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Egypt’s neglected Pictures by Ashraf Fares |
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The Gamalia district in the heart of Islamic Cairo looks nothing like an important component of a modern economy. To leave the main street is to find oneself watching an old woman sorting rags, or to walk in a hellish alleyway where a half-dozen metal workshops belch smoke and noise while ill-clothed boys and young men sweat over their labors as their elders sit and drink coffee. |
Up until a few decades ago, this informal sector was ignored. Now, it is seen by many as a key engine of the Egyptian economy. According to a 1992 study by economist Heba Handoussa, the informal sector provides 40 percent of Egypt’s non-agricultural jobs Ð and 90 percent of those in the private-sector. |
But as Egypt’s economic reform program has progressed, the sector has fallen through the cracks. Policies designed to boost investment and growth cater primarily to large-scale firms, both domestic and multinational, and create pressures that hamper the development of low-capital, labor-intensive enterprises. At the same time, little is being done to help small businesses survive and grow. In fact, the government is doing far less than it used to.
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In the 1950s, the government began to organize small workshops under cooperatives providing a range of services necessary to stimulate the sector. For example, in order to allow workshops to compete with large companies, the cooperatives distributed raw materials at subsidized prices and opened marketing channels between workshops and state-owned retail outlets. |
Now, with subsidies slashed across the board and state-owned enterprises threatened with privatization, that support is largely gone, and nothing has emerged to take its place. "They feel left out," says Norbert Eber of Freid-rich Ebert Stiftung, a German development foundation that has worked with Egyptian cooperatives for 20 years. His colleague Ahmed El Gannady notes that this lack of attention has created a crisis among the cooperatives, which relied on their ability to distribute government subsidies to attract workshop owners as members. Some have been able to adapt by providing new services, such as marketing, but many have simply become hollow shells.
For some business owners, it is just as well. "Socialism is no good," says Ahmed, a successful cobbler in the Bab El Shaaria district who didn’t want to use his real name. With three workshops, seven employees (including his two sons) and regular sales to stores throughout Egypt, he knows how to make the system work and wants no part of government support programs. El Gannady points out that many cooperatives were inefficient, heavily politicized and, like the agricultural cooperatives, were used to control workshop owners as much as to help them. But even so, the presence of large numbers of workshops in areas where cooperatives were active indicates that they had helped keep the small-business sector alive.
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In the absence of a flourishing network of cooperatives, the clearest government effort to support the informal sector is the provision of microcredit. Small loans at relatively low rates of interest are available through the Social Fund for Development, the National Development Bank and other sources. But while the programs have an excellent record of job creation in start-up ventures, the owners of informal workshops say they are not flexible enough to fit with the traditional channels of marketing and payment. |
Hassan Gamal looked into loans provided by the Social Fund but decided against them. The reason is be-cause when workshops sell a pair of shoes to a store, they only collect a small percentage up front. The bulk of the payment comes over a period of up to six months or a year. Sales are best around Coptic or Muslim festivals, when demand for shoes goes up, and it is only during Ramadan that business picks up enough to allow workshops to fully collect what they are owed and liquidate their debts. This irregular earnings scheme meshes poorly with strict schedules of loan repayment. "You have to start making monthly payments before you get paid," Gamal says. "It doesn’t help."
Ahmed the cobbler once considered applying for a loan from the USAID-funded program at the National Development Bank, but balked at the paperwork. "It slowed down my work," he says. Instead, he relies on the network of trust-based credit ex-changes that have become prevalent in his industry and lives effectively on the margins.
This is the key problem with microcredit: It doesn’t address the workshop owners’ real needs. The basic problem, points out Magdi, a metal-shop worker, isn’t credit but the market itself. Without marketing channels or the time and experience to develop them, workshop owners are limited to local merchants and suppliers with whom they have built up a reputation for honesty. Here, credit guarantees as a substitute for personal contacts would help more than credit itself.
