allAfrica.com: Egypt: Informal Economy Drives Egypt's Economic Growth (Page 1 of 3)

Egypt's economy received a dismal report card in the World Bank's Doing Business in 2005 report released last month. Nearly a fifth of Egyptian business takes place in the informal economy. As an increasingly important factor in job creation and public procurement, the informal sector is proving to be essential for Egypt's economic growth. Yet, lack of business reform continues to impede economic growth, especially in this low-income sector. The country received dismal rankings on barriers to business entry, rigidity of the labor market, and lack of credit laws in the World Bank's report.

For insight into how Egypt's economy performs, allAfrica.com interviewed Dr. Alia El Mahdi, Vice Dean for Graduate Studies and Research in the Economics and Political Science division of Cairo University, who recently completed a paper analyzing the Egyptian informal economy. In this interview, Dr. El Mahdi spoke about the informal sector and small enterprises as well as the political direction in which Egypt heads after its recent cabinet shuffle.

Could you describe what the informal economy is and what its effects are on the national economy as a whole?

When I talk about the informal economy, we have to agree on certain issues. First, we do not mean the underground or illegal economy. It's totally legal, but it hasn't been formalized, meaning it is not underground, it is not invisible. Everyone can see it. You have a workshop, with workers in it. You just didn't register your enterprise or get your license. But you aren't doing anything illegal.

So it's in the private sector, the very small private sector. Some of the enterprises are micro such as workshops or shopping stalls. Some are larger with 10 to 15 workers. An informal workshop wouldn't exceed 25 to 30 workers by any means. They are private sector companies and some are very productive. The only problem with them is they are not totally formal, and so the volume of transactions taking place with these informal enterprises are unknown.

Why is that a problem? If you don't know, you can never estimate the real size of your GDP. We're talking about a GDP in Egypt that's equivalent to $70 billion. Considering the informal economy, you might as well tack on another 20 percent.

Does the lack of formalization hinder the government's ability to create economic policy and stimulate growth?

To me, in my opinion, I don't really care if it's a formal or informal enterprise. Who cares? As long as it provides jobs, produces value-added goods, generates income, that's good enough.

In your paper, you write that almost a quarter of the Egyptian economy may be in the informal sector. Why do you think people argue for the formalization of the economy?

I don't know. I think it's good. But maybe people think this will be a good way of raising tax revenues that the government doesn't get properly. Another aspect, and I agree with this, would be if you're talking about informal enterprise, then these companies aren't able to go to banks and get financing. So, if you formalize them, you make them more capable of asking for formal financing from banks. I agree with this argument.

But to tell you the truth, formal small enterprises don't really have a much better chance of acquiring loans. Unless we introduce drastic changes to the banking sector to be able to deal with small and micro-enterprises in a better way, normalizing wouldn't, in my opinion, make any difference.

Do you think there should be drastic changes in the banking sector?

Yes. Banks are usually reluctant to deal with small and micro enterprises because they claim the transaction costs of creating a loan are too high. But were the banking sector improved so that they had special departments for micro and small enterprises (MSEs) and provide better training to deal with small companies, then this would benefit both banks and MSEs.

I think the new cabinet is moving in this direction. Just before I came I heard that the director of the Social Fund, which is the fund responsible for supporting micro and small enterprises, made an agreement with the director of the post office organization so that owners of small enterprises would be able to go to local post offices to obtain loans.

From the laborer's perspective, what would be the benefits they could derive from formalization? Would they receive increased health and social benefits?

No, that cannot happen unless we look at our social security sector because if you are going to formalize the labor and give them contracts you have to register at the labor office. But registration at the labor office means you have to register social security organization and fund. After that, both entrepreneur and worker alike have to start paying the high rates for social security subsidization. This subtracts substantial sums from workers' wages, around 15 percent. The entrepreneur will have to pay 25 percent of the workers' wage.

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