Economy 4.0

Hernando de Soto on the Middle East’s ‘Informal’ Revolution

Stan Alcorn Jun 20, 2011
Economy 4.0

Hernando de Soto on the Middle East’s ‘Informal’ Revolution

Stan Alcorn Jun 20, 2011

Peruvian economist Hernando de Soto is best known for the big, paradigm-shifting idea of his 2000 book: The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. In it, he argues, in a nutshell, that developing countries are held back by red tape and “dead capital”: Bad bureaucracy pushes economic activity into the black market, and the black market prevents economic activity from flourishing and creating new jobs.

It’s an interesting theory of poverty. But what does it have to do with the uprisings sweeping the Middle East? According to de Soto: Everything.

“I would say that to a great degree what you’ve got in the Middle East is an informal revolution,” de Soto told us in an interview. “People who were outside the legal system and who would like to work in a legal system that supports them, that they can integrate. But it hasn’t been designed yet.”

When we spoke to him, a research team had recently returned from Tunisia, where, among other things, they had been researching the story of Mohamed Bouazizi, the vegetable seller whose self-immolation last Winter helped spark this year’s Arab Spring. In this interview excerpt, De Soto explains how the resonance of Bouazizi’s story throughout the Middle East is all about the “informals,” and the feeling that capitalism is failing them.

Full Transcript:

The whole Arab uprising, or what they call the Arab Spring begins in Tunisia. And it begins with a man called Mohamed Bouazizi who sets himself on fire, immolates himself. And other people immolate themselves following him, and that sets off people going to [the] streets.

And here’s the characteristics of Mohamed Bouazizi: Mohamed Bouazizi was a street vendor. And he was selling on the streets, therefore he was the extralegal economy. And he made about ten dollars a day of which he had to pay about three dollars in bribes and was never actually given a license to operate. And his final frustration is when he’s got a scale with which he weighs, of course, the fruit or vegetables that he sells, and that’s taken away by a policewoman. And he fights for his scale and the police woman slaps him in the face and it’s his last humiliation and so he sets himself on fire.

Now it becomes a big deal because the press takes it up. He starts symbolizing the downtrodden.

Now the interesting thing, of course, about Mohamed Bouazizi he’s also a member of a club of people called the unemployed club. But none of them were really unemployed, because if you’re unemployed you die after two months. So there is no such thing as unemployed people. That can only exist in the West, where you’ve got food stamps and all other things. In developing countries it actually means you do little things on the side and you survive.

So he was part of that unemployed system, and he, all his troubles also began very early on, when his father, who had also been in the informal economy, through squatting was able to get a little piece of land. His father dies and the mother wants to of course now get the property in her hands. But the problem is that since the property is on paper that is hard to transfer, she can’t fully get at it. So they can’t even really capitalize on that land and get a credit against it. On top of it she’s afraid to do the red tape to make a transfer of the property title to herself, because according to Sharia law the preference is that when the husband dies, it goes to the eldest son rather than to the wife. Women are not protected. And so that is why the man, when he tries to make money and be a street vendor, he actually wanted to go from the tricycle he had to a truck, but he wasn’t able to mortgage or create credit out of his property. So this is what’s happening all over Egypt.

The situation of Tuaregs is quite different from the situation of Egyptian citizens, who have actually a very well-structured state that’s been around for an awful long time and a tradition of being governed that is over 6,000 years old. Very very different from the northeast and it’s a different situation, obviously, from Jordan and from the nomads in Saudi Arabia. But what links all of them is this class of people that have got two characteristics that I think are very important. Which is one: They feel alienated, because they know they’re working; they know they’re working in inferior conditions; and they know that some people are being more successful than others. And that’s what creates the social rift, the anger that you’ve seen. And then probably there’s that also democratic ingredient that nobody listens to them, and they want to know that the state is taking care of them.

So I would say that to a great degree what you’ve got in the Middle East is an informal revolution: People who were outside the legal system and who would like to work in a legal system that supports them,that they can integrate. But it hasn’t been designed yet. And I think what makes this interesting is the fact that the whole revolution is set off by informals. I mean it isn’t set off by university students. It can be further carried out by university students, by political operators, but it starts out with the informal economy, which everybody identifies with, whether they understand what an informal economy is or not. They just know it’s a situation of inferiority.

So keep your eye open for that name, Mohamed Bouazizi. That’s where it all started.

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