian economy you would have brought into the mainstream economy close to 400 billion dollars, more than all foreign investment since Napoleon.
So along with the Ministry of Finance, which commissioned the research, we drew up a program to formalize those rights and we submitted it to the economic cabinet of the Egyptian government. The whole program was about integrating those who were excluded and giving them a voice in their future, including specific property and business rights that would have allowed, for example, issuing shares to capture investment or protecting assets through the establishment of limited liability. It would have been a win-win for everyone. The poor would have been empowered. Investors would have had their legitimate rights protected. Governance would have been improved. The government could have improved tax collection and even reduced rates.
FP: And yet the reform package was ultimately torpedoed by people within the government.
HD: In Egypt there was a lot of open discussion about the measures, from conferences to talk shows. That was part of the strategy: Be as inclusive as you can. The idea was to stop mistakes in advance. All 11 members of the economic cabinet approved it. We expressly included a mechanism for popular consultation.
But in every system there is always a small group of people who believe that they have something to gain from the status quo. And that’s what happened here. You can’t conduct reforms without creating appropriate institutions. If you’re going to change things, your enemy is the status quo. So we had argued that they needed an organization, right from the start, that would act as an advocate for the reforms within the bureaucracy. But that never happened, so the reforms never got off the ground. We don’t know precisely who put up the resistance. They didn’t show themselves.
FP: The results of the parliamentary elections suggest that the Muslim Brotherhood will control the next parliament and, more than likely, the next government as well. Will they be in position to do something about this issue?
HD: When you read the Quran there’s no doubt about where it stands. It says very clear things about respecting property, recording transactions, honoring debts. It is very much in favor of the entrepreneurial class. That’s why I’m quite optimistic.
You know, what we discovered was that in Egypt almost every extralegal building or business has some piece of paper authorizing its existence. The problem is that these papers rarely come from government. They usually come from neighborhood associations (quite often religious, but sometimes not) that have organized ways of certifying it. But this sort of documentation is rarely fungible. It rarely constitutes the kind of formalized right that will be recognized by everyone within the system regardless of who or where you are. It doesn’t do what the formal system does with property, namely, to leverage it and turn it into capital.
But what this does mean is that in Egypt the starting point for awarding assets has already been created to a great extent at the shadow level. It’s the same with property all over the world. The Domesday Book in medieval England recorded property data on a wide range of people: "John Smith owns so many barns, cattle, etc." Those records weren’t titles, but as the years went by property titles were built up around them. As I like to say, historically property always starts with the king at least nodding in your direction.
FP: But that process took centuries, didn’t it? Is there anything that can be done to liberate the energies of Egypt’s entrepreneurial underclass right away?
HD: Well, back then, we calculated together with the Ministry of Finance that if these $400 billion of assets were brought under the rule of law, Egypt’s GDP growth rate would double in the next five years.
Let me explain why it’s not a miracle. The reforms that were done in Peru had the immediate effect of raising the price of the dirtiest and most neglected pieces of land. In Lima the average price of shanty property rose in average by 400 percent from 1997 to 2010. And that had a great deal to do with guaranteeing legal certainty of ownership.
Let’s say you and I are in Cairo, and you want to buy a piece of property I own. I tell you that it’s worth a million dollars, and that corresponds with your own estimate of how much the property is worth. But then you ask me if I have the title, and I have to admit that I don’t. I know it’s my property and all my neighbors know it too, but I don’t have a piece of paper that says the same thing according to the rules of the legal system. Do you think you’ll buy? But if you can implement the idea that you have one standard definition of property that you can compare and measure, then you free up an enormous potential.
FP: But can you really do this overnight?
HD: You can. But you have to take a political decision first. You have to make a decision to change the status quo, and then you have to put someone in charge of the program who has an interest in making it happen. The Japanese did it from 1945 to 1950. They went from being a feudal country with a per capita GDP below Latin America’s to one of the world’s most successful economies. Technologically it’s not hard. But you have to solve that first problem: You can’t change if the enemies of change lead the program.
FP: Can there be meaningful economic reform in Egypt without addressing the role of the military, which controls enormous swathes of the economy? Surely the generals know that they won’t be able to compete in a genuinely open economy. Do you think they can be persuaded to play along? Or can there be no real economic progress without curtailing their role?
HD: Look, I’m not an Egyptian. That’s a delicate question, and it’s up for Egyptians to decide. But if it were up to me, right now I’d focus on the poor. I’d use the sorts of legal reforms I’ve suggested here to boost their opportunities, to empower them. Once you’ve improved their lives, not to mention your knowledge about the entire economy, then you can move forward in a more informed and dispassionate way. Do what’s easy to do. Help Egyptians to become cognizant of the fact that they don’t control most of their assets nor can they use them to raise capital and finance. Once they get that, other things become much easier to achieve. Keep your eye on the ball. Don’t get sidetracked.
Let’s imagine that all the electronic databases in New York City were wiped out by a virus. You’d have to create a team that goes from building to building, drawing up new titles. In most cases it’s pretty easy to determine who owns what. There will be all sorts of corroborating documentation, and in more than 90 percent of the cases that will be quite clear. Here and there you’ll find a case – I don’t know, maybe Donald Trump got an unfair tax break – where it’s a bit controversial. Here’s what you do: You deal with the 94 percent really quick. Don’t get hung up on the six percent.
Go to what people really care for first. It doesn’t mean that these other things are not issues. Once you yourself have become an owner you’ll have a better basis for making decisions. I like the idea of everybody getting their part of the action. Don’t distract everyone from getting wiser.
FP: Are there some aspects of Marx’s teachings that are applicable to the current economic situation of Egypt? And if so, why?
HD: Marx understood what brings certain societies or governments down. It’s alienation: this sensation that you’re not really part of productive apparatus, that you’re marginal. I think that’s very important. But what’s true in Egypt is that the people who are alienated are not just a proletariat. They’re an underclass that feels excluded. It’s many of these people who set themselves on fire to protest their situation. They didn’t tweet, they didn’t use Facebook. They did the burning.
I was interviewing one of the ones who survived. He ran a small restaurant, but had to endure constant harassment. I said, "You’re a businessman whose few rights have been taken away." He said, "Please don’t call me that. I’m not a businessman. Just call me poor." It took me a while to understand why he insisted on this. By calling himself poor he got subsidized bread that he could put on the table in his restaurant. He had no idea that legal business tools would have improved his life far more. So what you have in Egypt and the rest of the Middle East is a badly labeled class of political upheaval. It’s only by understanding this class and its needs that political leaders will be able to make the necessary reforms.