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.
The World Economic Forum lists a weakening judiciary as one of the issues holding back economic reform in Pakistan. (Photo: Pakistan Today)
In Pakistan, the process of economic reforms has been painfully slow – a fact underlined by stalled or slipping progress on several international indices. On the World Bank’s 2015 Doing Business, Pakistan fell from 107th out of 185 countries to 128th. The World Economic Forum’s Global Competitiveness Index brought Pakistan down to 129th in 2014-15 from 124th in 2012-13. And the Fraser’s Institute report kept Pakistan at 124th out of 167 countries — the same spot it earned in 2013.
The World Economic Forum published its Global Competitiveness report this week, showing similarly weak progress. Three large South Asia Countries were ranked – India at 55th, Bangladesh at 107th and Pakistan at 126th. As compared to the last report, India jumped 16 places, Bangladesh by 5 and Pakistan slipped by one.
This Saturday, April 5, marked the two-year anniversary of the signing of the Jumpstart Our Business Startup Act (JOBS Act), which paved the way for “equity crowdfunding” in the United States.
This year, the crowdfunding community celebrated that anniversary as Global Crowdfunding Day. While rules are still being drafted to make equity crowdfunding a reality in U.S., the broader crowdfunding world has already grown by leaps and bounds since that act was signed into law.
Simply put, crowdfunding allows anyone to invest in making an idea a reality — whether it’s a new product, a business, a book, movie, album, or video game, or a charitable project. By harnessing the power of the Internet and social media, crowdfunding platforms let people with innovative ideas harness donations as small as $1 from thousands or tens of thousands of people around the world who share their enthusiasm.
Someday, equity crowdfunding will allow these contributors to earn a return on their investment when they invest in a project like Oculus Rift, which was recently bought by Facebook for $2 billion. In the meantime, however, there is no shortage of creative ideas and potential in the crowdfunding community.
Facebook made headlines on Tuesday when it announced it would acquire Oculus Rift, a maker of virtual reality headsets, for $2 billion. Such acquisitions are not unusual in Silicon Valley — just last month, Facebook bought chat service WhatsApp for $19 billion. What’s unique about Oculus Rift is that it started as a project on the crowdfunding site Kickstarter.
Under the Kickstarter model, backers contribute to projects because they want to see them made. The most they can expect to receive is a copy of the finished product and a token of appreciation. The more than 2,000 backers who gave less than $275 to the Oculus project received only items like T-shirts and posters, along with the hope of one day being able to buy the VR headset in stores.
Some backers were outraged at the sale. If those who received a headset had instead received a share of the company, a $300 investment would result in a $20,000 payout (after accounting for subsequent venture capital funding.)
Last year Leen Sadder of Beruit, Lebanon had an idea to create an organic and biodegradable alternative to Western-style teeth cleansing. Called Miswak, this twig of the Salvadora persica tree has been used for teeth cleaning throughout the Middle East and Asia for millennia. Leen recognized the sustainability of eliminating both the toothbrush and paste and its application for the developing world. She created a crowdfunding campaign on Lebanon-based crowdfunding platform Zoomaal and within weeks raised over $18,000 from 301 backers — 104 percent of her target — along with 4,400 likes on Facebook and 573 tweets. This bought her money, market validation, and media attention. She is now in production. This idea that would never have seen “likes” or funding from banks or venture capitalists. Enter the alternative world of startup and small business financing, called crowdfunding.
Crowdfunding is a simple but transformative concept. An entrepreneur proposes a business, charitable, or creative project on a crowdfunding website. If convinced, tens, hundreds or even thousands of individuals commit relatively small amounts of capital to support the idea. Taken together, these contributions may be significant enough to turn the idea into a commercial reality. This industry is still in its infancy, but it topped $3 billion in transactions in 2012 and may top $5 billion by the end of this year.
Informal businesses in rural areas are a key part of the economy in many countries, like India. (Photo: Wikimedia Commons)
The informal sector — the unlicensed, unregistered small businesses that make up the bulk of economic life in many countries — is not all bad.
A recent article in the Economist analyzed the issue of informality in the Indian economy and drew out a range of excellent points regarding the size of the country’s informal economy and the energy and dynamism that undocumented economic activity has brought to rural India, as well as the difficulties that informality can bring. These include costs to the entrepreneurs themselves, in terms of accessing credit and problems achieving scale, among others, as well as costs to the overall economy in terms of lost tax revenue and the circulation of money outside of the financial system. Indeed, there has been no shortage of research on the challenges posed by informality around the world.
What this article gets wrong however, is its conclusion, regarding what India can do to promote the formalization of the informal sector. The author writes “The best way to speed up the process is to extend the reach of the financial system. In return for coming into the formal economy and paying taxes, firms would get access to capital.” This analysis misses an important point about informality.
Divisional Coalition meeting at Rajshahi including women entrepreneurs, officers the from the Department of Women’s Affairs, representatives from local NGOs, and bank officials. (Photo: BWCCI)
What happens when carefully crafted laws are not properly or fully enforced?
Back in 2009, CIPE partner the Bangladesh Women Chamber of Commerce and Industry (BWCCI) advocated for a number of local and national level policy reforms by endorsing the first ever Women’s National Business Agenda (WNBA).
The WNBA suggested policy changes concerning social and financial barriers faced by women entrepreneurs. This effort led the Central Bank to start issuing collateral-free loans for women entrepreneurs. The policy was initially a success and helped provide nearly $23 million in loans to 3,000 women.
However, due to the lack of continued monitoring, over time many banks began changing their lending fees or stopped complying with the law all together. This phenomenon is what CIPE calls an implementation gap – when laws on books are not practiced in real life. Since April 2013, with CIPE support, BWCCI has been trying to close this gap for women entrepreneurs in Bangladesh.