Keep It Black

A brawl rolled through the middle of the marketplace at Cairo’s Turgoman bus station. Bored vendors sprinted away from their sales racks to join in, and angry shouting echoed around the small car park. Three uniformed policemen walked over and, after some final ego-preserving shoving, it was over in moments.

“It’s just guys arguing over spots,” said 22-year-old clothes trader Nasr Eissa. “It happens all the time over the unallocated spaces. Just like on the street, really.”

Eissa and the brawlers are just a few of the hundreds of unregistered vendors who, on Aug. 24, were unwillingly ejected from downtown Cairo by the police. Although the vendors knew it was coming — the local government has been telling them they’d be evicted since July — Eissa said some sellers thought they’d at least receive temporary lodging in the station’s empty shopping mall. Instead, the vendors are stranded outside in a small parking lot, stuck in the searing summer heat between a concrete wall and a three-meter fence, with few customers.

Eissa and his competitors are archetypical of Egypt’s black market economy: opportunistic entrepreneurs who’ll sell you a flag during a national celebration and be back to hocking Batman t-shirts the next day. They’re regular targets of police and bureaucratic shakedowns for bribes, and represent a small fraction of an underground economy. It includes non-taxpaying companies, allegedly up to $360 billion of unregistered real estate assets, and provides up to 40 percent of the country’s GDP, according to research from the Peruvian think tank Institute of Liberty and Democracy (ILD).

These entrepreneurs are also the targets of a brand new government initiative seeking to formalize the informal economy. It’s an idea that’s been tried before in Egypt, but this time, the directives are coming from the very top.

Sherif el-Diwany is head of the Egyptian Center for Economic Studies (ECES), an entity that has been pushing the government to focus on the informal economy for the past year. He says President Adbel Fattah el-Sisi is leading an initiative that will encourage Eissa and his fellow street traders to become licensed businessmen.

The initiative, he explains, will start by creating a presidential-level body to oversee reforms, including anti-corruption measures and streamlining bureaucracy around business registration. He says these reforms will empower Egyptians, restore their faith that law and public institutions can work in their favor, and ultimately create a strong democratic system. And Egypt’s economy could use the help. Unemployment currently rings in at 13.3 percent and youth unemployment at 29 percent, according to statistics body CAPMAS.

“To be able to deal with [the informal economy] you need a new institution, a completely new institution with a very, very clear vision and understanding of what this sector is about,” said Diwany. “It’s the president who’s now spearheading [it]…. This country will not become a democracy unless this problem is solved, because people feel dependent on brokers of power to protect them against a state that is actually not serving them.”

The institution will take its lead from the ECES and Peruvian economist Hernando de Soto, whose work on formalizing black economies has led a number of world leaders to his door. This includes the now-disgraced former Peruvian president Alberto Fujimori with whom de Soto transformed the country’s system of land registration during the 1990s, former Ghanaian President John Kufuor who kicked off a de Soto program in 2002, and even Egypt’s Hosni Mubarak and Mohamed Morsi, who both had talks with de Soto’s think tank, ILD.

Sisi is the latest to seek his help. He met with de Soto three times between May and July to talk over a plan to integrate the parallel economy. De Soto will be back in Cairo in October to discuss the project’s implementation and timetable with the government and private sector groups, according to his Egypt media representative. A source close to the president said the government would probably wait for the yet-to-be announced parliamentary election before embarking on any major legal reform.

De Soto’s theories revolve around property rights. Making it simple for vendors like Eissa to register his business, or a farmer to own the land he works, unlocks the “dead capital” in those assets, which can then be used as collateral for a loan to invest and grow. But forcibly removing street vendors from downtown Cairo goes completely against this theory. The sellers are still illegal operators with no realistic way of joining the formal economy.

In an email to Foreign Policy, de Soto said he’d identified 13 problem areas that have pushed people into Egypt’s informal economy — such as the fact that it takes 189 days, 86 steps, and $1,169 to register a single-person business, and that the businessperson must provide 57 documents to six different agencies all with the same information.

De Soto estimates that 8.2 million Egyptians are employed informally outside the agricultural sector, with 68 percent of those working in illegal businesses and 22 percent in formal businesses. In January, then-finance minister Ahmed Galal said the sector employed 40 percent of the country’s labor force.

The sheer size of the informal sector — a genuine parallel economy — creates a structural risk. Diwany says the usual tools for managing an economy are unusable when a sizable chunk of the country’s assets and production are hidden in the black market. For example, last year Youm7 newspaper discovered that unregulated “backdoor” cheese factories were adding formaldehyde to their products to extend shelf lives.

Diwany says Sisi must show he’s serious about reform by staying away from anything that hints at tax collection, immediately giving all street traders formal status, and stopping police and bureaucrats from extracting bribes — difficult, but he says it’ll be worth it. In theory, integrating the parallel economy should lift the state’s tax revenue and the country’s asset base; reduce poverty by giving small informal businesses the legal protection to grow and merge; allow workers to access social security; and do all of this while delivering on the “bread, freedom, and social justice” demands of the 2011 revolution.

But not everyone agrees that the existence of the informal economy is bad for Egypt, nor that Sisi’s government can heal decades of distrust in state institutions.

Angus Blair, founder of the think tank Signet Institute, points out that the sheer size of the informal sector is what got Egypt through the tough economic times of the last three years. He says it provides a huge amount of liquidity, and that Egypt’s real GDP might not be growing at the 2.3 percent it is now (as projected by the International Monetary Fund) if all that extra, unaccounted-for cash wasn’t floating around.

Even heavy-hitting businessmen think the informal economy should be left to its own devices. Ahmed Alfi, founder of venture capital fund Sawari Ventures and new downtown tech hub, the GrEEK Campus, told me earlier this year that the informal sector distributed risk across Egypt’s economy. Pointing to the booth of a small trader, Alfi said: “He changes what he’s doing three times over three years. One day he’s selling mobile phones, the next day it’s groceries, the day after that he’s selling flowers.”

“The flexibility of a distributed, unregulated economy is what has kept Egypt alive,” he explained. “That’s formal and informal, SME [small and medium enterprises] and informal, unregistered businesses. I’m a big believer in the whole distributed economy.”

There is also a question of whether Sisi has the political capital behind him to overcome the erosion of trust in government and the law. The Turgoman marketplace is a prime example of how much faith Sisi and his reformers must win back in order to convince vendors like Eissa to join the formal economy. In July, the Cairo governorate announced that all downtown street vendors would have to move to the Turgoman bus station, before moving again to a permanent $55.9 million mall at Abdel Moneim Riyad Square, which is expected to be ready for the vendors in six to eight months. But Eissa doesn’t believe promises that the new location will be ready in time, and he’s extremely skeptical about the government’s ability to fulfill its half of the deal.

“I don’t trust Sisi, I don’t trust Morsi, I don’t trust the government. They keep lying to serve their own goals, not our goals,” Eissa said.

Diwany believes if Sisi is to win back political capital lost on unpopular subsidy reforms, he will have to count on the government to achieve well-publicized, early success — and this might be his chance. “The biggest problem is achieving certainty and credibility of the new program,” Diwany explained.

But if Sisi, with his almost heroic status among Egyptians, commits to reform and fails, the price will be high, deepening Egyptians’ distrust of their public institutions and scuppering any faith in future political promises.

MAHMOUD KHALED/AFP/Getty Images