Shedding light on 'Grey areas'

By Gillian Tett in the Financial Times
 

Leaders forget that unless people feel confident that they truly ‘own’ assets, it is well-nigh impossible to build a stable market economy.

 In recent weeks, Hernando de Soto, the acclaimed Peruvian economist, has been brainstorming with the leaders of the Muslim Brotherhood movement in Egypt. The reason? A few years ago, de Soto’s think-tank, the Institute for Liberty and Democracy, conducted a survey of the “informal” – or non-legal – Egyptian economy for the former regime of Hosni Mubarak. This indicated that the informal economy was vast and creating growing social tensions, since it left many people without secure legal rights.

De Soto reckons, for example, that 90 per cent of all Egyptian housing and 82 per cent of entrepreneurs exist “extralegally” – undocumented and outside the law – because it is so costly and difficult to operate inside the system. Simply setting up a bakery or building a plot on vacant land in a “legal” way can take 18 months or 10 years respectively. Thus this informal economy is now worth an eye-popping $347bn – or, according to de Soto, “four times greater than the value of companies on the Egyptian stock exchange”.

The Mubarak regime apparently ignored de Soto’s findings, at least in the sense that it did nothing to tackle the problem. But now that the old regime has been toppled, its successor is trying to be savvier – or so it seems. On a visit to New York this week, de Soto revealed he has now received a “mandate from the deputy supreme guide” of the Muslim Brotherhood to survey the informal economy and, more importantly, “implement a plan of economic inclusion to create a modern market economy for the Egyptian people that will incorporate people excluded from the market”. That may reflect expediency or idealism by the Brotherhood; most likely, it is a combination of both. Either way, de Soto’s researchers are now fanning out across Egypt, using old-fashioned sleuthing techniques to track the shadow economy and advise on how to make it more “legal” and “visible,” with techniques that have already been deployed in Latin America.

It remains to be seen whether any of this advice will be adopted, let alone work. But, if nothing else, the story is thought-provoking. In some senses, the 21st century would appear to be an age in which human beings have become supremely good at watching each other. The rise of companies such as Google and Facebook makes it easy to record behavior around the world, and most of what western consumers or companies do today creates electronic or paper trails which armies of economists, analysts and lawyers are paid to measure, record and organize.

Yet even amid this ever-swelling tsunami of paperwork and megabytes, large swathes of activity remain partly out of sight, hovering in a legal limbo land. And, some of these “grey” areas matter enormously, even – or especially – in this information age.

Egypt and the rest of the Muslim world is an obvious case in point. During the past year, it has become fashionable to cite poverty among the young as the cause of the Arab spring uprising. However, on the basis of his work, de Soto is convinced that this partly misses the point: what made ordinary people angry was not just inequality, but the fact that so many were excluded from the mainstream economy. Before the Arab spring this tended to be ignored, partly because this grey economy is hidden. But once the revolt started, the “extralegals” realized they had nothing to lose – and social media gave them new tools to mobilise.

Egypt is certainly not the only place where the uncounted matter; similar patterns can be seen in much of the emerging world. And grey edges continue to dog the western world, too. The vast, shadowy, global drugs industry is one obvious example. On a more mundane level, large parts of the (non-criminal) Italian and Greek economies also operate in an “extralegal” sphere, in the sense that they are partly undocumented, to avoid tax. And, perhaps ironically, as modern finance has supposedly become more “sophisticated”, it has created cyber shadows, too. Information about what is happening in the $600tn-plus derivatives market, for example, sometimes seems surprisingly opaque. During the recent credit boom in America, mortgage activity became so frenetic that the paperwork sometimes became surprisingly patchy. As a result, American banks often find it hard to disentangle who “really” owns distressed sub-prime properties, because assets have been sliced and diced so many times in shadowy cyberspace that the legal foundations of deals have become blurred.

Of course, the “shadows” in modern finance operate in a very different context to a third-world bazaar, let alone the global drugs trade, but the key point is the same. As the economist Adam Smith pointed out three centuries ago, unless people feel confident that they truly “own” assets, with legal security, transparency and a sense of inclusion, it is well-nigh impossible to build a stable market economy. Leaders of emerging markets and western societies alike forget this truth at their peril. If de Soto’s experiment with the Muslim Brotherhood gathers pace, it will be truly fascinating to watch – and not just for what it might reveal about Egypt, but for the implicit challenge it raises for western policymakers, too.

gillian.tett@ft.com

Copyright The Financial Times Limited 2012.