Beyond Informality: The Importance of Macro- and Local-Level Environments in the Development of Small Firms in Egypt

In recent years, international development agencies have asserted that the 'informal sector' can play an important role in addressing Egypt's economic crisis. As a result, much theoretical and empirical work has attempted to define informality and the informal sector. This paper questions the utility of informality, which is increasingly defined as the lack of government regulation as the most salient feature of small firms. It asserts instead that macro-level and local-level environments affect them more profoundly. Despite a difficult regulatory environment, small firms in the furniture and shoemaking subsectors underwent dynamic growth in the 1970s and 1980s and then slumped in the 1990s. These changes were the result of broad economic trends in the Egyptian and international economies. In addition, many important constraints and opportunities at the local level can be identified. Understanding these macro and local-level environments, then, is likely to provide more important insights for developing small firms than focusing on their informality.