The debate over integrating the informal economy with the formal sector is perpetually polarized between proponents who want to preserve the state’s ability to collect taxes and opponents who want to increase employment rates and take advantage of Egypt’s expanding labour force. This issue is of the utmost significance to the Egyptian economy given the trend towards maximizing all state resources, localizing Egyptian industry, and boosting exports. So, what are the obstacles and strategies for integrating the informal economy into the formal economy?
Definition and Characteristics
The term “informal economy” refers to the sector of the economy that operates without government oversight, avoids taxation, and has no official presence in the local or statewide GDP figures. It also includes illegal activity, also referred to as the black market, as well as legal activity that is underreported or not reported at all in order to evade taxes. British economist William Arthur Lewis, winner of the Nobel Prize in Economics in 1979, referred to it as the “grey economy”. Lewis gave it this name because, despite being a source of income, its participants lack social security, job security, and other forms of guaranteed employment.
Employment in the informal economy can take the form of either independent work or wage labour. Participants’ skill levels range widely, from those with no formal education or training to those with extensive experience and advanced degrees.
While precise statistics are lacking for this sector, estimates show that it accounts for up to 70 percent of employment in emerging and developing economies and makes up between 40 and 60 percent of the overall economy. In Egypt, the latest economic census for 2017–2018 estimates that there are about 2 million informal economic establishments, making up about 53 percent of the total economic establishments. According to statistics from the Arab Monetary Fund for 2017, Egypt’s informal economy was estimated to make up about 23.12 percent of the total, compared to an estimated 1 percent in the Emirates, 11.3 percent in Morocco, and 22 percent in Tunisia. Numerous factors may account for this disparity, but the most significant is that the agricultural sector is included in Egypt’s informal economy, whereas in most other countries it is not. According to the Central Agency for Public Mobilization and Statistics (CAPMAS), the agricultural sector has one of the highest concentrations of informal enterprises, with an estimated 73 percent of all agricultural enterprises operating informally.
Dimensions of the Informal Economy’s Impact on Macroeconomics
The definition of the informal economy makes clear that the effects it has on the state can be categorized into three categories: economic, social, and safety and public security. Regarding the economic aspect, data from the most recent economic census for the years 2017–2018 show that the size of informal economic establishments in Egypt is estimated to be around 2 million establishments, or 53 percent of all economic establishments, and the number of workers in the sector reached around 4 million, or 31.4 percent of all employment. The production volume of the sector totals EGP 362.1 billion, or 11.1 percent of the GDP, and EGP 8.7 billion is generated in capital formation. In contrast, the added value generated by this sector is estimated to be approximately EGP 238,8 billion at a rate of 12.8 percent. This indicates that, despite acquiring a sizeable portion of the economy’s supply of raw materials required for production, this sector adds relatively little value to the economy. Thus, the inflation of the informal economy leads to distortions and structural imbalances in the macro economy, diminishes the efficacy of economic policies, and reduces the capacity of countries to face economic-related crises.
On a social level, it provides a source of income and employment opportunities for a substantial portion of society that is not integrated into the formal economy, but it does not provide job security and satisfaction, as its employees are not covered by the insurance system or government pensions.
When it comes to occupational security, safety, and health, performing these tasks outside the purview of the relevant authorities endangers the lives of employees, local residents within those entities’ boundaries, and purchasers of goods produced by this sector. In the event of damages, the informal sector lacks the financial means to contact consumer protection agencies.
As a result, the informal economy has diverse effects on economic growth and development. If that sector is not factored into the GDP of a state, it will not help accelerate economic growth. Nonetheless, it involves an economic activity that produces goods and services, creates employment opportunities, and generates income and profits for its workers, thereby contributing to an improvement in their standard of living. It carries risks, though, and can be hazardous to those who work in it as well as those who interact with it.
Strategies for Integrating the Informal Sector into the Mainstream Economy
Perhaps the most effective method for integrating units of the informal economy into the formal economy is to provide more incentives, facilitations, and reforms to the formal sector so that the informal sector units develop a desire to transfer to the formal system in order to take advantage of these advantages and facilities. At the executive level, there are still many difficulties associated with implementing these laws, including Law No. 152 of 2020 on the Development of Micro, Small, and Medium Enterprises, despite the fact that the state has taken a significant number of steps to improve the business climate at the policy level and in the legislative environment.
The purpose of this law is to regulate the operations of small, medium, and microbusinesses, as well as bring projects from the underground economy into the mainstream. The law granted informal economy projects an opportunity to rectify their situation and a temporary license while they did so. The deadline has been twice extended and will expire in April 2024. Despite the fact that the law was passed more than three years ago, it is estimated that only a small percentage of the 2 million informal projects—roughly 10,000—have already joined the accounting system for small and medium-sized businesses. Additionally, the number of financiers who have done so does not exceed 7,000.
It is suggested that, in order to encourage small and medium enterprises, one of the pertinent government agencies purchase the goods produced by small and medium enterprises and market them in such a way that, in addition to the importance of this in integrating the informal sector into the formal economy, it encourages small investors to engage in economic activity by providing the opportunity to sell the goods.
To stimulate small and medium enterprises, it is suggested that one of the pertinent government agencies purchase the products of small and medium enterprises and market them in a manner that encourages small investors to engage in economic activity by ensuring the opportunity to sell the products, in addition to the significance of this in integrating the informal sector into the formal economy.
In order to make taxes on small and medium-sized businesses easier, a tax amendment is suggested that ensures fair treatment for these businesses. Under this amendment, progressive taxes on business profits shall be approved in accordance with brackets similar to income taxes, giving small and medium-sized businesses tax benefits that are different from those enjoyed by large corporations.
As the state moves towards bolstering the private sector, the role of integrated industrial complexes should be activated. These complexes bring together large, medium, and small units with the goal of achieving production integration by having relatively smaller projects undertake the production of intermediate goods and supply them to larger projects, ensuring marketing opportunities and distributing the products of small and medium enterprises, and accrediting and promoting small and medium enterprises.
