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.