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 of evading “extorting” government taxation, they’re actually depriving themselves of basic rights (such as health insurance).
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 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 promote 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.
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.
“While the need for economic reform is well-recognized by political stakeholders, neither people on the street nor those in the government are yet ready to bear the social and political costs of reform.”
Bassem Awadallah (Tomoh Advisory) set off this ERF policy session with a background on the gravity of economic problems in the Arab spring countries and how the governments struggle with the politics of reform. Following the Arab spring uprisings, which demanded freedom, bread and social justice, Awadallah argues that the economic challenges facing the Arab spring countries have only become more pressing; unemployment nearly doubled, foreign investment dried up, tourism revenues are endangered and fiscal challenges remain at large. What’s alarming, though, is the apparent absence or painful tardiness of policy response.
Inequality of opportunity is spreading everywhere as a concept. However, it was not very famous in the Middle East. A couple of years back, the Economic Research Forum made an effort to produce research and study the field of inequality and equity. ERF is dedicated to contribute to the literature, and in this session held at the Seventeenth World Congress ’Inequality of opportunity in th Middle East’ ERF presents three recent papers.
Ragui Assad, University of Minnesota presented a paper ‘’ Does Improved Local Supply of Schooling Enhance Intergenerational Mobility in Education? Evidence from Jordan’ co-authored by Mohamed Saleh, Toulouse School of Economics, the paper mainly is about inequality of opportunity in relation to schooling and whether schooling will be responsive to government policy towards increasing the local supply of schooling in Jordan.
‘The International Monetary Fund (IMF) estimated in 2011, that food subsidies amounted to 0.7 percent of GDP and that for energy was equivalent to about 8.5 percent of regional GDP, or 22 percent of government revenue. (IEA webmeets)’. In Egypt, Energy subsidy accounts for 25% of government expenditure, this is twice as much as Egypt spends on education. Four times than Egypt spends on the health sector. Figures are alarming. However, this is not an explicit problem to Egypt, its one that has hit many countries within the MENA at different points of time. And each country tried to deal with it differently, thus there is room to learn what worked and what did not.
Energy Subsidy reform in Egypt has become a must
Having stated the above mentioned figures, energy subsidies continue to be a burden on government budgets. There is very little evidence tracing the effectiveness of previous energy subsidy reform programs and its impact on reducing poverty or reaching the needy. In fact, there is more evidence shared showing the ineffectiveness of energy subsidy programs during the opening session of the Seventeenth World Congress “The Dilemma of Subsidy Reform and Equity in MENA” . The purpose of this session is to discuss subsidy reform and its underlying challenges such as achieving a more equitable system while avoiding inflationary effects and food riots in the context of MENA countries.
Leaders matter. Incompetent regimes are more likely to be replaced, Caroline Freund
The Arab spring has had a political whirlpool effect on countries of the Middle East. With nothing happening for quite a long time, to almost all drives for change interchangeably playing active role in the region. After many decades of nothing, a lot of change happened. The ERF organized a session on’ The Political Economy Of Change In The Middle East – What Is Driving Change? during the Seventeenth World Congress, organized by Intentional Economic Association (IEA) and the Colombia Global Centers, Amman. The session aims to discuss ideas and directions to think about what is guiding this change, what is currently happening, make some logic of surrounding events and try to figure out the main drives for change in the Middle East, being it geopolitical, social or economic.
In this session Caroline Freund, Peterson Institute presented a paper ‘Change In The Middle East: Similarities And Differences With Global Experiences’ co-authored by Melise Jaud, World Bank. The aim of the paper is to try to understand what to expect based on other countries’ experience that has gone through democratic transitions by examining the causes and economic consequences of political transition. Freund in her paper examines over 100 transitions in the last half-century with various outcomes: to and from democracy, some partial, and some failed.