Informality: Choice or Last Resort for MSMEs in Egypt and Palestine?

The economies of the MENA region are comparable to the structure of an iceberg, with the formal sector being similar to the surface, which is discerned by all, and the large informal part of the economy operating underground. The informal sector evades taxes, is not taken into account in the calculation of GDP, and is not monitored by the government. The rise of the informal sector in the MENA region economies is not without consequences on economic growth and productivity. This session, which is part of the workshop on the economics of informality in the ERF region, endeavors to tackle the informal sector in Micro, Small, and Medium Enterprises (MSMEs) in Egypt and Palestine. It aims at explaining the reasons behind such a large informal sector in these two particular countries, the pros and cons of informality and its impact on the whole economy, and last but not least, the measures that should be taken to promoInformalityte formalization.

Dr. Belal Fallah (MAS) starts off the session by presenting his draft paper, entitled  ‘The Pros and Cons of Formalizing Informal MSMEs in the Palestinian Economy’. The main target of his paper is to explain the extensive size of the Palestinian informal sector. He departs from the argument that a large informal sector can be really harmful to an economy. The tax evasion emanated from informality, he argues, results in a large budget deficit that hinders the government’s ability to provide basic goods and services. He then claims that formalization, on the other hand, widens business opportunities to expand. The tax rate in Palestine, he confirms, is one of the lowest in the world, yet massive tax evasion is witnessed.  Dr. Fallah wraps up his presentation by providing a set of policy recommendations. Raising awareness about the benefits of joining the formal sector, enhancing tax monitoring and decreasing the cost of joining the formal sector are all possible channels through which decreasing the scope of informality in the Palestinian economy could be achieved.

Dr. Hala Abou Ali (Cairo University) then presents her draft paper, entitled ‘MSEs Informality and Productivity: Evidence from Egypt’, co-authored with Dr. Reham Rizk (British University in Egypt). She begins by drawing the audience’s attention to the large scope of Micro and Small Enterprises (MSEs) and informality in the Egyptian economy. As for the main reason why MSEs resort to informality, Dr. Abou Ali claims that it is mainly a free choice rather than a forced one. Firms find the formalization process rather tedious and costly, and therefore avoid it. She discusses the factors that have an impact on the probability of joining the formal sector. The age of the firm holds a negative relationship with the probability of joining the formal sector, while the access to industry clusters has a positive relationship. Dr. Abou Ali concludes her presentation by advocating a set of policy recommendations, which includes reducing costs of doing business, enhancing infrastructure facilities, and establishing trust funds agencies.

The session, chaired by Dr. Alia El Mahdi (Cairo University and ERF), is concluded by a thorough discussion of the two papers, undertaken by Dr. Fatma El Hamidi (University of Pittsburgh), who underlines the positives and negatives of each paper, and suggests potential improvements.

To sum up, the size of the informal sector in Egypt and Palestine is undeniably large. Despite contributing to the reduction of poverty by providing jobs, informality hinders national growth and productivity. Added to that, the jobs provided by the informal sector are of adverse conditions, offering very little job security and low incomes to the workers. Yet, firms in Egypt and Palestine still choose to operate informally to escape the tedious and costly procedures of formalization, and because they are not well informed about the benefits of joining the formal sector.  Addressing informality is becoming increasingly crucial, thus policy recommendations offered in the workshop should be put into action as soon as possible.

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