Egypt's Informal Economy: An Ongoing Cause of Unrest

Introduction

Because Egypt is not an oil-rich country like the Gulf Arab states, Libya or Algeria, it has maintained a hybrid economic model that relies on expatriate remittances from the Gulf and a dominant informal economy. In today’s Egypt, the informal economy constitutes up to 50 percent of the country’s GDP,¹ provides 68 percent of new jobs,² and increases in size relative to the formal economy by 1 percent every year.³ Throughout the last 50 years the informal economy has boomed because it has provided low-income families with cheaper, more affordable products and services and creates work for those displaced from the formal sector or from other countries experiencing shocks and unrest. Similarly, remittances have played an outsized role in Egypt’s economy; between 1977 and 2018, remittances averaged 7.4 percent of GDP. The more than $26 billion of remittances became the country’s primary source of foreign income, constituting 10 percent of GDP in 2017, 2018, and 2019—making Egypt the highest recipient of remittances in Africa.

Historically, the informal economy has run parallel to the formal one, maintaining a highly integrated marketplace that allows off-the-books daily labor for businesses. For decades, Egypt’s economic reforms have bestowed privileges on political elites, disregarding the lower-income levels of society and pushing them into the informal economy. In the past several decades, the informal economy has grown from a negligible size to almost half of the population.⁴

This paper argues that the informal economy has been a principal driver of socioeconomic unrest and will continue to destabilize the country. Additionally, a reduction in yearly remittances to Egypt, due to geoeconomic changes in the Gulf Arab states, will increase the likelihood of social unrest.

1977: The Bread Riots

Following the 1967 war and loss of the Sinai Peninsula to Israel, the Egyptian government directed most of its limited resources and aid from the Gulf Arab states towards rebuilding its military. Consequently, the war effort’s burden fell on the Egyptian citizens, whose salaries did not increase in line with soaring inflation. This decision allowed the governments to continue providing jobs and subsidizing goods and services as in the period prior to 1967. Because of the war, the poverty rates in Egypt reached 44 percent.⁵ To help Egypt stabilize its finances and restructure its 1973 war-induced debt, President Anwar Sadat negotiated a deal with the World Bank and the International Monetary Fund (IMF) in 1976. This deal mandated that Egypt eliminate food and oil subsidies in exchange for loans. In January 1977, Sadat announced the cancellation of subsidies on flour, rice, sugar, cooking oil, bread, cigarettes, and gasoline, as well as the cancellation of bonuses and pay raises for state employees.⁶ Once the measures came into effect, prices rapidly increased.⁷ This, in turn, sparked mass protests across major cities such as Cairo, Giza, Mansoura, and Aswan, where hundreds of thousands of Egyptians took to the streets and clashed with the security forces.⁸ The protesters were mostly lower-class, unskilled, underpaid workers at state-owned factories and entities, or daily wage laborers. The protesters were primarily concentrated among cities’ fringes, which were notable for their lack of government services and limited levels of public security. The protesters targeted properties and symbols of upper class and government entities because of their deep feeling of being abandoned and marginalized by the government policies.⁹

The 1977 Bread Riots deterred consecutive governments from adopting a similar reform path for Egypt’s unstable economy. Likewise, the job creation from the growth of the informal economy over the ensuing decades ensured that the Bread Riots did not lead to sustained unrest. However, this constraint on economic reform laid the foundation for the informal economy’s domination in Egypt for the next four decades.

1977 Aftermath: Remittances Feed The Informal Economy

The governments of Gamal Abdel Nasser and Anwar Sadat pursued expansionary fiscal policies that led to the growth of Egypt’s middle class and the unprecedented urbanization and industrialization of the 1950s, 1960s, and 1970s. While there is no specific year that marks the beginning of the informal economy as a phenomenon, the rise of the informal economy correlated with the political and economic changes following   the 1973 war. Empowered by the legitimacy he gained in the 1973 war, President Sadat began denouncing the Nasserist centrally planned eco- nomic model that had relied on the state as the primary employer, over its failure to improve the lives of millions of Egyptians. Sadat later introduced the open-door policy (infitah) as an economically liberalizing reform.¹⁰ The open-door policy effectively terminated the state-sponsored social mobility that defined Nasser’s years. As a result, the informal economy replaced the government as the country’s main employer and provided millions of jobs over 40 years for the country’s growing population. The rise in the informal economy coincided with the oil boom in the Gulf. By 2016, Egypt received $16.6 billion of remittances from the diaspora, accounting for 5 percent of the country’s GDP.^11,12

