Analysis

Wednesday, March 28, 2012 8:29 PM. by

The Arab Spring

De Soto on Egypt's Extra-Legal Economy

In this Wall Street Journal editorial, world-renowned Peruvian economist Hernando de Soto revisited 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.

Suggested Reading on the Arab Spring by Hernando de Soto

• FT: The Free Market Secret of the Arab Revolutions
• Foreign Policy: The Real Mohamed Bouaziz

2012 IPRI

2011 IPRI

2010 IPRI

2009 IPRI

2008 IPRI