12 February 2011

Egypt ... and the "Mystery of Capital"

I have been recommending to friends and netizens for years now two excellent books on economics by Hernando de Soto, viz., The Mystery of Capital  and The Other Path.  Both of these books focus primarily on the impact real property rights have on freeing up capital and wealth in third-world countries.  Richard Curtis (Girl in the Cafe) might want to read one of these tomes before he lectures the West again on simply writing checks to these ravaged countries.

Recently, I had a conversation with a national talk-show host and his guest from the American Enterprise Institute, and reminded him on the air that when Reagan was lecturing Gorby at the Brandenburg Gate in Berlin to "tear down this wall" two years before it did fall, there were Vaclav Havel's and Solzhenitsyn's and others who were ready to pick up the mantle of freedom and democratic leadership once their countries were freed from their shackles of tyranny.  We don't have that now in Egypt.  I am not suggesting a paternalistic approach in Egypt, just a fundamental focus on what matters during this transition for the Egyptian peoples (the 97% of whom are not in Tahrir Square!) early on, e.g., the primacy of property rights.

I also expressed my disappointment with President Obama (No. 44) and the missed opportunity regarding his speech in Cairo (University of) in 2009 where Obama could have called out (politely, in his inimitable fashion) the ruling oligarchs in the middle east (i.e., billionaire despots) who are sitting on stacks and stacks of blackened, oil-slicked cash, to recognize officially the underground economies that are worth hundreds of billions of dollars.  Who better than our President to reach across the Persian rug aisle to the skeptical and tribal (sectarian?) leadership of the Middle-East? If only ... What we got instead was pablum and banal talk of past greatness to placate his audience.  No one was challenged. No leadership awkwardly called to the carpet in front of the world.  A mere two years later (a timespan ironically similar to Reagan's post-Brandenburg Gate speech), Egypt is changed forever and US statecraft under this administration was revealed to be sorely lacking and feckless ... again.

Nature and tyrants abhor a vacuum.  And, when this wide-body kleptocracy of Mubarak exits the Sinai Peninsula, I fear we will have radicals entering the vacated public square ready to bring new direction and dictates to the masses that do not have the rights of man at the fore of their agendas. I'm afraid that radicalism will replace corruption, and then the West will have both to contend with.

Mr. de Soto in his WSJ editorial discusses the radical transformation possible in Egypt IF a fundamental shift in socio-economic policies is encouraged and implemented.  I post (in part) here for you:
After years of fieldwork and analysis—involving over 120 Egyptian and Peruvian technicians with the participation of 300 local leaders and interviews with thousands of ordinary people—we presented a 1,000-page report and a 20-point action plan to the 11-member economic cabinet in 2004. The report was championed by Minister of Finance Muhammad Medhat Hassanein, and the cabinet approved its policy recommendations.
Egypt's major newspaper, Al Ahram, declared that the reforms "would open the doors of history for Egypt." Then, as a result of a cabinet shakeup, Mr. Hassanein was ousted. Hidden forces of the status quo blocked crucial elements of the reforms.
Today, when the streets are filled with so many Egyptians calling for change, it is worth noting some of the key facts uncovered by our investigation and reported in 2004:
• 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 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.)
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.
Read the rest of his excellent piece here in the WSJ.  What are your thoughts?


Divine Theatre said...

I am just TOO excited! Hernando DeSoto! I thought I was the only one who knew who he is!
I have not read the entire article yet. I am just here to squeal with joy! Now I am off to finish the article in its entirety!

Divine Theatre said...

Economic development is not something the rich West can paternalistically apportion to others. It is a task that must be borne by people of poor nations themselves, through building their own 21st-century version of capitalism.
As our forefathers were well aware, property rights are tantamount to freedom. A parallel argument can be made in protest of astronomical taxes and regulations of businesses on our own soil.

Jg. for FatScribe said...

DT -- hail fellow traveler, well met. appreciate your sentiments. i just read this last week a rebuttal of hernando de soto's work that i found actually to be a bit weak, but good to read nonetheless.

Divine Theatre said...

I googled "Hernando DeSoto rebuttal" and was inundated with statist rhetoric pondering how DeSoto hopes to accomplish his goal without redistribution and government intervention.
*sigh* They just don't get it. Do they?

Caleb Garcia said...

Great post Johnny G. I especially love the opening about "the impact that real property rights have on freeing up capital and wealth in third-world countries." And how the solution isn't to "simply write checks to these ravaged countries."

My Dog-Eared Pages said...

A very important discussion Jg! I did not know about the 92% of properties without legal title in Egypt, but I'm not surprised. I hope the Egyptian people will be able to handle their own destiny with an acute awareness of worldly despots. WE need new policies around countries with a history of totalitarian rule.

Divine Theatre said...

Dog Ear, I am intrigued. Which policies do you speak of?

My Dog-Eared Pages said...

DT, to not turn a blind eye toward human atrocities! To walk our walk and talk our talk with authenticity, no matter what's at stake.

Jg. for FatScribe said...

Caleb -- thanks for your comments!

Barbara -- Totally agree that all peoples need to be in control of their own governance. ridding tyrants is such a once-every-several-hundred-years thing that egypt has to act now.

we don't need to run their countries, just help them out, especially when it's in our (U.S.) best interest to do so. we missed opptys with the Kurds in Iraq and the millions of folks in Iran and now we're about to fold with the folks in Taiwan that we supposedly do have commitments to aid them against the chinese communists.

i think about cambodia and ethiopia and somalia. statecraft is not an easy thing to be sure...

heady times!

Anonymous said...

I'm trying to counter my pessimism over the political future of Egypt and Israel's lethal increased challenges to its existence. Egypt, Jordan and Syria are in turmoil, but it's not beyond possibility that there will be created new Islamic political organizations that will spend time in petty feuding and strutting rather than seriously threatening Israel.

Wishful thinking? Probably. But I must find a way to survive this horrible political cabaret.

Jg. for FatScribe said...

Nickie G -- appreciate your pessimism. as a big Israel advocate praying for the peace in Jerusalem, i hope your sentiments are accurate about strutting over likely strife.

as Christianity had to go through a reformation, i firmly believe that so too Islam needs a reform movement. perhaps a half-dozen revolts against despots and religious caliphates will bring that into reality. wishful thinking too? probably.