Egypt Needs Free Enterprise More Than Democracy

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As Egyptians struggle to throw off the yoke of dictatorship the world watches and wonders, what comes next?

Is this a battle between democracy and Islamism? Some believe that as long as the "will of the people" is honestly determined in free and fair elections peace and prosperity will follow. Skeptics ask, what happens if the majority choose Islamism?

This poses a problem for democracy advocates. By what political theory can the legitimate will of a people be denied if they overwhelmingly choose to impose Sharia law on themselves, or endorse a state of perpetual jihad? Ironically, it's the same forgotten theory of limited government fighting long odds to make a comeback in the U.S.

The tragic flaw revealed when unlimited democracy is practiced by pre-enlightenment cultures leads political pragmatists to a distasteful conclusion. Maybe the world would be safer if such people were ruled by a strongman. If so, let's make sure he's our strongman!

And what happens when this devil's bargain breaks down? Disasters like Iran.

There is another way.

The deepest malady afflicting the Egyptian people, and most other underdeveloped countries for that matter, is not lack of the vote. It's the inability to open a bakery without spending two years hacking and bribing your way through a bureaucracy designed to stomp on independent businesses. It's the impossibility of getting clear title to the land your home is built on. It's the indignity of being told that you can't sell vegetables without a fistful of permits issued by corrupt and inaccessible political appointees. It's the dashed dreams that come from earning a college degree then finding out that the only jobs available are government jobs reserved for the well-connected.

Democracy, particularly the unrestricted version preached by western liberals, offers no solution to these problems. Sometimes it even makes things worse, as demonstrated in Greece. India has been a democracy since it gained independence yet it wallowed in poverty for decades until it began to embrace free enterprise.

And it's not the controversial multinational capitalist version of free enterprise that brings the fastest relief. It's the small-bore, entrepreneurial, pull yourself up by your bootstraps version that can profoundly change both a country's fortunes and its hopes for the future.

Look at Egypt today. More than 90% of the people hold their property without legal title. Economist Hernando de Soto calls this "dead capital," assets that cannot be pledged as collateral for loans. A system of clear property rights could put $400 billion dollars to work in the Egyptian economy. This money would be directed not by state agencies, government granted monopolies, or NGOs but by individual entrepreneurs willing to put their homes on the line betting they can make a buck serving the needs of their neighbors.

Egypt's underground economy is larger than its legal private economy. Like anyone with gumption, Egyptians prefer being lawbreakers and tax dodgers to starving while waiting for permits. None of these businesses can rely on enforceable contracts. None can raise capital to expand from investors who want their rights secured. This means none of these businesses can scale beyond the bounds of family trust.

Compare this to the bounty free enterprise has unleashed in China.

Does China have democracy? Not yet. Democracy is a luxury good the Chinese people are saving up to afford. Is China's system perfect? Of course not. Cronyism still reigns, there is far too much government involvement in inefficient large-scale enterprises, and Beijing's export-dominated industrial policy is stunting domestic consumer markets.

Yet the Chinese are building an enviable path to the future. Without the vote. Without a free press. Without the many virtues of democracy that we hold dear. I have no doubt that they will hold these virtues dear one day too. As soon as their standard of living approaches ours.

It all started by letting farmers on collective farms sell some of their produce on private markets. Since breathing that first breath of free enterprise China progressed to world class manufacturing plants and towering new cities in one generation.

Egypt can do it too. Any country can, the recipe is simple. And the evidence is impossible to hide as it is visible to anyone with an internet connection.

So the international community should stop trying to foment some grand bargain aimed at achieving an impossible balance of political power among implacable foes. Instead the unified goal should be to free Arab economies from the straightjacket of government control regardless of who is in the driver's seat.

If practitioners of realpolitik want to work with despots let them demand economic freedom as the price of their support. If democracy advocates think the Middle East is ready for the vote let them insist on the separation of economy and state as the bedrock of any constitution.

An Islamic nation practicing free enterprise will become a modern nation. Once people experience material progress, with hopes of a better future for their children, they will not sign up for a one-way trip to the fourteenth century.


Bill Frezza is a fellow at the Competitive Enterprise Institute, and a Boston-based venture capitalist. You can find all of his columns, TV, and radio interviews here.  If you would like to have his weekly columns delivered to you by e-mail, click here or follow him on Twitter @BillFrezza.

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