In the late 1970s and 1980s, the open-door policy and the remittances provided by Egyptian expatriates in the Arabian Gulf states allowed for the capital in the informal economy to provide jobs in the construction, service, and transportation industries. These informal sector jobs were characterized by low productivity, a lack of social safety nets, and a low possibility of social mobility. Between 1980 and 2012, the informal economy grew consistently by 1 percent every year.¹³ As a result of this growth, the government felt it did not need to provide as many jobs in the formal economy. Gradually, the informal economy grew beyond providing individual jobs in the construction and service industries to creating businesses and production facilities that spanned commerce, agriculture, furniture, metal, and food processing. These businesses operated entirely outside state laws and government control. Over time, the sizable informal economy created its own alternative regulations and enforcement mechanisms through families and local religious leaders.¹⁴

In the 1980s, the dynamics of informality and remittance flows from the Gulf Arab states played a significant role in stabilizing Egypt despite a youth population boom by providing jobs, goods, and services. The Egyptian government had not been able to offer these basic requirements to its citizens due to its lack of financial capabilities.¹⁵ In the years since, the informal economy has continued to act in this role, relieving societal pressure on the government.

2011: Informal Economic Networks And Mubarak’s Fate

In 2011, amid the Arab Spring, Egypt  experienced  its  first  significant social unrest since the Bread Riots. President Hosni Mubarak faced unprecedented and consistent demonstrations—a revolution, unique in Egypt’s recent history. The Mubarak administration could not resist for more than 18 days and fell as soon as the security forces withdrew their support. Mubarak’s quick downfall resulted from social network effects of the informal economy’s dominance of Egypt in the preceding decades. The government had not been a primary job creator since the open-door policy, so it lacked the network required to effectively compete with the influential religious and civil society communities that mobilized against Mubarak. The latter rose to power as a result of informal economic networks.

Egypt’s economy approached a breaking point in the mid-2000s when the informal economy contributed more than 40 percent of the country’s GDP, created most private sector enterprises, and provided the majority of jobs.¹⁶ Egypt’s decisions over the preceding decades to allow the informal economy to flourish succeeded in keeping the country afloat. However, the size of the informal sector by the mid-2000s highlighted that the government was losing its socio-economic and political levers of power over society that it had cemented after the end of the monarchy in 1953. The increasing size of the informal economy meant that millions of Egyptians were without government-sponsored social safety nets. Unregistered businesses do not pay taxes, so their employees have not been entitled to social services—they have had no prospect of social mobility, leaving millions of Egyptians vulnerable to the shocks of potential liberalizing reforms.

In the mid-2000s, Gamal Mubarak, then President Hosni Mubarak’s youngest son and potential presidential successor, became the critical decision-maker in economic affairs and empowered a group of market- oriented technocrats and cronies to implement major economic reforms. Gamal Mubarak’s group privatized major government-owned companies and laid off thousands of low-skilled workers; devalued the Egyptian currency; removed food and oil subsidies; and imposed more taxes.¹⁷ The liberal reforms led to a significant increase in Egypt’s real GDP growth, which averaged 7 percent between 2005 and 2010.¹⁸ However, this GDP growth did not trickle down to the lower and middle classes—the Gini coefficient centered around 3.8 in 2004 and 3.2 in 2010—and only benefited regime loyalists and cronies.¹⁹ According to the World Bank, poverty in Egypt increased from 16.7 percent in 2000 to 25.2 percent in 2011, and the informal economy reached 50 percent of the country’s overall GDP.²⁰

Because of this unbalanced socioeconomic system, informal Islamic networks and churches gradually replaced the government in providing primary education and health services to citizens, which eventually undermined the political legitimacy of the Mubarak regime, who was constrained by the state’s limited public finances.²¹  The informal economy’s fulfillment   of the state’s role in providing essential services and jobs meant that the state did not have any bargaining power with the majority of the population, and therefore no control in a political crisis. When elections were held for Mubarak’s successor, Muslim Brotherhood candidate Mohamed Morsi emerged the victor. While his legitimacy was initially broad-based, his party had been strengthened by their operations within the informal economy.²²

2019’s Short-Lived Revolt

In September 2019, the Spain-based construction contractor and regime defector, Mohamed Ali, posted viral videos accusing the Egyptian government, under former army chief Abdel Fattah el-Sisi, of corruption and over- spending Egypt’s limited finances on opulent palaces and hotels.²³ Similar to the Bread Riots in 1977, Ali’s claims resonated with lower-class Egyptians from the major cities’ fringes, who once again felt marginalized for the benefit of the elites. The protesters took to the streets in their neighborhoods, where the government did not have strict control, and clashed with security forces. The government responded with a harsher-than-usual security approach to quell the protests, using state-backed digital and traditional media to discredit Ali’s allegations by alleging ties to anti-Egypt regional foes Turkey and Qatar. Unlike prior protests, this occurred under a military- controlled regime that emerged in 2013 following a coup against Morsi. Clearly, the militarization of Egypt did not make the government immune to public anger, especially from the marginalized segment of population that suffered from that government’s economic reform programs.

