Washington, DC — 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.
The new cabinet was formed just a few months ago, what are the major changes they're looking to implement in the Egyptian economy?
As the president pointed out, we have to look at low-income group to see how they can be helped, to provide, for example, policies in education, medical services, and providing social benefits to the needy. This is the social aspect of the new policies. On the other hand, from the economic perspective, unemployment should be dealt with.
First of all, we have to raise investment to raise the GDP growth rate. Offer new jobs to new labor market entrants and the unemployed. A third aspect of the new policy would be to look into the fiscal policies, how to rationalize them. To look into the two sides of the revenues balance, the expenditures balance. See where you can readjust, look for waste, what areas need more funds. There's going to be a readjustment of the budget.
My feeling, from what I gather in the newspapers, is that during the coming parliamentary years, there will be a new law on taxes. The main aspects of the law will be to emphasize or present tax incentives or reduction in tax rate, which will be beneficial to large groups of low- and middle-income families as well as to businesses. On the tax side, I suppose there will be an improvement that every one will feel, given that the new law is passed by the parliament.
Do you think the cabinet might focus more attention on MSEs?
They are moving towards improving the investment climate for MSEs and for medium enterprises. The cabinet has issued recently a micro and small enterprise law. The main intention to open things up for small entrepreneurs, to make registration a "one stop shop" so they don't have to go through the old long ways to get a license, and offer them land to establish their enterprises at very low prices.
There are also now opportunities for them in public procurement, 10 percent of public procurement will come from MSEs, which is relatively high considering they never were able to have a chance in this field. There are a lot of changes taking place, but we have to be given time to see whether they will be successful or not. My feeling, however, is that the movement in this direction is very small.
Do you think the cabinet's priorities will improve Egypt's economy?
The policies that are undertaken are in the right position. But at the end of the day it all depends on implementation. If the implementation is right, is correct, is flexible, then we will be moving in the right direction. If there is a split between policies and implementation then we're still having a problem.
But my feeling is that everyone says there is a problem in implementation, we have to take care of that, and that's what it is all about in the new cabinet. They say that the next phase in the coming months will witness a drastic improvement in implementation. So, the policies are moving in the right direction, but we'll have to wait to see the implementation.
Are there any benchmarks you're waiting to see achieved before you can determine successful implementation and the new cabinet can prove its worth?
Yes, unemployment for instance. We're talking about two million unemployed Egyptians. If you are able to offer within the next year one million jobs to the unemployed, then you are talking about serious reduction.
Is one million jobs created in one year a realistic possibility?
No, I think it's a little wishful thinking. We hope that something like that could be done, until now what we've been able to do is 500,000 new jobs a year. We'd like to see an improvement.
Does 500,000 new jobs keep up with the yearly increase in labor supply? Is that net job creation?
We need every year between 600,000 and 800,000 new jobs to be created for the new entrants to the labor market. We're not going to be able to create enough jobs for all the unemployed in one year.
There's been a lot of focus on Hosni Mubarak's health and this has generated a lot of speculation about potential successors and moves toward political liberalization and multi-party democracy. Do you see such changes coming?
Yes. In Egypt, we have 17 political parties, but there are really only three or four effective parties. There is a move toward more democracy. The ruling National Democratic Party has made a lot of work in this direction. There is also the Wafd party, which is more right wing, and the Tagamu party which is leftist. There are quite a number of other parties that are not as big. So, we are talking about three main political parties, but by far the most influential party is the National Democratic Party, which is headed by President Hosni Mubarak.
There is a lot of work going on to engage more people and encourage more political participation. Not just from people, but of civil society. There are interactions with the NGOs, labor unions, universities, and different factions and groups. There is quite a movement in this area by the National Democratic Party. I guess this will encourage other parties to come and play a more positive role. They are there but at the same time not active enough. Nowadays, even if you look at the number of private newspapers we have, it's increasing tremendously. The amount of freedom of speech that is allowed, I haven't seen it in any Arab country at all.
Sign up for free AllAfrica Newsletters
Get the latest in African news delivered straight to your inbox
So the feeling on the streets in Cairo then is that people are more involved and participate?
Not every one on the streets feels more involved. But there is a movement in that direction. If you belong to a certain group or belong to the party, then you are more engaged in meetings, in discussions. Still at the end of the day, the numbers of people engaged in political parties is not that big.
Often when people speak about the bigger relatively more powerful countries of Africa, Nigeria, South Africa, and Kenya are typically named. But often times, Egypt is left off that list, perhaps due to its involvement in Middle Eastern affairs. Egypt is one of the most powerful countries in Africa, yet they weren't included on the African Union's first Peace and Security Council. How does Egypt view the African Union, and Africa in general?
The Organization of African Unity - African Union's predecessor - was initially established by African leaders including Gamal Abdul Nasser.
But I'm not sure why it's like that. I guess we should do more work with African countries. However, we are now part of the Common Market for East and Southern Africa (COMESA) treaty. Perhaps we should direct more efforts toward African economic relations.
Besides treaties such as COMESA, do you think that Egypt and Egyptians are looking toward Africa, or is their site set trained more toward the Middle East? What kind of issues in Africa concern Egypt and Egyptians?
In Africa, we are concerned with first of all economics, like trade. We are also concerned with the river Nile countries, primarily our immediate neighbors such as Sudan, Ethiopia, and Somalia. We also have strong ties to the other North African countries, though I'm not sure you consider them African or not...[laughter]
Yes we do...
I just don't know why this is. A lot of people confuse Africa with Sub-Saharan Africa. There is a political state, I don't know who invented it, but it was not there 25 years ago. Most people now when speaking of Africa mean sub-Saharan Africa even though Egypt, Morocco, Tunis, Algeria, and Libya are part of it. But I think we have homework to do in this respect. Egypt needs to put more effort toward Africa, because, after all we are an African country.
