SAIS Review 21.1 (2001) 13-43
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Dead Capital and the Poor
Hernando de Soto
Similar to less developed countries (LDCs) and former communist nations (FCNs), Egypt is successfully carrying out an economic reform and structural adjustment program. In Egypt, as in Latin America, a concerned number of people realize the need to ensure that the program benefits the large majority of citizens, including the poorest, as quickly as possible. This is crucial because in countries such as Peru, most people are unable to see just how economic reforms can make a substantial difference in their lives, at least in the short and medium term.
Egypt's problems are certainly not unique. In most developing countries, the majority perceives a gap between what macroeconomic reforms are designed to achieve and how they will affect their economic opportunities and well-being. Therefore, for a reform program to remain politically and financially sustainable, it is important not just to mitigate the adverse effects of these reforms on the poor in the short term. Ways must also be found to bridge this gap and to link the objectives of the program directly to the economic life of all citizens in the long term.
The reforms intend to create a market economy. If the majority of the population is to bear the costs of these reforms and be supportive, they must reap the benefits, the sooner the better. Part of the solution may lie in the real assets they already own, albeit informally. Interestingly enough, few are aware that the less privileged already possess most of the land and businesses in developing countries, but lack the kind of formal property rights over these assets that could raise their value and convert them into "live capital." Because ownership cannot be readily traced and validated, and exchanges cannot be governed by a legally recognized set of rules, their assets cannot be used in efficient and legally secured [End Page 13] market transactions. The property of the poor is, in effect, "dead capital." It exists in a universe where there is too much room for misunderstanding, confusion, reversal of agreements, and faulty recollection. It is useless as collateral; it can neither secure a bank loan nor guarantee the payment of water, electricity, or other infrastructure services. As long as the majority cannot put their assets to work in the market because they are informal, they will not realize most of the benefits that should accrue from macro reforms.
The informal real estate and businesses owned by the poor and many ordinary Egyptians represent a surprisingly large proportion of domestic real assets. For example, a first estimate of Egyptian real estate alone indicates that 92 percent of dwellings in the urban sector and 87 percent of holdings in the rural sector are informal. This is equivalent to some US$240 billion of dead capital. This amount is thirty times greater than the market value of the companies registered in the Cairo Stock Exchange, fifty-five times greater than the value of direct foreign investment in Egypt until 1966, and 116 times greater than the value of public enterprises privatized between 1992 and 1996. These figures would indicate that, by formalizing informal assets, Egyptians may be able to release more potential value that can be used for productive purposes than the value which they were able to harness by building the Aswan Dam.
The problem that reformers in developing countries face is that most property in the informal sector cannot be documented and permanently inserted into the legal and global market economy by traditional titling, registration, surveying, mapping, and privatization approaches. Available Western technology does not help speed along the crucial processes that Westerners went through to convert patrimony and informal possession to formal property in the last few hundred years. Moreover, there is scarce experience in converting First World experience to Third World conditions today. To complicate matters, determining ownership is not enough. The formalization process must also include mechanisms to increase the productivity of informal sector assets by linking them to contracts and legal instruments that allow their owners to...