Sisi’s Egypt has been no different from that of Sadat and Mubarak. Following Mubarak’s departure, both the Egyptian people and the Egyptian government benefited from the Gulf ’s financial largesse. Remittances increased to help families inside the country cope with the economic deterioration caused by enduring political and social unrest. Additionally, Saudi Arabia, the United Arab Emirates, and Kuwait provided Egypt with the finances needed to weather the storm of political transition after 2013 because of their support of Sisi’s anti-Muslim Brotherhood doctrine.²⁴. The Gulf’s financial aid—estimated to be more than $40 billion—helped Sisi invest in mega-infrastructure projects such as Egypt’s New Administrative Capital, a 3,000-kilometer-long road network, and the New Suez Canal. These mega-infrastructure projects helped provide hundreds of thousands of low-skilled jobs and helped stabilize the ailing informal economy that suffered from the Tahrir Revolution. However, because of the oil crash in 2014, the Gulf countries could not continue to provide Cairo with capital to support the Egyptian economy.²⁵ In 2015, Cairo faced a double whammy: the continuing crash of oil prices that limited the Gulf ’s finances and the downing of a Russian airliner over Sinai by ISIS, the latter of which severely impeded the recovery of the tourism industry, second to remittances as a source of foreign currency to Egypt.²⁶

The geoeconomic realities forced Sisi to make the same  decision  as  Sadat in 1977: he had to seek help from the IMF to stabilize the country’s finances on the condition of economic reform. In 2016, the IMF approved  a $12 billion loan to Egypt to boost growth and create jobs while protecting vulnerable groups.²⁷ The IMF deal mandated that Cairo remove currency controls, gradually remove food and energy subsidies, increase tax revenues, and put an end to the already-limited state hiring. Cairo successfully reduced its budget-deficit-to-GDP ratio, current account deficit, and inflation rate.²⁸ However, as was expected, the rebalancing of Egypt’s public finances came  at the expense of millions of Egyptians who fell below the poverty line. In 2019, the Egyptian government announced that poverty increased from 27.8 percent in 2015 to 32.5 percent.²⁹ The economic reform associated with the IMF increased reliance on informal economic networks to provide more than one third of the population with the food and health services they require.

After being caught by surprise by the September 2019 protests, the Sisi government increased oil subsidies for the first time in decades, started to expand its existing social safety programs to needy families, and delayed the removal of subsidies.³⁰ Supported by a rebound in tourism, an uptick in remittances, and the IMF deal, Cairo created a financial cushion big enough to help the government offer concessions to the angry public. In this case, the protest movement had not progressed to the extent that it had in 2011, allowing Sisi to implement an economic solution to the political crisis.

COVID-19, Continuing Unrest, And The Way Forward

In 2020, Egypt, along with the rest of the world, faces a series of unprecedented shocks: the COVID-19 pandemic, the sharp decline in remittances due to an equally sharp drop in oil prices, and the economic fallout associated with both. These unprecedented circumstances will profoundly impact the vulnerability of the informal economy and its linked population. The COVID-19 economic fallout threatens Egypt’s current mirage stability and might cause another series of protests against the current economic dwindling. In September 2020, another series of protests connected to those of September 2019 erupted in the fringes of Aswan, Cairo, Giza, and Luxor because of the deteriorating socioeconomic situation and the government crackdown on informal housing³¹ The 2019 and 2020  protests  highlight  the threat to government stability arising from the continuing protests that Egypt is likely to face due to the increasing pressure on the informal economy. COVID-19 is sinking the tourism, service, and aviation industries. Egypt has been a sought-after global  tourism  destination  and was projected  to reach a record year in 2020, building on the strong recovery of the previous two years. In 2019, Egypt recorded 14 million tourists, returning almost to the levels of 2010, and the total revenue from tourism reached an estimated $14 billion. The economic fallout from COVID-19 is also captured by a loss of 4 million jobs that work directly or indirectly in the industry. This explains the government’s rush to deploy fiscal stimulus to support the tourism industry. Nevertheless, tourism will take years to bounce back because of a global reluctance toward travel in general.