Large workshops and factories are better able to market their goods or services and to extend credit to buyers. They also benefit more easily from government support structures like cooperatives, which sell raw materials at a discount but only in lots too large for small workshop owners to afford. As a result, the market share available to micro-industries shrinks every year. "I can produce cheaper than the factories can," Magdi says. "But they will still get the orders, because they can wait longer to be paid. |
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The market is tough, but the biggest obstacle to growth may be that the government still has no coherent policy toward the informal sector. True, this lack of oversight is what has given the sector its drive. Yet what once manifested itself as benign neglect has begun to appear as outright harm. In central areas, where labor is plentiful and where marketing channels are more developed, informal entrepreneurs have problems getting adequate work space. These problems are made worse by local authorities who want to decongest such areas by getting rid of industry. Already, Cairo Governor Omar Abdel Akher has moved the Ezbekeya book market, the Imbaba camel market, the Rod El-Farag vegetable market and the Sayeda Zeinab slaughterhouses out of town, and efforts continue to uproot the Imam Shafei junk market in the City of the Dead.
Central government policy, meanwhile, caters to big-ticket investment by offering incentives like special industrial cities, free-zones and tax holidays. Many of the tax exemptions clearly favor large projects. A five- to 10-year exemption for hotels and tourist projects, a five-year exemption for industrial projects employing more than 50 people and other exemptions for land reclamation and remote-area projects are obvious examples. This isn’t to say that the government hasn’t tried to make room for the informal economy. Cooperative members, Eder says, are often included in ministerial trips and trade fairs, and the new cities have areas reserved for small businesses, which can claim 10-year tax exemptions if they relocate. But businesses that have evolved to serve bustling urban markets are reluctant to move to the thinly populated desert. "You go there and everyone is just sitting around," says one workshop owner. "There are no markets for us there."
Small businesses that don’t take advantage of opportunities in the new cities are effectively penalized. Ac-cording to the Egyptian Business-men’s Association, the network of tax exemptions distorts the national economy, requiring the government to increase the taxes levied on other firms. The tax code itself is unfriendly to small business. According to a 1991 report by Integrated Development Consultants, Egypt’s combination of sales, stamp, business and personal taxes can raise the effective tax rate on business earnings to 80 percent. The tax code is progressively graduated meaning that big earners should pay a larger percentage than small earners but income brackets are skewed downward here, so higher rates are reached at relatively low levels of profit. Moreover, the prevailing system of tax assessment inhibits the sector’s growth. Tax bills are often based arbitrarily upon a business’s productive capacity rather than its sales. Owners, therefore, are disinclined to upgrade their equipment or expand their operations. Also, the tax collector tends to overlook firms below a certain threshold, so small size is seen as a defense. A 1985 study by the government statistics agency CAPMAS found that the average informal business has just two workers.
Development experts have gone back and forth on whether small or large firms make a better vehicle for a government to expand its economy. Originally, size was seen as the best guarantor of obtaining efficiencies of scale and therefore jobs. But with economic stagnation in the 1970s, and with population growth and urbanization that led to vast, unabsorbable increases in the urban labor market, small businesses got a second hearing. In the late 1980s, a number of experts pointing to the experience of Northern Italy, Hong Kong and Taiwan began to argue that small businesses, because of their lower overhead and greater flexibility, could in fact be very competitive. This reality is observable in El Gamalia and Bab El Shaaria. A 1986 census of workshops in these neighborhoods conducted by German researcher Gunter Meyer found nearly 600 workshops and 2,500 workers within an area measuring just one-eighth of a square kilometer. Multiplied out, Meyer’s figures put the informal sector’s job creation in these neighborhoods at 19,500 jobs per square kilometer, not including the workshops’ stores and service outlets. That’s a lot of jobs, and according to a 1994 study by the National Center for Social and Criminological Studies, they pay 22 percent more than Egypt’s average prevailing wage.
The challenge is to improve work conditions and growth within the sector to benefit the national economy. This isn’t happening here. According to Eder, informal businesses aren’t being forced to make the transition to higher productivity. "There’s no reform orientation," he says of government policy. There could be. Italy established marketing cooperatives that coordinate production and regulate quality, and paired this support with partial deregulation and tax incentives for the sector. Now, Italy’s small businesses create one-quarter of the country’s $240 billion in annual exports a total that ranks Italy sixth in the world, according to Time magazine. The small business share alone amounts to more than 12 times Egypt’s total exports for 1995/96. There’s a lesson here. Italy engineered its transformation with an economic base devastated by World War II and a population roughly equivalent to Egypt’s. With the right policies, Egypt could realize a spurt of its own.
Dr. Cross is an assistant professor of sociology at the American University in Cairo and an expert on the small business sector.
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[Reproduced on this website with permission from Business Monthly]