Egypt: Costs And Benefits Of Working In The Informal Economy

An Egyptian market
An Egyptian market
Osman El Sharnoubi

CAIRO — Some people prefer working in the shadows.

Egypt"s vast informal economy has drawn the focus of government officials in recent years. Authorities have been looking to merge the informal economy with the formal economy as quickly as possible in order to boost official economic figures, which have been marked by low rates of growth that officials say do not reflect the true size of the economy.

The government's incentive to integrate the informal economy is clear. With an estimated value of 2 trillion Egyptian pounds ($121 billion), unregistered businesses are a potential source of substantial tax revenues for the state. The government is also eyeing the money collected by state bureaucrats through the extortion of unregistered businesses, a widespread practice in the informal economy that operates through kickbacks.

Proponents also argue that registering businesses in the formal system allows for a more competitive marketplace, as informal businesses are able to undercut their registered competitors by foregoing taxes and pensions. The disparity can be a serious source of consternation, exemplified in the comment of Mohamed al-Sewedy — a businessman, member of parliament and head of the Federation of Industries — who proclaimed during a parliamentary session that "the real terrorism in the country is the informal sector."

According to the Minister of Planning, Hala el-Saeed, the solution is simple: provide incentives to micro enterprises and small enterprises — which traditionally represent the majority of the informal sector — by streamlining bureaucratic procedures and issuing tax incentives.

Yet this strategy to incentivize informal businesses to officially register has already been on the books for the last 20 years, when Egypt first began attempting to implement a system to fast track the registration process — and the informal economy has nevertheless continued to grow.

The state approaches the issue as a strictly binary one — a formal versus an informal economy — leading to an overly simplified view of Egypt's economic landscape. By treating the informal economy as an aberration — a deviation from the norm that can be corrected — the reform measures the government has pursued over the years have produced meager results.

In contrast to countries where authorities chase after informal enterprises to collect taxes from them, the Egyptian government has taken on a less interventionist approach by introducing economic incentives aimed at attracting businesses to register and join the formal sector.

In an interview in November, Saeed said that the tactic of simplifying bureaucratic requirements and reducing registration costs to encourage informal businesses to join the formal economy is one that has been used in countries around the world.

The primary factor that discourages informal businesses from registering is the costs and interest payments that come with joining the formal sector, says Alia al-Mahdy, an economics professor at the University of Cairo who has researched the issue.

The informal economy represents from 27% to 35% of Egypt's GDP, according to common estimates, yet government officials believe it may actually constitute up to 60% of the economy. Mahdy says estimating the size of the informal economy is complex, which leads to the wide disparity in estimates. She calculates that there are approximately eight to nine million informal workers and employees currently working in Egypt.

A market in Cairo — Photo : Effe Ietsanders

Al-Mahdy, along with other researchers, met with a number of tradesmen who own unregistered workshops between 2003 and 2004. The proprietors said they wanted to legalize their businesses, because they were frequently extorted and forced to pay bribes to various officials.

But the process of legalization is a complex one that involves wading through a maze of red tape, with bureaucratic requirements spread out among a number of state entities, including the Labor Bureau, the Tax Authority, local authorities, and others.

There is also the cost of legalization. Al-Mahdy says that at the end of the day, informal business owners are "rational and crunch the numbers: If a bribe is 3,000 pounds and legalizing costs 10,000, the answer is clear."

In addition to the costs of registering, there are also recurring annual costs to consider. "Applying for commercial electricity alone costs more than 11,000 pounds, and the cost of a business feasibility plan is around 25,000 pounds. Those two requirements alone cost 35,000," Alia says. "It is natural that the business owner would opt to work from home and steal the electricity."

Curbing taxes for micro and small enterprises is a necessary step.

Legalization costs are relatively higher for smaller enterprises, says Ragui Assaad, a professor at the Humphrey School of Public Affairs at the University of Minnesota. "There is a close relationship between the size of the enterprise and the likelihood it remains informal," Assad says.

According to 2010 estimates, the vast majority — around 80% — of all micro and small businesses are informal.

