The informal economy represents economic activities that are outside state control, with income generated by the informal economy not being taxed and often not included in gross domestic product (GDP) calculations, including unregistered businesses and real estate. The legalisation of the informal sector in Egypt could generate additional economic growth estimated at two per cent annually and correct many of the institutional and structural problems in the economy, according to the Egyptian Centre for Economic Studies (ECES), an NGO. The economy could modernise and grow faster, and workers would gain social benefits. New tax revenues would be generated and poverty would be reduced. However, the road to integrating the informal part of the economy into the rest of the economy is not an easy one. Speaking at a seminar organised this week by the ECES, “Making the Case for Formalisation in Egypt,” Hernando de Soto, President of Peru's Institute for Liberty and Democracy, said that bureaucracy and high registration costs in Egypt that were the outcome of poorly considered legislation were main reasons for the existence of the informal sector. He stressed the importance of changing this legislation. Complicated registration procedures for businesses or property in addition to high costs made many people, particularly those in low-income categories, prefer to remain outside the formal economy, he said. The size of informal activities in Egypt last year was equivalent to approximately 40 per cent of GDP, including 2.7 million enterprises employing an estimated five million workers and representing 66 per cent of total non-agricultural employment in the private sector, according to a note by the ECES. The note added that real estate owned by 92 per cent of Egyptians was not registered and was estimated to be worth LE1 trillion. 70 per cent of such ownership is concentrated among low-income earners. Ayman Ali, the owner of a house in New Cairo, said that he had started procedures to register his ownership two years ago but had still not finished. Thus far, it had cost him LE65,000, he said. “It is as if the government wanted to punish me for doing the right thing by registering my house,” Ali said. Reforming the laws to give people incentives when joining the formal sector would encourage them to register their business and properties, according to de Soto. “Registering just five per cent of unregistered assets would double the size of the Egyptian economy within a few years,” he said. There must be communication with this sector and dialogue about the laws issued to regulate it, he said. Heba Handoussa, a professor of economics and founder of the Egypt Network for Integrated Development (ENID), said that laws should be issued tailored to the Egyptian case. People working in the informal sector should be consulted before issuing any such laws, she added. The laws should provide incentives in the form of infrastructure and services to informal enterprises and unregistered properties, she said. They should help people to achieve higher productivity and offer ways of marketing their products. Handoussa considered the newly formed unit of the ministry of finance to deal with formalisation a good start. Legalisation should be done gradually, and the government should balance costs and benefits, she said. Involving the banking sector in the process would make things easier by providing credit to cover the registration costs of businesses and properties. However, the political will to pursue formalisation may be the most important requirement for success. According to an ECES study, without clear political will prospects of including the informal sector in the economy will face many barriers. The study suggested a system of formalisation that would motivate extra-legal businesses and property owners voluntarily to join the formal economy in order to benefit from the opportunities provided in a market regulated and protected by law. This would also ensure that they remained formal and prevent them from falling back into informality. The paper recommended steps such as simplifying registration procedures, especially those relating to proof of ownership, and granting full registration authority to local registry units. Registration fees should be reduced, and an efficient dispute settlement mechanism introduced. A new administrative body should be in charge of implementing the proposed system. Good communications between government and people in order to acquire comprehensive data about the unregistered economy was also needed, the study said.
