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Tuesday, March 15, 2011

What the Media Missed in Egypt

"Individual Muslims may show splendid qualities, but the influence of the religion paralyses the social development of those who follow it" — Winston Churchill, 1899

While all of the hubbub over Egypt was going on in the media last month they missed one of the fundamental reasons for the ongoing unrest and revolt in the Middle East. The talked a lot about freedom and democracy, but neglected the real underlying reason for this unrest — money.

On December 8, 2010 I posted a blog “What Separates the Rich from the Poor.” Since then my post turned into an article for American Surveyor and is available April edition. The article expands on my blog post and contains photographs.

In my blog post and article I quote the writings of Hernando De Soto, a Peruvian economist through his book; “The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else.” My publisher received an e-mail from Dr. De Soto requesting a copy of the article, which he sent and as of this witting I am waiting for a response from Dr. De Soto.

588px-Hernando_de_Soto_Polar_bw_hi_resOn February 3, 2011 Dr. De Soto published an opinion piece, “Egypt's Economic Apartheid”, in the Wall Street Journal recounting his recent experience in Egypt. He states: “More than 90% of Egyptians hold their property without legal title. No wonder they can't build wealth and have lost hope.” This was the main point of my blog post. The ability hold a legal and recognized title to the land you own or occupy is the primary reason western nations with a defined and consistent court system have vibrant and entrepreneurial economies — economies that have separated them for the poor and underdeveloped nations of the world. This is especially true in he Muslim world where the laws of sharia dictate how land is passed on or parceled out.

A headline that appeared on Al Jazeera on Jan. 14, a week before Egyptians took to the streets, affirmed that the real terror eating away at the Arab world is socio-economic marginalization."

The Egyptian government has long been concerned about the consequences of this marginalization. In 1997, with the financial support of the U.S. Agency for International Development, the government hired the Institute for Liberty and Democracy. It wanted to get the numbers on how many Egyptians were marginalized and how much of the economy operated "extra-legally"—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.

A blurb from the ILD web site states: “The ILD emerged as an effective agent of change first in their home country of Peru and then answered the call of heads of state around the developing world. In the early 1990’s, they conceptualized, mounted and then managed the only successful system of property formalization in Peru. According to independent evaluations of the results of the ILD’s reforms, the poor of Peru obtained US$ 9.4 billion in net benefits between 1991 and 2003: 6.3 million Peruvians below the poverty line now legally own their real estate assets whose value increased by US$ 2.2 billion, while the income of the owners increased by US$ 3.2 billion; 380,000 business enterprises belonging mainly to the poor were formalized, generating 560,000 additional legal jobs and increasing tax revenue by US$ 300 million a year.” De Soto and his crew know what they are talking about and the have a track record of success.

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— in 2004 the ILD presented a 1,000-page report and a 20-point action plan to the 11-member economic cabinet. 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.

Seven years later, when the streets were filled with so many Egyptians calling for change, it is worth noting some of the key facts uncovered by the ILD’s investigation and 2004 report:

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 ILD estimated the value of all these extra-legal 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 extra-legal assets would be worth more than $400 billion in today's dollars.).

I can attest to this from my dealings in Egypt. One of the conditions of the Israeli-Egyptian peace accord was for the United States to pony up $3 million each year to both nations. Most of Israel’s share went to defense while Egypt used the money for so called “infrastructure improvements.” One of those improvements was a $300 million dollar mapping project of the Nile Delta. This project would supposedly give Egypt the ability to better manage the waters of the Nile and act a as benefit to commerce.

One of my project managers (I’ll call him Dave) was so taken with an opportunity to work on such a project he left my employee and took a position as a project manager for one of the U.S. contractors to USAID — the agency funding the project. After about six months I ran into Dave at a conference and I asked him what he was doing back in the United States. He said the pay was good, the benefits better, but he could no longer stand working with the Egyptians. He said they never came to work. Instead the took the USAID supplied survey equipment, computers and aerial mapping plotters home and ran underground businesses — just as Dr. De Soto claims.

The problem is that these 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 extra-legal enterprises are limited to employing their kin to produce for confined circles of customers.

Dr. De Soto goes on to state: “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. The only thing that can emancipate them is legal reform. And only the political leadership of Egypt can pull this off. Too many technocrats have been trained not to expand the rule of law, but to defend it as they find it. Emancipating people from bad law and devising strategies to overcome the inertia of the status quo is a political job.”

