Reforming Egypt’s Black Market – High Hurdles, Big Rewards

The economist behind a plan to unlock at least $380 billion worth of assets from Egypt’s black market says President Abdel Fattah al-Sisi must first restore another asset that has depreciated over the years: the trust of a wary public.

That is a tall order in a country where the government has chronically neglected basic duties, in many cases leaving citizens to fend for themselves and find ways around laws and bureaucracy that hinder more than help.

But Peruvian economist Hernando de Soto, who has been consulted by dozens of world leaders on private property reform over the last 25 years and has met with Sisi three times since May, is confident the president will use a narrow window of opportunity to address Egyptians’ pervasive suspicion of government.

“Egyptians don’t trust their own administration,” de Soto told Reuters. “They’re not going to hand in names or data, so you’ve got to start by establishing credibility.”

He has given Sisi a plan outlining specific changes to the bureaucracy and legal code needed to integrate an estimated 60 percent of the population into the system by registering and documenting ordinary Egyptians’ assets.

He predicts such reforms could more than double economic growth rates within five years by giving people access to credit and the protections of legal status. Forecasts for Egypt’s growth this year range between 2 and 2.5 percent.

De Soto’s initiative is part of efforts to restore public finances, attract foreign investment and revive an economy battered by three years of political turmoil and unrest, and is expected to be implemented alongside others including from U.S. consultancy Strategy& and investment bank Lazard (LAZ.N).

Sisi is also standing by other ambitious initiatives, such as one to build 48 new cities in the desert.

De Soto said in an interview that Sisi had begun appointing officials to form an agency which would run a communications campaign aimed at building consensus for the reforms and ensuring their implementation.

The presidency did not respond to Reuters’ requests for comment. But a statement from Sisi’s campaign released two weeks before elections in May said the candidate had met with de Soto to discuss “a vision for the future of the informal economic sector in Egypt”.

Sisi has already expended some political capital on tax hikes and subsidy cuts.

Previous governments have talked about reforming the economy without much effect. De Soto met with officials from President Hosni Mubarak’s government a decade ago and all the candidates in the 2012 presidential elections, including Morsi of the banned Muslim Brotherhood.

Obtaining buy-in from a public that may not like the status quo but has repeatedly felt cheated by empty government promises is the first step of de Soto’s plan – and likely its biggest obstacle for Sisi. De Soto predicts it will take about a year.

“I think [Sisi] has realized what his historic moment is and he really wants to turn the country around,” de Soto told Reuters by telephone from Lima.

“It’s got to be relatively quickly because you’ve got to take advantage of expectations being high now.”

BREAK THE INERTIA

The symptoms of informality, which de Soto calls “a disease of government”, are unavoidable in Egypt.

Unlicensed vendors flood the streets, hawking everything from clothes and electronics to vegetables and seafood. The microbuses that many Egyptians rely on for transport skirt meaningful regulation.

Whole districts spring up inside major cities and operate beyond government control, a phenomenon that has become regarded as normal.

Meanwhile, Egypt’s massive public sector puts up red tape in the way of millions of Egyptians who resort to living and working beyond the law.

Loss of faith in central government was a main cause of the 2011 uprising that ended Mubarak’s 30 years in power. Mistrust only increased in the following years, as police abandoned their posts, and officials avoided making decisions they feared could land them in jail.

The key to his plan, said de Soto, is for Sisi to “create enough enthusiasm for the idea of being able to work within a system where everybody obeys the law… That allows you to break the inertia.”

Since he announced he would run for office, Sisi has adopted a rhetoric which appeals to Egyptians to help him save the country from collapse through hard work and sacrifice.

“The president would be saying and identifying for them what the obstacles are, how government intends to go about [removing them], and he will ask for help,” said de Soto.

If Sisi succeeds, the economist says he has prescriptions available based on five years’ of research on Egypt’s informal sector conducted before the 2011 uprising, which a team from his Institute for Liberty and Democracy (ILD) think tank has recently updated.

“It’s very precise: point by point, office by office, norm by norm,” he said, declining to reveal details. Legal revisions and changes to bureaucratic protocol are clearly part, but not all, of the program.

The ILD’s website lists among its achievements implementing or inspiring property titling initiatives from Thailand to Russia which it says have increased access to credit and reduced poverty.

“This is where most of the country’s resources that can give you … the high growth rates are,” said de Soto. “It’s the informal economy.”

Source: Reuters