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Blog

    Egypt's Economic Apartheid

    02/07/2011

    Protecting People and their Property

    Thus far in world history, personal freedom best prevails when governance systems provide predictable, universal and consistent rules of law, which protects personal freedom and the rewards of a person’s labor and intellect – their private property.

      Egypt's Economic Apartheid More than 90% of Egyptians hold their property without legal title. No wonder they can't build wealth and have lost hope.

     

    Hernando de Soto, author of "The Mystery of Capital, has extensively researched and written about the difference between Third World economies and advanced economies.  Explicitly, how advanced economies universally and consistently protect every person’s property.  A paramount duty of government is protecting a person’s property and enforcing contracts.  Using secure property as collateral, banks loan money with the reasonable expectation of recovering their loans in case of a default.  Hence, people with protected property have the opportunity to borrow money, expanding the use of their wealth and talent,  individual initiative thrives. and economies and civilizations advance.

    Over ten years ago, Egypt hired de Soto to assess and recommend legal rules to foster a dynamic economy.  Specifically de Soto was tasked:  It (Egypt) 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.

    In the Wall Street Journal, de Soto writes about the lack of property rights:

    • 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.

    • 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 …

    Tragically, powerful Egyptians, probably benefitting from the corruption associated with a rigidly bureaucratic governance system, prevented the implementation of the legal reforms.  Thus, the extralegal entrepreneur was unable to borrow and expand his economic opportunities.  De Soto explains:

    The entrepreneurs who operate outside the legal system are held back. …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.

    …  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.

    Lacking universal and consistent rules of law to protect people and their property makes Egypt’s economy dormant.  De Soto describes the plight of the extralegals:

    Despite hard work and savings, they can do little to improve their lives.

    De Soto pleads for a stable legal order protecting property and enforcing contracts applied to all Egyptians:

    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.  …

    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.

    Addendum:  America is an exceptional nation because of the rule of law.  It is extremely important that We the People continue to demand our government abide by the following:

     A government with moral and legal authority promulgates written rules and universally, impartially and uniformly enforces the rules, which provides a predictable and stable legal order on which to base economic and personal decisions.  The law prevails, not the proclamation or arbitrary decision of a ruler, government bureaucrat, the enforcer (e.g., policeman) or judge.

    The rule of law and civilization are precious and fragile.  Again, all Americans must demand adherence to the rule of law.