Egypt: The informal economy
This sector is important for the economic cycle, forming an inverse relationship with the formal economy
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Egypt’s informal economy, or all unlicensed and unregistered capital and real estate, constitutes at least 34 percent of GDP, serving as a security buffer during harsh times.
Despite its potential, however, it remains a major risk without proper management, experts said at a conference Tuesday organized by the Egyptian Center for Economic Studies (ECES), titled “Enabling the Poor in Egypt: Integrating the Informal Economy into Mainstream Activity.” “This sector is important for the economic cycle, forming an inverse relationship with the [formal] economy,” said Souad Kamel, economics professor at Cairo University. “It grows in times of depression, while contracting or experiencing decelerated growth in [bullish] times.”
Economists have to be careful and to abandon policies that may threaten the informal sector or its employment, Kamel said, especially during current times, with Egypt recording an alarming unemployment rate of 12 percent during the fourth quarter of 2011, according to the most recent ILO report. Economists and analysts, however, estimate the real unemployment rate to be at least double the officially announced figures.
Kamel said the primary reasons why the informal sector grows is because of over-bureaucratization of the other ‘formal’ sectors coupled with the exhaustive and inflexible procedures they require. “Working officially doesn't produce enough benefit until surpassing a certain point, so it depends on the size of such ventures,” she said. She expressed particular concern at the recent statements made by parliamentarian Mohamed Abdel-Moniem El-Sawy, who demanded constitutional provisions to criminalize “any unregistered commercial activity.” That would have detrimental consequences, she said. Kamel also told of previous practices under Hosni Mubarak’s regime, when this sector was viewed as an opportunity for the government as a lucrative, though tax-evading source of income. “Governments are torn between encouraging its development and extending the tax net as far as possible,” she said, citing the accusations of former Finance Minister Youssef Boutros-Ghali, who nicknamed this sector “the stair-shaft industry.”
Kamel noted that an ILO report conducted after the “Arab Spring,” which scanned the effects of uprisings, spelled bad news for countries dependent on foreign direct investment (such as Egypt and Tunisia), as it was concluded that “long-term confidence of foreign investors was [deeply] shaken.”
Tapping informal real estate
Dissecting the informal sector, Malak Reda, chief economist at ECES, classified it broadly into the production and commercial activities aspect, and real estate assets.
“There are two kinds of informal real estate: that which was originally informal (as unlicensed construction over agricultural soil or property seizing); and that which was formal and became informal (such as illegal modifications to existing structures).”
Citing an ECES study conducted in 2004, Reda showed as an example that 75 percent of real estate possessions in the Greater Cairo region (worth LE 370 billion) are informal, with 35 percent of them belonging to the former (purely informal) variety. The same study also shows that 70 percent of real estate assets in Egypt during 2004 belonged to the poor, then valued at LE 240 billion.
Reda reiterates the bureaucratic factors previously mentioned by Kamel as reasons that drove the growth of informal real estate and obstacles towards its development. Such include excessively long registration durations along with high costs and the inability to legalize such possessions, only preventing their demolishing. As an example, it requires 208 days and 96 bureaucratic procedures to legally register an asset with the local authorities.
Reda attributed the rise of slums — a prime feature of the sector which include over 15 million residents according to a 2007 estimate — to an imbalance in affordable housing with a high market demand proportionate to low supply. She also noted the high local ration of ownership to rent, at 80 versus 20 percent, with the global average being 55 versus 45. Warning of their risks, particularly slums, such as potential increase in crime and pressure on existing sanitation, electrical and water infrastructure, Reda proposed a three-pronged approach for development.
Firstly, enacting fiscal policies that encourage funding by the civil and private sectors, and the appropriation of a government organization to coordinate these efforts and to place and enforce strict measures on them.
The other two prongs are implementing the necessary legislative reforms to simplify registration and decentralization, and the activation of a record made by the Housing Ministry of all formal and informal possessions based on a national ID for each property. Among the advantages such reforms will produce are decreasing the number of procedures for registration down 24 steps and to 71 days, she said. As for already existent informal and unlicensed properties, Reda’s proposal estimates a decrease in legalization costs of a range of well over LE 20,000 to at most LE 646, and decreasing the number of days to 330 instead of almost 2900.
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