January 19, 2004 | Copley News Service

Egypt on the Economic Cusp

I just returned from a remarkable conference in Cairo, Egypt, put on jointly by the Egyptian Center for Economic Studies and Instituto Libertad y Democracia. ILD is led by Peruvian economist and Empower America associate Hernando de Soto, whose two books, “The Mystery of Capital” and “The Other Path,” are seminal works for understanding and solving world poverty and terrorism in the 21st century.

The conference was the culmination of a joint study by the two organizations in which they developed concrete proposals on how to integrate Egypt's informal sector (what usually is referred to loosely as the “underground economy”) into the formal economy. The project was conducted with the support and assistance of Egypt's Finance Ministry and would not have been possible without the personal commitment of Finance Minister H.E. Medhat Hassanein and the Mubarak government.

The particular focus of the ECES/ILD study was on how to bring the extralegal business and real estate sectors above ground and onto the books, thus turning “dead capital” into “live capital.” If successful, Egypt will be the first country in the Middle East to make these reforms, and it will set a precedent and serve as an example and template for the whole Arab and Islamic world. At the conclusion of the conference, I invited the leaders to Washington in the spring to help make the case for taking these reforms beyond Egypt into Iraq, Afghanistan and beyond.

In a nutshell, the study concluded that, “Under the coarse mask of extralegal activities lies a mass of talented and hardworking people capable of creating value out of practically nothing who hold the potential for making Egypt a rich and powerful country.” Egypt has approximately 1.4 million extralegal entrepreneurs, who comprise 82 percent of Egypt's entire entrepreneurial class.

The extralegal economy employees some 8 million Egyptians, and the value of business and real estate assets in extralegal enterprises totals almost $30 billion. All told, 92 percent of the Egyptian population holds its private real estate assets extralegally, thus preventing people from leveraging property into capital. In round numbers, this “dead capital” adds up to almost $250 billion.

In addition, Egyptian taxes, laws, paperwork and regulations thwart entrepreneurial efforts and discourage work, saving and investment. For example, the study found that it takes more than 500 days and costs the equivalent of 27 minimum monthly salaries to open a mere bakery in Egypt. Registration and licensing of a single-person business take an entrepreneur 189 days and 86 administrative steps to complete. An entrepreneur must suffer through more than 10 years of red tape to convert a sandy piece of land into a commercially useful parcel, and up to six years of judicial and administrative battles are required to avoid demolition of a business initiated in an extralegal manner.

Doing business in Egypt subjects the poor to dealing with 56 different government agencies and complying with 300 separate pieces of legislation, all of which lead to “repetitive, redundant and overlapping government inspections.” Meanwhile, there are no enforceable accounting principles to standardize business activity and regularize commercial relationships. In short, the study concludes, “because businesses and real assets cannot be organized productively, using the economies of scale that would result from operating in the broad Egyptian market, and because people cannot secure the interests of all parties and be leveraged to guarantee credit and investments, they are 'dead capital' incapable of initiating surplus production and the increasing productivity in any significant manner.”

Just before the Super Bowl in Houston, I will be reporting on the Egypt conference and speaking on the topic dear to my heart – a 21st century Marshall Plan for Central Asia and the Middle East – at the Baker Library of the James A. Baker III Institute of Public Policy at Rice University. The institute's director, Ambassador Edward P. Djerejian, a leading expert on the complex political, security, economic, religious and ethnic issues of the Middle East, has written extensively on how to bring democratic capitalism to this region and how to engage in new diplomacy to the Arab world. I will be sharing with the institute the work of the 21st Century Committee, created and led by Ted Forstmann at Empower America in conjunction with ILD, where we are thinking through how best to create a 21st century Marshall Plan based, in large part, on de Soto's ideas.

Egypt stands on the cusp of an economic revolution. If the reforms proposed by the ECES/ILD study are implemented, it will ignite the most far-reaching economic and social transformations since the Japanese, Korean and Taiwanese economic wonders were created in the aftermath of World War II. If Egypt implements these reforms, it could ignite an economic transformation not only in the Middle East but throughout the entire Arab and Islamic world.