Yesterday I hosted the Peruvian economist Hernando de Soto for a meeting at CFR. De Soto and his Lima-based think tank, the Institute for Liberty and Democracy (ILD), are well-known for their advocacy of secure property rights as an essential gateway to equitable growth and poverty reduction.
Yesterday’s conversation focused on the Middle East—specifically what de Soto sees as the economic roots of the uprisings that have swept the Arab world. You can watch the meeting video below, or access it on CFR’s YouTube channel.
De Soto begins his analysis of the Arab upheavals with Mohamed Bouazizi, the Tunisian fruit vendor who set himself on fire after his cart was confiscated by police. Bouazizi, de Soto argues, lost much more than just his $225 of wares that day–because he operated in the informal economy, he lost his hard-earned spot on the street. That one altercation bankrupted him and drove him to his desperate act of self-immolation. According to the ILD’s research, 34 more informal businessmen immolated themselves across the region in the weeks following Bouazizi’s act. To de Soto, this illustrates a widespread frustration with economic exclusion, a frustration that drove the uprisings across the region.
In the midst of the Middle East’s ongoing political change, de Soto has been advising various political groups, including Egypt’s Muslim Brotherhood. The ILD has long experience in Egypt; in the late 1990s, the Mubarak government invited the ILD to study the country’s informal sector. After several years of research, supported by a grant from USAID, the ILD concluded that Egypt’s informal economy amounted to 55 times all the foreign direct investment Egypt had received since Napoleon and accounted for more of the country’s employment than either the public sector or the formal private sector. But reforms to promote the formalization of this activity failed to materialize, something de Soto blames on bureaucratic resistance. Looking at Egypt today, though, de Soto is optimistic. He says that Muslim Brotherhood leaders understand the entrepreneurial potential of average Egyptians and are committed to reducing the legal and institutional obstacles they face in starting and running new businesses.
I asked de Soto about criticism of his work. Some have argued that his focus on property rights oversimplifies the problems of poverty and exclusion, that titling of land has produced mixed results, and that the issue is less land titles than broader issues around land reform. De Soto responded by emphasizing the need for thorough legal and institutional changes. He agreed that a piece of paper (i.e., a title) is not enough; it has to correspond credibly to a real asset and be useable throughout the society. At another point in the discussion de Soto mentioned civil law, which, in some countries, prevents women from inheriting land. In such situations, titling land is only one of many necessary reforms. When pressed at the end on whether economic frustrations can really explain the Arab uprisings, he conceded that many factors came together to spark the unrest, but that economic frustrations are a large part of the story. On this we undoubtedly agree. Watch the video for more of De Soto’s colorful examples of how formalizing informal economic activity can promote economic growth.