Sunday, February 6

Egypt’s economic apartheid

Why Egypt revolted. Extract:

The key question to be asked is why most Egyptians choose to remain outside the legal economy? The answer is that, as in most developing countries, Egypt’s legal institutions fail the majority of the people. Due to burdensome, discriminatory and just plain bad laws, it is impossible for most people to legalize their property and businesses, no matter how well intentioned they might be.

The examples are legion. To open a small bakery, our investigators found, would take more than 500 days. To get legal title to a vacant piece of land would take more than 10 years of dealing with red tape. To do business in Egypt, an aspiring poor entrepreneur would have to deal with 56 government agencies and repetitive government inspections.

All this helps explain who so many ordinary Egyptians have been “smoldering” for decades. Despite hard work and savings, they can do little to improve their lives.

and here

• Egypt's underground economy was the nation's biggest employer. The legal private sector employed 6.8 million people and the public sector employed 5.9 million, while 9.6 million people worked in the extralegal sector.

• As far as real estate is concerned, 92% of Egyptians hold their property without normal legal title.

• We estimated the value of all these extralegal businesses and property, rural as well as urban, to be $248 billion—30 times greater than the market value of the companies registered on the Cairo Stock Exchange and 55 times greater than the value of foreign direct investment in Egypt since Napoleon invaded—including the financing of the Suez Canal and the Aswan Dam. (Those same extralegal assets would be worth more than $400 billion in today's dollars.)

I was reminded about this when I lectured on the topic of doing business in India. Egypt ranks 94th out of 183 countries. Not really that bad is it? And the graph on page 6 in the World Bank Survey says that Egypt made huge strides in improving conditions in doing business.  It cut or simplified post registration procedures relating to tax registration, social security registration and licencing. It recently launched a system to establish companies electronically. I quote:

Egypt introduced a one-stop shop in 2005. Further reforms included incorporating more agencies in the one-stop shop, introducing a flat fee structure and reducing and then abolishing the paid-in minimum capital requirement. The time and cost of incorporation were reduced in both 2005 and 2006, and by 2007 the number of registered companies had increased by more than 60%. Reductions of the minimum capital requirement in 2007 and 2008 led to an increase of more than 30% in the number of limited liability companies.

I am not convinced that this economic deprivation is indeed just the reason for the revolution. If this was indeed the case, you will be having revolutions across most of the globe outside the OECD countries. How about India? Its on 134th rank, even sunny old Nepal is above India. Take a look at this document. States run by the communists were horrible for wealth and employment creation. Generally, the canker of corruption and the dead hand of the state stops India from achieving its true potential (besides some other bits) but that explains why India doesnt have revolutions of this ilk. It is a democracy. Egypt revolted because it didn't have democracy and there was no outlet.

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