Uber, Lyft, and Middle East Rent-Seeking

In this 2012 interview Hernando de Soto explains how his ILD team was drawn into economic research in the Middle East. DeSoto’s discussion of legal institutions and elites and how they obstruct economic reform and development in the Middle East is key for students researching the NCFCA topic: Resolved: The United States should significantly reform its policy toward one or more countries in the Middle East.

The interviewer starts by commenting that most news stories about the Arab Spring focused on voting and political parties. Poverty, unemployment, and Islamists are mentioned, but news stories usually paint elections and political changes as the goal rather than economic and legal reforms.

Yet voting plays a limited role in peaceful and prosperous societies across the developed and in the transformed Asian countries of Taiwan, Hong Kong, Singapore and South Korea (the Four Tigers), to Vietnam, Malaysia, and Thailand. In commercial republics, voting is for choosing who will run the government but not so much for what powers government officials will have over the economy.

Constitutions, which are documents defining and limiting state power, are approved in extra-democratic processes. The U.S. Constitution was passed through a separate ratification process, not by federal or state legislatures.

(For more on the ratification of the U.S. Constitution, I recommend Pauline Maier’s Ratification: The People Debate the Constitution. Constitutional scholar Randy Barnett discusses the book here.)

Journalists seem not to appreciate the key role of legal institutions for economic development, and the dynamics of elites resisting reforms that threaten to reduce their power. One could argue that the biggest source of poverty and inequality in the U.S. are the regulatory barriers that make it difficult and sometimes impossible for less educated and connected people to start and run a business.

On the Institute for Justice website, short videos tell the stories of state regulations making life hard for new businesses, from entrepreneurs in food trucks and carts to hair braiders, dentists cleaning teeth, to people trying to keep their homes from being seized.

Another example in the U.S. can be seen with local taxi and bus monopolies urging politicians and transportation regulators to ban Uber, Lyft, and other smartphone transportation services. Across the Middle East, India, Africa and Latin America are thousands of similar stories of local established firms using government regulations to protect their enterprises. Economists call this rent-seeking.

Occupational licensing is a rent-seeking similar story of raising barriers for people trying to enter various professions. Certification is the market alternative for consumer protection. It is harder though for people without much money and few connections to start careers or businesses where regulatory barriers to entry are high. This protects people and firms already established in those businesses and allows them to charge higher prices.

How could U.S. government policy toward Middle East countries do more to encourage economic freedom reforms? U.S. politicians and bureaucrats pass and enforce similar top-down regulations protecting favored firms so they are a poor influence on politicians and regulators in other countries.

Recent posts on refugees in the Middle East discuss a similar problem: refugees are generally not allowed to work or launch enterprises, and are not allowed to relocate to where jobs are available. Displaced families are locked out of other countries and locked into refugee camps, and many were locked out of the formal economy at home.

Understanding the central role that dysfunctional legal systems play in hampering economic development is key to understanding the Middle East. Again, I highly recommend the 2012 interview with Hernando de Soto.

Any questions, comments, or corrections and suggestions are welcome… (Greg Rehmke: grehmke@gmail.com)