Is formalization really the panacea for informality in MENA?

The informal sector typically comprises all business and economic activities that are not monitored by the government, and so -technically- do not exist in official books. But what does that mean exactly, for both the economy and those who work informally? Well, since their revenues are not taxed and are not included in a country’s gross national product (GNP), the phenomenon results in major mis-representation of the country’s economic performance. On the other hand, workers in the informal sector may think that they’re rather better off evading “extorting” government taxation, they’re actually depriving themselves of basic rights (such as health insurance).informality_policy_panel

This workshop’s proceedings drew attention to a number of the major problems of the informal sector in the MENA region. Yet the question still remains; is formalization worth the trouble, especially in the region’s countries’ dire conditions? The workshop concluded with a policy panel comprising of four of Egypt’s finest policy affiliates and makers. They tackled the issue of informality in Egypt from different policy levels, corresponding with their expertise in working –directly or indirectly- with the informal sector.

The first speaker was Mr. Tamer El-Meehy (President, Entrust-DMC Consultancy). He argued that informality is now rather seen as a continuum; 82% of the enterprises in Egypt do not adhere to rules and regulations, in which sense the informal sector is much larger than the mere number of informal enterprises. There is thus a flaw with the rationale of equating informality with smallness. Informal enterprises are by definition small or “micro”, yet a substantial number of large enterprises, and not only in Egypt operate informal activities, the revenue of which sums to to millions of dollars.

So how do we attract them to formalize?  The problem with Egyptian policymakers, argues El-Meehy, is that they almost always resort to the easy solution; the supply side solution “give them credit”. However, most studies on the impact of microcredit relay the same results; micro-credit schemes have marginal if any impact on the successful formalization of informal enterprises. Their real binding constraint is access to markets; if they were to have active demand, they will no longer operate on the fringe of poverty; then they will succeed in sustaining profiting formal businesses.

His question for both economists and policymakers is thus; how can markets be adjusted to accommodate micro and small producing enterprises?

Dr. Sherine El-Shawarby (Associate professor at FEPS, Cairo University and former consultant to the Minister of finance) then debates that the informal sector needs to be modernized in order for it to cope with the formal sector. SMEs have been around for a long time, she says, so devising a module for SMEs in Egypt requires collaborative work encompassing the ministry of trade and industry, unit of economic justice (ministry of finance) and many other ministerial bodies and institutions.

She also concurs that they need technical and marketing assistance, not credit. There is thus a need for not only integrating the informal sector in the mainstreaming of the economy, but also integrating it in the overall development strategy.

What are the policy options for SMEs to formalize?

With both a social worker and ministerial hat, Dr. Laila Iskander (Minister of State for Urban Renewal & Informal Settlements) argues that the informal sector is already market-based. In fact, the informal activities pose a threat to the corporate “formal” sector. They need land and infrastructure. They want machines and the technology. They want to diversify their products. And they want export restrictions to be alleviated.

She also emphasizes that the government actually works against the informal sector; laws and regulations are mostly impeding to the formalization process. They also don’t receive the same level of “flexibility” or “reception” to their demands in comparison to their counterparties in the well-established corporate sector.

There is thus a need for a systematized and transparent formalization routes for those who want to formalize.

Finally, Dr. Ziad Bahaa EL-Din (former Deputy Prime Minister & Minister of International Cooperation), in concurrence with Mr. El-Meehy, claims that it’s not that some businesses are formal and some are informal; all businesses have some level of informality among its activities, and they does not per se classify in terms of illegality.

A better way to look at the incentives of formalization, argues Bahaa El-Din, is to focus on promoting the consequences and benefits of formalization, rather than on the working environment itself.

Can there be a law that if issues would facilitate formalization?

He argues that there needs to be a clear mandate for a law, one that defines its exact scope. For instance, a law that only focuses on the “supervision” aspect will not encourage formalization as would an array of laws targeting investment and access to information.. etc.

In conclusion, there still isn’t a clear pathway for the dilemma of informality. There is, however, hope for better informed researchers and policy-makers and a deliberated pathway.

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