Mahdy and Assaad agree that curbing taxes for micro and small enterprises is a necessary step, but the simplification of the legalization process may be even more important. For example, simplifying taxes so business owners can accurately calculate how much they need to pay on an annual basis is key, Mahdy says. This is particularly true because the nature of the work of many of these businesses is often irregular, so being able to assess the annual tax expense in advance would act as a reassurance.

Most countries have introduced a lump-sum tax, which is a fixed amount payable regardless of the circumstances, Mahdy says. Egypt has succeeded in easing the registration process, as noted in the World Bank's "Ease of Doing Business' report for 2018. Yet Assaad says more needs to be done, including reducing the cost of registration even further.

These types of measures are touted by international financial institutions, such as the World Bank and the International Monetary Fund. However, this type of approach has come under criticism for being detached from the realities of the informal economy. It is more complex than a simple calculation of profit and loss.

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The Food Truck, A Sign That The White And Wealthy Are Moving In

In San Diego, California, a researcher tracked how in the city's low-income neighborhoods that have traditionally lacked dining options, when interesting eateries arrive the gentrification of white, affluent and college-educated people has begun.

Balboa Park Spring Fling Food Truck festival

San Diego Food Trucks via Facebook
Pascale Joassart-Marcelli

SAN DIEGO — Everybody, it seems, welcomes the arrival of new restaurants, cafés, food trucks and farmers markets.

What could be the downside of fresh veggies, homemade empanadas and a pop-up restaurant specializing in banh mis?

But when they appear in unexpected places – think inner-city areas populated by immigrants – they're often the first salvo in a broader effort to rebrand and remake the community. As a result, these neighborhoods can quickly become unaffordable and unrecognizable to longtime residents.

An appetite for gentrification

I live in San Diego, where I teach courses on urban and food geographies and conduct research on the relationship between food and ethnicity in urban contexts.

In recent years, I started to notice a pattern playing out in the city's low-income neighborhoods that have traditionally lacked food options. More ethnic restaurants, street vendors, community gardens and farmers markets were cropping up. These, in turn, spurred growing numbers of white, affluent and college-educated people to venture into areas they had long avoided.

This observation inspired me to write a book, titled The $16 Taco, about how food – including what's seen as "ethnic," "authentic" or "alternative" – often serves as a spearhead for gentrification.

Take City Heights, a large multi-ethnic San Diego neighborhood where successive waves of refugees from places as far away as Vietnam and Somalia have resettled. In 2016, a dusty vacant lot on the busiest boulevard was converted into an outdoor international marketplace called Fair@44. There, food vendors gather in semi-permanent stalls to sell pupusas, lechon (roasted pig), single-sourced cold-brewed coffee, cupcakes and tamarind raspado (crushed ice) to neighborhood residents, along with tourists and visitors from other parts of the city.

Informal street vendors are casualties.

A public-private partnership called the City Heights Community Development Corporation, together with several nonprofits, launched the initiative to increase "access to healthy and culturally appropriate food" and serve as "a business incubator for local micro-entrepreneurs," including immigrants and refugees who live in the neighborhood.

On paper, this all sounds great.

But just a few blocks outside the gates, informal street vendors – who have long sold goods such as fruit, tamales and ice cream to residents who can't easily access supermarkets – now face heightened harassment. They've become causalities in a citywide crackdown on sidewalk vending spurred by complaints from business owners and residents in more affluent areas.

This isn't just happening in San Diego. The same tensions have been playing out in rapidly gentrifying areas like Los Angeles' Boyle Heights neighborhood, Chicago's Pilsen neighborhood, New York's Queens borough and East Austin, Texas.

In all of these places, because "ethnic," "authentic" and "exotic" foods are seen as cultural assets, they've become magnets for development.

Food vendor at outdoor international marketplace called Fair@44.

Fairat44 via Instagram

A call for food justice

Cities and neighborhoods have long sought to attract educated and affluent residents – people whom sociologist Richard Florida dubbed "the creative class." The thinking goes that these newcomers will spend their dollars and presumably contribute to economic growth and job creation.

