Watching the Bell Jar

Although the news from Iraq right now is dominated by security issues, particularly the current American offensive, I wanted to pose a question for readers of this blog (there are some of you guys out there, right?)  The question reflects an area in which I think free market types have an analytical comparative advantage, and you don't have to be a supporter of the war to find it worthy of concern. The question: how does Iraq stand right now relative to what I'll call the "Hernando de Soto agenda" of promoting economic growth through property rights and transparent business registration processes?

Many of you will be familiar with De Soto's book, the Mystery of Capital (read the first chapter free or order the book here).  The subtitle is "Why Capitalism Triumphs in the West and Fails Everywhere Else" and De Soto answered this question so compellingly that his ideas are getting lip service even from the governmental mainstream. Though I'm not at all convinced that they are acting in accordance with his ideas - more on that later.

De Soto is the head of a Peruvian think tank called the Institute for Liberty and Democracy, and based on their experience in Peru they did a bunch of empirical research in developing countries in the late 90s.  De Soto and ILD found that poor countries had legal property regimes so baroque and corrupt that ordinary people could not realistically access them.  In a famous (ok, maybe just to libertarians) series of charts in his book, pages 22-27, he tabulates how long it would take to register property in various developing countries - if one were to follow the prescribed legal steps without resorting to political influence or bribery, which of course a poor person couldn't do.  A sample result is one for Egypt: "Procedure to gain access to desert land for construction purposes and to register these property rights - 77 steps, 31 entities, 6-14 years."  Of course, no one actually goes through these steps.  Either people use pull and corruption to bypass them, or they don't register their property legally at all.  If they can't legally register homes or businesses, they are vulnerable to pressure from the police (being shut down/kicked out), can't easily appeal to the police for protection from crime, generate no taxes for the government (alas), and most importantly they cannot borrow money based on the security of real property.  De Soto claims that there is approximately 9.3 trillion dollars worth of informal property in the developing world, more than enough to finance the development of those countries if it could be 'liberated' into the capital markets.  This is the "bell jar" effect - capitalism thrives in the West because of accessible legal systems. Go to a comparably resourced country in the developing world, though, and you are outside the jar. Poverty reigns.      

So this is obviously a live issue for the future of Iraq.  It must not fall back into the typical Middle Eastern trap where an autocratic elite squashes the economy under quasi-socialism and shares just enough wealth (usually from petrodollars) to keep the  population from revolting.  To avoid this, though, Iraq has got to develop a thriving economy from the bottom up. And to do this the bell jar has got to be removed. 

But what is the status of Iraqi property rights? It's difficult to tell.  There was a freshet of articles about the need to establish them during or soon after liberation - a spring 2003 article by Hernando de Soto himself is here, a July one here - and periodic pieces since then re-affirming this need in the abstract.  But I cannot find any specific information about how things have gone during the occupation.  ILD has a country diagnosis page but it is quite small (covers only four countries) and doesn't include Iraq.  That's understandable of course given the dangers of operating there, much less doing an extensive study.  Government sources are not any better, however.   Even finding a proxy such as the unemployment rate (on the theory that a high rate reflects dysfunction in the legal regime for business) is tough.  The World Bank's Iraq Data Sheet brings the state of the art in pie charts to bear on slicing and dicing international development aid - the top-down approach that will be doomed to failure unless the grassroots infrastructure of business is established. The Bank's Iraq Data Profile is likewise useless, reporting no information later than 2003 and not much even then.  There is a report from Al Jazeera (um, which I don't trust) that says that  unemployment was 70% in mid-July of 2004.  I finally decided to go with an extensive and seemingly judicious commentary on the unemployment numbers at the TruckandBarter blog, which concludes that the real unemployment rate is about 25%.  That rate seems to indicate that serious dysfunction remains in the Iraqi economy, especially since many of the jobs that do exist are driven by outside aid ("working for the occupation.")

Is the Iraqi government and its US advisors aware of this problem?  I'm searching for tools to answer this question.  An Iraqi Business Center exists but it seems oriented towards helping people land reonstruction contracts.  There is an article published two days ago at Portal Iraq entitled "New business registration process created for domestic and foreign companies in Iraq."  Hopeful sounding title, but in the body of the article we learn that the registration process is actually *being* created, that it is being supervised by USAID, and that one of its purposes is to centralize licensing and taxation.  The language used does not indicate to me that the authorities understand the De Soto insights (among other things, they don't mention the need to comprehend customary and informal law within the registration process.) 

If there are any of you gentle readers who are motivated by this sort of thing, please share any relevant information that is out there.  Perhaps this issue has already been taken up at a think tank or elsewhere in the blogosphere, which would be best, but if it's being neglected I think libertarians (or anyone concerned with Iraq's future) ought to pay attention to it.   I also intend to dig further into the issue and will share what I find in future posts.

Comments

[neoconnews]

that's a very good question. i don't know the answer but i hope these issues will be dealt with. perhaps it's too early to figure out what's happening considering the chaos in iraq.

[Heather]

Does anyone out there have any insight as to whether or not the informal economy in Iraq is getting bigger or smaller since the oust of the former regime? Common sense would tell me it's just as big if not bigger but just wanted to know if anyone can point to some recent (reputable) articles that have addressed the issue or perhaps has some more insight than what is being offered through literary channels. Thanks.