EGYPT'S INFORMAL ECONOMY: AN ONGOING CAUSE OF UNREST.

• Author: Soliman, Mohammed

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 economic 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...