Food, it seems, has become the perfect lure.

It's uncontroversial and has broad appeal. It taps into the American Dream and appeals to the multicultural values of many educated, wealthy foodies. Small food businesses, with their relatively low cost of entry, have been a cornerstone of ethnic entrepreneurship in American cities. And initiatives like farmers markets and street fairs don't require much in the way of public investment; instead, they rely on entrepreneurs and community-based organizations to do the heavy lifting.

In City Heights, the Community Development Corporation hosted its first annual City Heights Street Food Festival in 2019 to "get people together around table and food stalls to celebrate another year of community building." Other recent events have included African Restaurant Week, Dia de Los Muertos, New Year Lunar Festival, Soul Food Fest and Brazilian Carnival, all of which rely on food and drink to attract visitors and support local businesses.

Meanwhile, initiatives such as the New Roots Community Farm and the City Heights Farmers' Market have been launched by nonprofits with philanthropic support in the name of "food justice," with the goal of reducing racial disparities in access to healthy food and empowering residents – projects that are particularly appealing to highly educated people who value diversity and democracy.

Upending an existing foodscape

In media coverage of changing foodscapes in low-income neighborhoods like City Heights, you'll rarely find any complaints.

San Diego Magazine's neighborhood guide for City Heights, for example, emphasizes its "claim to authentic international eats, along with live music venues, craft beer, coffee, and outdoor fun." It recommends several ethnic restaurants and warns readers not to be fooled by appearances.

Longtime residents find themselves forced to compete against the "urban food machine"

But that doesn't mean objections don't exist.

Many longtime residents and small-business owners – mostly people of color and immigrants – have, for decades, lived, worked and struggled to feed their families in these neighborhoods. To do so, they've run convenience stores, opened ethnic restaurants, sold food in parks and alleys and created spaces to grow their own food.

All represent strategies to meet community needs in a place mostly ignored by mainstream retailers.

So what happens when new competitors come to town?

Food vendor at outdoor international marketplace called Fair@44.

Fairat44 via Instagram

Starting at a disadvantage

As I document in my book, these ethnic food businesses, because of a lack of financial and technical support, often struggle to compete with new enterprises that feature fresh façades, celebrity chefs, flashy marketing, bogus claims of authenticity and disproportionate media attention. Furthermore, following the arrival of more-affluent residents, existing ones find it increasingly difficult to stay.

My analysis of real estate ads for properties listed in City Heights and other gentrifying San Diego neighborhoods found that access to restaurants, cafés, farmers markets and outdoor dining is a common selling point. The listings I studied from 2019 often enticed potential buyers with lines like "shop at the local farmers' market," "join food truck festivals" and "participate in community food drives!"

San Diego Magazine's home buyer guide for the same year identified City Heights as an "up-and-coming neighborhood," attributing its appeal to its diverse population and eclectic "culinary landscape," including several restaurants and Fair@44.

When I see that City Heights' home prices rose 58% over the past three years, I'm not surprised.

Going up against the urban food machine

Longtime residents find themselves forced to compete against what I call the "urban food machine," a play on sociologist Harvey Molotch's "urban growth machine" – a term he coined more than 50 years ago to explain how cities were being shaped by a loose coalition of powerful elites who sought to profit off urban growth.

I argue that investors and developers use food as a tool for achieving the same ends.

When their work is done, what's left is a rather insipid and tasteless neighborhood, where foodscapes become more of a marketable mishmash of cultures than an ethnic enclave that's evolved organically to meet the needs of residents. The distinctions of time and place start to blur: An "ethnic food district" in San Diego looks no different than one in Chicago or Austin.

Meanwhile, the routines and rhythms of everyday life have changed so much that longtime residents no longer feel like they belong. Their stories and culture reduced to a selling point, they're forced to either recede to the shadows or leave altogether.

It's hard to see how that's a form of inclusion or empowerment.The Conversation


Pascale Joassart-Marcelli is a Professor of Geography and Director, Urban Studies and Food Studies Programs at San Diego State University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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