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Hernando de Soto On Egypt's Informal Economy

In an excellent op-ed article in the Wall Street Journal Hernando de Soto discusses some of the economic driving forces behind the social uprising in Egypt. In 1997 he was hired by the Egyptian government to study Egypt's informal economy and the consequences of the lack of property rights. After years of field work the results were presented in 2004, but unfortunately the report's recommendations were not acted upon.

His analysis also applies to other developing countries and emphasizes the importance of institutions in economics. As De Soto writes:

"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."