Recent sector trends are unfavourable
A priori, recent structural changes in the economy do not favour a significant rebound in activity based on productive investment and job creations. The public sector accounts for about 40% of the official economy and a quarter of formal employment. For historical reasons, the public sector plays a very key role in the economy, and recent reforms have not changed this substantially. The public sector, in the broad sense of the term, remains active in numerous sectors, largely exceeding the perimeter of government functions. Access to land also remains tightly controlled. Although the public sector has been a key growth engine driving the economic recovery since 2015, the need to pursue fiscal consolidation reduces its manoeuvring room in the medium term.
The private sector is very heterogeneous. The vast majority of Egyptian companies are small businesses and micro enterprises (97% of the total according to EBRD). They account for 68% of total employment, which is much higher than for the other countries in the region (40% in Jordan and 34% in Turkey). Moreover, large-scale manufacturing companies in the consumer and capital goods sectors are focused mainly toward the domestic market. This over-representation of small and very small companies tends to curb investment. They are mainly active in the retail sector, which is not very capital intensive and does not require a high skills level.
A large informal sector
The informal sector accounts for between 40% and 50% of the economy. Traditionally, this sector is concentrated in agriculture, retail trade, craft industry and other small industry. Informal businesses require relatively little capital and training. Given the informal sector’s economic vulnerability and the heavy dependence of family income on economic activity, producers tend to prefer short returns on investment and to limit high, irreversible fixed capital expenditures.
The deterioration in the broad economic situation of households almost automatically fuels growth by necessity in the informal sector. In a study by the American University of Cairo[11] on the motivation of Egyptian entrepreneurs in the formal and informal sectors, the later are especially driven by the necessity to generate income rather than by the pursuit of economic opportunities. Based on the analysis of a selection of 54 countries, Egypt has the highest proportion of entrepreneurs driven by economic need rather than seeking opportunities. Moreover, this proportion has increased significantly recently. This is due both to fewer job opportunities in the formal sectors (sharp slowdown in public sector hiring and a wait-and-see attitude in the private sector), and to the decline in economic opportunities for entrepreneurs. Ismail et al (2019) points out that entrepreneurs driven by necessity tend to develop business in the informal sector with low physical and human capital intensity, and very limited prospects for job creations.
All in all, the recent period of economic uncertainty and reforms eroding disposable household income have favoured the development of economic activities focused towards subsistence, to the detriment of economic opportunities, a source of productive capital accumulation.
A thriving platform economy
Alongside the traditional private/public and formal/informal dichotomies, the platform economy sector has rapidly developed in Egypt over the past few years. The platform economy is based on the formation of networks of individual “entrepreneurs” in a given economic sector, often in the services sector. The urban transport sector has been transformed by a vast, diversified development of the platform economy, ranging from motorized tricycles to bus services. Its development is having a significant impact on employment, although we do not have any precise figures[12] and it is hard to distinguish between net job creations and the substitution of informal jobs for employment in the platform economy sector[13].
The development of a platform economy satisfies two needs: it corrects the shortcomings of Cairo’s transport system and provides young graduates an opportunity to enter the job market. In terms of autonomy and flexibility, it is better alternative to the informal sector[14], but it does not provide the labour status or guarantees associated with formal sector employment. Despite its non-negligible impact on employment, the development of a platform economy does not, a priori, generate much productive investment or productivity gains, since it is mainly focused on service activities requiring relatively little capital or skills.
Egypt has entered a new phase in the economic reform process. It is in the process of consolidating its main macroeconomic imbalances: external liquidity has stabilised at an acceptable level, and a fiscal primary surplus should be recorded at the end of the current fiscal year. Short-term prospects are positively oriented. Though narrowing, the imbalances still exist: the hard-to-curb government debt service entails a high fiscal deficit, and the decline in CPI inflation is slower than expected. Moreover the economy is exposed to exogenous factors such as commodity prices and investors’ appetite for emerging market risk. Beyond that, the question of job-rich economic growth remains open. Alongside certain very dynamic sectors, notably in new technologies[15], a very large part of the economy is still geared towards rent seeking[16]. In recent years, economic policy has been characterised by a blend of old remedies (massive state interventionism) and macroeconomic consolidation. On its own, the later will not suffice to ensure a sustainable, job-rich economic recovery.