Dead Capital and the Poor in Egypt

There is the widespread view that the benefits of economic reform programs are not shared by the majority - especially the poorest. This skepticism also surrounds the "trickle-down" approach to solving the problem of poverty and the social safety nets instituted to treat it. What should be done to counter this pessimism and generate a viable reform process?

Author(s): Hernando de Soto

Publication Number: ECES-DLS11-E&A

The best solution to date seems to be the East Asian model of economic growth, characterized by labor intensive export-oriented strategies and government expenditure on primary education and health services. In this publication, Hernando De Soto advocates another. He argues that the poor in developing countries own more assets than is generally believed. But this capital is "dead" because its ownership cannot be readily traced, validated, and exchanged legally. As a result, the poor cannot use their assets in efficient and legally secured market transactions, like securing a bank loan or guaranteeing the payment of water, electricity, or other infrastructure services. De Soto asserts that a formalization process would benefit both the poor and society at large.Is this true for Egypt? De Soto presents surprisingly large numbers: 92 percent of real estate and land in the urban sector and 87 percent in the rural sector in Egypt are informal - over 70 percent of which belong to the poor. This is equivalent to some US$240 billion of dead capital, suggesting that a process of formalization would do much to eradicate poverty and strengthen support of economic reforms.De Soto's ideas received enthusiastic support at the seminar organized for him by ECES in Cairo. But participants did question whether the approach was applicable to Egypt and whether society's poorest would actually benefit. In spite of their doubts, they agreed that formalizing the assets of the poor in Egypt is certainly worth pursuing. This process, carried out in Peru, is now being implemented in Haiti. There is no reason why Egypt should not do the same.