I found this same situation while working as a contractor for the United States Trade and Development Agency in Bursa, Turkey. The Mayor of Bursa told me that he estimated more than half of the homes being constructed in his city and the outlying regions were being built on untitled land. Turkey is not constrained by Sharia Law, but they have laws regulating the ownership of property going back to the Ottoman Empire. These laws make it difficult to obtain title to land and pass it on to one’s heirs or assignees. Once again, the occupants of these houses, while having a place to live have no real stake in the city’s or nation’s economy. They are totally dependent on the sweat of their brow and the employment from others to provide for their families.

De Soto states: “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.”

“The examples are legion. To open a small bakery, our investigators found, would take more than 500 days. To get legal title to a vacant piece of land would take more than 10 years of dealing with red tape. To do business in Egypt, an aspiring poor entrepreneur would have to deal with 56 government agencies and repetitive government inspections.”

All this helps explain who so many ordinary Egyptians have been "smoldering" for decades. Despite hard work and savings, they can do little to improve their lives.

Bringing the majority of Egypt's people into an open legal system is what will break Egypt's economic apartheid. Empowering the poor begins with the legal system awarding clear property rights to the $400 billion-plus of assets that the ILD found they had created. This would unlock an amount of capital hundreds of times greater than foreign direct investment and what Egypt receives in foreign aid.

I found the same conditions existing in Sri Lanka while working on a World Bank contract for the Sri Lankan Urban Development Authority. One of the main missions of the contact was to develop a Geographic Information System that would allow the UDA to present available parcels of land to potential investors — mainly commercial investors wanting to build manufacturing facilities. They were fearful that one day the textile industry (Victoria Secret, et. al.) would up an move one day to Bangladesh where labor would be cheaper.

Sri Lanka, while having a history of British rule had some semblance of British laws pertaining to the ownership of property. But, they still had over 750,000 parcels with illegal residences on them — residences that offered no real equity or collateral to the occupants.

Leaders and governments may change and more democracy might come to Egypt — and other nations in the Middle East. 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 and rebelling against their governments will remain unfulfilled.

Based on my experience working and traveling in these countries I am not optimistic over the outcome. The Middle East is dominated by Islamic law and tribal leaders. Governments may change. Leaders may change but he underlying legal systems will remain the same. This also pertains to Latin America. The ILD did a great job in Peru and El Salvador, but the remainder of the region has not changed. It also pertains to the former eastern bloc communist nations where land titling and registration laws go back to feudal times.

We can pour billions into these nations and nothing will really change as the money slowly drifts down into the underground economies or the leaders at the top skim off their share. This is what the media consistently misses. I guess they are just too dumb or lazy to explore the real story. The only media person I have seen to understand this issue is John Stossel of Fox News. esriLg2009

In 2009 DR. De Soto addressed the the ESRI User Group Conference in San Diego. This conference the largest GIS conference in the world attended by more than 30,000 GIS professionals form all over the world each year. You can on the picture to view the video of Dr.De Soto’s address.


This is postscript to this blog post. In the post I mentioned I had responded to a request from ILD for a copy of my article. I was pleased to receive this e-mail from Gabriel Arrisueño, the Lima manger for ILD:

Dear Mr. Henstridge,

My name is Gabriel Arrisueño and I am a manager at the ILD. It was a pleasure to read your article and your kind comments about the ILD and our work. Your on-the-ground experience as a surveyor provides a fresh perspective on the importance of titling and registration. I fully agree with you that clear boundaries can lead to clear property rights, and they in turn set the ground for economic growth and social peace. I personally liked the link you make between legal title and job creation in the different industries surrounding titling and the virtuous economic circle it kick starts.

Moreover, I enjoyed your eloquent description, from your Romanian experience, of how focusing solely on technology, without taking into consideration the institutional aspects of land reform, can conspire against the sustainability of a system. I would like to add that understanding, documenting and mapping the different rights over land, often invisible to the “legal” world, is a sine qua non condition for the success of a formalization program, and indeed for the functioning of any land registration system. Without fully grasping reality, all we will have is an incomplete, and often unreliable, collection of databases and administrative procedures. Furthermore, a sound legal and institutional framework (laws, agencies, and procedures) supported by technology suited to the needs and means of a specific country, can achieve more, and at a much lower cost, than state of the art technology with the wrong institutional framework characterized by unclear responsibilities and overlapping of functions.

Thank you again for sharing this article and for helping raise awareness of the importance of clear and secure property rights supported by sound surveying.

Best regards,


Gabriel Arrisueño Fajardo
Las Begonias 441 Piso 9, San Isidro, Lima - Perú
T  +51 (1) 616-6100  | F +51 (1) 616-6190|

You may view a PDF of the article as published by clicking here

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