Without Property Rights, Egypt Will Remain Mired In Poverty
Just about the first task assigned to me when I landed a job working for the U.S. Congress fifteen years ago was to reach out to the famed economist Hernando de Soto and discuss how my bosses could help him in his quest to improve and expand property rights around the world.
In the late 1980s the Peruvian wrote a wildly influential book about the rampant poverty in his native country, which he largely attributed to the inability of the vast majority of his countrymen to obtain transferable property rights for their houses and stalls where they sold their goods. That lacuna denied them the ability to access capital markets and invest to improve their productivity and output.
De Soto argued--convincingly--that providing more tangible property rights would not only boost the economy but also deprive the Maoist insurrection that was laying waste to much of the country of its popular support.
While it would be a gross exaggeration to attribute the country's defeat of its terrorist threat and subsequent quarter-century of economic growth solely to De Soto's efforts, there is a consensus that the country's enhanced respect for property rights played an integral role in Peru's economic renaissance.
In 2004 De Soto had moved on to a new country: Egypt. He and his staff discovered that the country resembled Peru in the inability of its residents to have a legally recognized ownership stake in their biggest possessions, namely their home and--for entrepreneurs--their place of business.
The country's recordkeeping was weak, nearly all of the homes for the poor and working class had been built quasi-legally on property not designated for residential development, and no one evinced much of an interest in adjudicating these issues.
The members of the Congressional Committee on which I served--both Republican and Democratic--were hopeful that if De Soto were to succeed in Egypt that it might create a path for other countries in the Middle East to achieve economic growth, thereby taking some of the wind from the sails from the widespread unrest buffeting the populace in the wake of the Iraq war.
The U.S. eventually provided De Soto with funding, but his efforts there were largely unsuccessful. The Arab spring and the subsequent political upheaval undoubtedly played a role in its failure, but someone who worked closely with De Soto told me that the larger problem was that the Egyptians running the government ultimately evinced little enthusiasm for property rights. More property rights for citizens ultimately translates to less power for the people running the government, after all.
Unfortunately, little has changed in this regard, and the country's antediluvian perspective towards property rights threatens not only to bottle up domestic investment but to also greatly reduce foreign investment in Egypt as well.
In the last few years the country’s leadership has pursued foreign investment to improve its antiquated infrastructure, and in 2006 it awarded a 40-year concession to an international logistics company called DIPCO to operate a container terminal and expand and deepen the port at Damietta, which is near the entrance to the Suez Canal.
However, the project never got off the ground for a variety of reasons: The country never cleared the land for the container terminal for DIPCO to develop, government approval for the final plans kept getting pushed back, and the Arab Spring convulsed the government and led to multiple leadership changes, which contributed to the delays.
The repeated delays and the government’s instability made lenders reticent to finance projects in the country, further exacerbating the problem.
As the delay began to approach a decade, the country decided it would cancel the project rather take steps to ensure its success.
DIPCO sued the Egyptian government for damages in the International Court of Arbitration and was awarded $427 million. Egypt appealed the decision, claiming that it was the injured party and disputing that the Court has any jurisdiction over the matter.
It is certainly the case that the failure to complete the project has been costly for the country, which stood to greatly increase its customs fees from having a port deep enough and big enough to accept the largest cargo ships currently on the seas. It has already started to pursue another contractor to dredge and expand its port at Damietta, but its track record is sure to give pause to companies that may be considering long-term investments in the country.
This is not the first time that Egypt was on the losing end of a lawsuit regarding its cavalier treatment of a contract with a foreign investor. Union Fenosa gas recently won a $2 billion arbitration case against the country for a lack of gas supply to an Egyptian plant the company owns a majority stake in.
The recent pandemic has once again revealed that the economics profession is far from being an omniscient discipline that can foretell the consequences of major events, but there are a few things its practitioners do agree on.
High on that list is that without the establishment of and respect for property rights, a country will have trouble convincing its citizens--or anyone else--to invest. And without investment, the path out of poverty is closed for most of its populace. It’s a lesson that Egypt should take to heart.