The economics of informality in the MENA region!!

A typical MENA country produces one-third of its GDP and employs 67 percent of its labor force informally – World Bank

The informal sector or informal economy is that part of an economy that is not taxed, monitored by any form of government or included in any gross national product (GNP), unlike the formal economy. The recent Arab Awakening is seen by many analysts to partially reflect economic exclusion, in which informality is one of its forms. Workers in the informal sector tend to endure low job security, no social insurance, low income and adverse working conditions. Similarly, firms in this sector, while enjoying the ease of entry and exit and escaping costly formal regulations, are deprived from having access to formal credit, contracts and export opportunities.

The above problem is exacerbated by the observation that the informal sector is relatively large. Thus, in an attempt to understand the trends, causes and dynamics of informality in the MENA region, ERF is holding a workshop on “The economics of informality in the ERF region”, that will convene for one day in Cairo, Egypt. The main objective of the workshop is to provide a platform for discussing the draft papers and their preliminary findings among authors and experts in order to improve the final output.

A two-way relationship between poverty and informality in Egypt

The first session tackled the theme of poverty and inequality, 2 draft papers were presented and discussed. The first is “Informality and Poverty: A Causality Dilemma with Application to Egypt” by Hanan Nazier and Racha Ramadan; which studies the relationship between poverty and informality. They found out that education is a major factor affecting both informality as well as poverty, which are more concentrated among the less educated and low skilled occupations. Highly educated individuals are able to get well-paid opportunities in the formal sector.

Informal sector: a dead-end for women?
The second draft paper is “Informality and Socio-economic Wellbeing of Women in Egypt”, by Reham Rizk and Hala Abou Ali, assesses the impact of informality on women contribution to household budget. It pinpoints the socio-economic factors that affect women struggle to meet their household needs. They claim that 96.9% of self-employed females are informally employed; hence, informal sector is considered a dead end for illiterate, poor housewives to obtain income for subsistence needs. The authors conclude that informality increases the woman’s contribution to household budget, besides; the woman working in informal sector is characterized by a group of features, namely uneducated, unskilled, poor and engaged in elementary professions.

Now what?
Evidence recognizes informal employment in Egypt as a permanent phenomenon rather than being in a transitory stage. The exclusion of informal workers will result in a great loss at the micro and macro level of the economy. The authors of the two papers presented some policy implications, to begin with; it is of a great need to find a linkage between social insurance and health insurance to lessen social inequalities between formal and informal workers. In addition, it is necessary to establish vocational education and training centers to improve productivity to support household poverty reduction. Further, they recommend to invest in human capital and to develop rural areas. Last but not least, necessary incentives and policies are required to make formalization more affordable and appealing to informal economy workers and economic units.

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