Egypt’s remittances will face a long-term hit, as well. In 2019, remittances totaled $26.8 billion, which represented 11 percent of Egypt’s GDP.³² However, the majority of Egyptians working overseas are in the Gulf states, which have focused their recovery plans on the worst-hit sectors and businesses and have prioritized helping Gulf citizens. This will undoubtedly lead to a wave of layoffs affecting a large number of Egyptian expatriates who number 5 million. Egypt stands to lose a large proportion of its remittances coming from the Gulf.

Despite Sisi’s potential efforts to promote growth in the formal sector, the informal economy will be the only venue for the millions who have lost their jobs inside Egypt or in the Gulf because of the informal economy’s size and responsiveness.³³

The state is unable to support daily workers and businesses who lack insurance in the oversized informal economy. It has no way to provide immediate financial support to cope with the COVID-19 fallout. Without governmental support, the informal economy will not be able to absorb the COVID-19 shock, given that it already employs 63 percent of the nation’s labor stock and represents half of the country’s GDP.³⁴ The Egyptian government under- estimated the vulnerability of the informal economy, and moved on with its nationwide campaign to demolish informal buildings that houses lower-class Egyptians at the fringes of the major cities such as Cairo, Giza, Alexandria, and Aswan.³⁵ The campaign has sparked widespread anger across the country, leading to a number of violent confrontations between police and residents.

Indeed, the informal economy’s vulnerable status and the anger at the state’s campaign against informal building created the same conditions for protests present in 2019. The 2020 protests represent the new normal for Egypt, where the pressure on the informal economy will catalyze the population to demonstrate more frequently and in more geographic areas around the country. Despite the militarization and securitization of Egypt’s politics, Egypt witnessed continued social unrest and revolts similar to 1977, 2011, 2019, and 2020. This trend may likely continue in the near future as the lower class, unskilled and low-skilled workers of the informal economy will be at the forefront of future Egyptian protest movements.

