This post originally appeared at CIPE-Arabia in Arabic.
In a brief interview with CIPE-Arabia, Dr. Ahmed Fikry Abdel Wahab shared some of his thoughts on the pervasive informal sector in Egypt. His concerns center on the potentially negative consequences a large informal sector has on competitiveness, market values, and norms and quality of products. Abdel Wahab explained that while one might not necessarily describe the competition between the formal and informal sector as dishonest, it could easily be described as unfair.
Unlike informal businesses, formal enterprises have higher costs, which are reflected in the pricing of their products. In order to be able to compete, some enterprises compromise on the quality of their products thereby creating negative impacts on the industry and the overall market, as well as undermining consumer rights and the competiveness of the Egyptian products in the global market. He acknowledged that informal businesses suffer from marginalization, lack of access to credit, and meager opportunities for training, advancement and business relations. Abdel Wahab also noted problems faced by informal enterprises in terms of limited market size, attributing this issue to the quality of their products, which are often not fit for export because they do not meet the minimal quality standards. As a result, all these factors create unfair conditions with consequences for both sectors as they generate unhealthy competition, negatively impact the market, and undermine the foundations of industry and its values and norms.
Following is a summary of the main points raised by Abdel Wahab during the discussion.
Product Regulation and Standards
Contrary to the standard approach in addressing the informal sector, Abdel Wahab suggested another approach, which focuses on introducing product regulation as a means of integrating the informal sector. He explained that, by and large, most governmental initiatives targeted at informal sector integration usually focus on getting informal enterprises “on the books” in order to register them so the government can collect taxes and other social security contributions, and obtain other permits and licenses. According to Abdel Wahab, these initiatives usually discourage and alienate informal enterprises, especially given the cumbersome legal, regulatory, and bureaucratic burdens formal enterprises undergo in carrying out their businesses. Therefore, initial reform efforts should focus on establishing clear and transparent product standards and regulations that meet international standards. He emphasized that abiding by these standards will be critical if the country aspires to be part of the global economy and acquire a significant market share.
Abdel Wahab suggested that there needs to be a reasonable standard set for ensuring better product quality. He added that setting quality standards is necessary given that quality is considered one of the generally accepted basic consumer rights, including the right to safety. Consumers have the right to be protected against products and production processes that are hazardous to health and the environment. This right to safety should be addressed not only in the short-run, but also in the long-run, as it is relevant not just to the individual consumer but to society at large.
Adopting this approach to integrating the informal sector would circumvent the prevalent notion of being “ambushed” or “entrapped”, a widely held perception among many informal enterprises of attempts made by the government to regulate them. Many informal enterprises feel that government regulatory initiatives, whether they entail enforcement of mandatory measures or simply persuasion attempts, risk enterprises falling prey to various government entities who seek to manipulate them or gain something from them. In all cases, owners of small informal enterprises find themselves either devoting an inordinate amount of time in the labyrinth of the bureaucracy, at the expense of overseeing their own businesses, or hiring employees for the purpose of managing their affairs with the government.
Going Gradual with Formalization
Abdel Wahab stressed that it is important to recognize that informal enterprises are not homogeneous entities. He warned against generalization, and adopting a one-size-fits-all solution to formalizing the sector. Specific attention should be given to each sector, particularly given the expanding market economy. Using the food industry to illustrate his point, Abdel Wahab said there lies an opportunity to initiate the proposed standard setting mentioned earlier, as he further elaborated on the many reasons supporting his proposition.
Small, medium, and large-sized food enterprises are far-reaching nationwide and in addition to being directly relevant to the health of the consumer, also improve the quality of life and the environment. As such, consumers are integral to product quality regulation and have vested interests in the process. Moreover, food enterprises are better able to compete in the local market, as the market still has sufficient absorptive capacity for further investments. Once its production, quality, and health standards meet international requirements, the food industry will be able to utilize its potential as a key trade exporter, further supporting the argument to set product standards and regulations in the sector.
In fact, the government has a body in place, namely the Ministry of Supply that could undertake the task of regulating the food market and ensure products conform to quality standards. However, he noted that undertaking this function will require redefining the role of the ministry and building its capacity in order to be able to assume this role in a meaningful manner. As such, the ministry should operate within a comprehensive system and adopt the necessary tools and measures all geared towards regulating Egyptian product, with a focus on the best interests of both domestic and foreign consumers.
Offering Incentives
Creating a system of incentives is a topic often raised in discussions on formalizing the informal economy. While the concept of using incentives enjoys considerable consensus among those engaged in the informal economy debate, the debate over who should benefit from these incentives remains unsettled. For example, should these incentives be offered to those engaged in the formal economy to encourage formalization? Or, should incentives be offered to informal enterprises as a benefit for formalization? On this issue, Abdel Wahab asserted that it is important that the incentive system benefits all. He maintained that creating a differentiated incentive system only provides temporary relief to a problem with no sustainable and meaningful outcomes.
Generally speaking, the government should focus on improving the overall investment climate to benefit all. Some of the measures the government could adopt to improve Egypt’s overall investment climate include; easing regulations, lessening tax burdens, creating an overall conducive environment to encourage savings and investment, and finally by improving finance mechanisms for small and medium-sized enterprises through either stimulating change in the operating philosophy of banks, mandating banks dedicate a portion of their lending portfolio to small and medium sized enterprises, or creating new bodies for supporting small and medium-sized enterprises, most of which populate the informal economy. If the government does decide to provide incentives to informal enterprises, it could do this with financial incentives by improving their access to credit on the condition that they join the formal economy.
Market Exit
Abdel Wahab recounted several factors contributing to the pervasiveness of the phenomena of the informal sector in Egypt. Among these factors are; barriers to market entry and exit, high transaction costs related to formalization, and lack of transparent and clear mechanisms for market exist. He stressed that implementing a new substantive and comprehensive law addressing bankruptcy and the market is critical to solving the current problems.
Allowing enterprises to “wither away” while still in the market, without having a safe exit option has significant and detrimental effects on the markets. In his view, the lack of options to safely exist in a market is no less important than the pervasiveness of informality when considering the disruptive consequences it has on the market. Under such dynamics, product quality falls victim, as markets become infused with unhealthy competition, leading businesses to compromise on quality as the only available option in light of the sluggishness in operations. In such conditions, enterprises find themselves having to follow competition rules dictated by the market reality rather than fair competition rules associated with healthy markets, and that which, enterprises should abide with.
Dr. Ahmed Fikry Abdel Wahab is the General Manager and CEO of FAW Industrial Group, and the Executive Director of the Egyptian German Automotive Company (Mercedes-Benz in Egypt). Abdel Wahab is also the vice president of the Chamber of Engineering Industries of the Federation of Egyptian Industries. He is a board member of the Egyptian Federation of Industries, the Engineering Export Council of Egypt and the Egyptian Competition Authority. He is also a member of the Dean’s Strategic Advisory Board of the School of Business at the American University in Cairo. Abdel Wahab holds a B.Sc. in Electric Engineering, and a Ph.D. in Business Administration (Management Science and Statistics) from the University of Alabama.
Published Date: June 09, 2016