Notes

1. “Informal Economy Exceeds 50% Of Egyptian Economy,” Egypt Today, 16 April 2019, https://www. egypttoday.com/Article/3/68388/Informal-economy-exceeds-50-of-Egyptian-economy.
2. Hany M. Elshamy, “Formalizing the Informal Economy: A Required State Regulatory and Institutional Approach Egypt as a Case Study,” International Journal of Business Management and Economic Research (IJBMER) 6, no. 2 (2015), 137–42.
3. Elshamy, “Formalizing the Informal Economy.”
4. Jacob Kolster, “Addressing Informality in Egypt” (working paper, African Development Bank Group, North Africa Policy Series, March 2016).
5. Yassin Taha, “18 & 19 January 1977: Lessons from the Uprising,” Revolutionary Socialist, February 1977, https://revsoc.me/revolutionary-experiences/18-w19-ynyr-1977-drws-lntfd/.
6. Relli Shechter, The Rise of the Egyptian Middle Class: Socio-Economic Mobility and Public Disconnect from Nasser to Sadat (Cambridge: Cambridge University Press, 2018), https://doi. org/10.1017/9781108672627.
7. Ibid.
8. Ibid.
9. Taha, “18 & 19 January 1977: Lessons from the Uprising.”
10. Ibid.
11. Mohamed Samar Abdalla Zahran, “The Response of Remittances Inflows to Asymmetric Oil Price Shocks in Egypt,” Review of Economics and Political Science, (forthcoming).
12. Marwan Muasher, “The Next Arab Uprising,” Foreign Affairs, 28 January 2019, https://www. foreignaffairs.com articles/middle-east/2018-10-15/next-arab-uprising.
13. Elshamy, “Formalizing the Informal Economy.”
14. Amro Adly, “Informal Economy in Egypt: Realities of Marginalization and Illusions of Empowerment,” Assafir Arabi, 4 May 2020, http://assafirarabi.com/en/26784/2019/08/21/informal- economy-in-egypt-realities-of-marginalization-and-illusions-of-empowerment/.
15. Zahran, “The Response of Remittances Inflows to Asymmetric Oil Price Shocks in Egypt.”
16. Adly, “Informal Economy in Egypt.”
17. K.V. Nagarajan, “Egypt’s Political Economy and the Downfall of the Mubarak Regime,” International Journal of Humanities and Social Science, no. 19 (May 2013), 22-39.
18. Ibid.
19. Ibid.
20. Yasmin El-Rifae, “Egypt’s Informal Economy,” Middle East Institute, 6 January 2015, https://www. mei.edu/publications/egypts-informal-economy.
21. W.J. Dorman, “Informal Cairo: Between Islamist Insurgency and the Neglectful State?” Security Dialogue 40, no. 4-5 (30 September 2009): 419-41, https://doi.org/10.1177/0967010609343940.
22. Marie Vannetzel, “The Muslim Brotherhood’s ‘Virtuous Society’ and State Developmentalism in Egypt: The Politics of ‘Goodness,’” International Development Policy, no. 8 (2017): 220-245, https://doi. org/10.4000/poldev.2327.
23. Vivian Yee, “Egypt Protests Came as a Total Shock. The Man Behind Them Is Just as Surprising,” New York Times, 22 September 2019, https://www.nytimes.com/2019/09/22/world/middleeast/egypts- protests-sisi-mohamed-ali.html.
24. David Kirkpatrick, “3 Persian Gulf Nations Pledge $12 Billion in Aid for Egypt,” New York Times, 13 March 2015, https://www.nytimes.com/2015/03/14/world/middleeast/3-persian-gulf-nations-pledge-12- billion-in-aid-for-egypt.html.
25. Marc Stocker, John Baffes, and Dana Vorisek, “What Triggered the Oil Price Plunge of 2014-2016 and Why It Failed to Deliver an Economic Impetus in Eight Charts,” Let’s Talk Development, World Bank, 18 January 2018, https://blogs.worldbank.org/developmenttalk/what-triggered-oil-price-plunge- 2014-2016-and-why-it-failed-deliver-economic-impetus-eight-charts.
26. David D. Kirkpatrick, “ISIS Ally in Egypt Emerges as Key Suspect in Russian Jet Crash,” New York Times, 9 November 2015, https://www.nytimes.com/2015/11/10/world/middleeast/suspects-in-russian- jet-crash-risk-exposing-their-isis-allies-to-a-backlash.html.
27. “IMF Executive Board Approves US$12 Billion Extended Arrangement Under the Extended Fund Facility for Egypt,” IMF, 11 November 2016, https://www.imf.org/en/News/Articles/2016/11/11/ PR16501-Egypt-Executive-Board-Approves-12-billion-Extended-Arrangement.
28. 28Ahmed Shams El Din, “Egypt’s Economy Isn’t Tanking. It’s Thriving,” Foreign Policy, 26 June 2019, https://foreignpolicy.com/2019/06/26/egypts-economy-isnt-tanking-its-thriving-sisi-muslim- brotherhood-imf/.
29. “32.5 Percent of Egyptians Live below Poverty Line: CAPMAS - Economy - Business,” Ahram Online, 30 July 2019, http://english.ahram.org.eg/NewsContent/3/12/341838/Business/Economy/-percent-of- Egyptians-live-below-poverty-line-CAPM.aspx.
30. Egypt Decreases Fuel Prices for the First Time in Decades,” Associated Press, 3 October 2019, https://apnews.com/57858b43ee2247c7b6dbb40668240bcc.
31. “New Anti-Sisi Protests Break out in Egypt as Security Forces ‘Detain Hundreds’,” New Arab, 22 September 2020, https://english.alaraby.co.uk/english/news/2020/9/22/new-protests-in-egypt-as- security-forces-detain-hundreds.
32. “Personal Remittances, Received (% of GDP) - Egypt, Arab Rep,” World Bank, https://data. worldbank.org/indicator/BX.TRF.PWKR.DT.GD.ZS?locations=EG
33. Mohammed Soliman, “COVID-19, the Oil Price War, and the Remaking of the Middle East,” Middle East Institute, 8 April 2020, https://www.mei.edu/publications/covid-19-oil-price-war-and- remaking-middle-east.
34. Mirette Mabrouk, “Egypt’s Sizeable Informal Economy Complicates Its Pandemic Response,” Middle East Institute, 22 June 2020, https://www.mei.edu/blog/egypts-sizeable-informal-economy- complicates-its-pandemic-response.
35. Mada Masr, “Government Campaign to Demolish Informal Buildings Sparks Anger,” Mada, 10 September 2020, https://www.madamasr.com/en/2020/09/10/news/politics/government-campaign-to- demolish-informal-buildings-sparks-anger/.

This Argument appears in Politics of Protest, the Spring/Summer 2020 issue of the Journal of International Affairs. Subscribe or purchase to read the article in print or via JSTOR.

Photo Credit: mona, licensed under the Creative Commons Attribution 2.0 Generic license.