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Assessing the Impact of Trade Reforms on Informality in Egypt

Listed author(s):
  • Irène Selwaness

    ()

  • Chahir Zaki

    ()

    (Faculty of Economics and Political Science, Cairo University)

This paper proposes an empirical investigation of the effect of trade liberalization on informality in Egypt. The literature does not indicate a clear relationship between informality and trade liberalization. While some studies find that it is more profitable to enter the formal sector rather to remain informal when trade openness increases, others argue that trade liberalization may lead to an increase in informality. This effect of trade liberalization on the informal sector has been widely discussed at both empirical and public policy levels but was never tested empirically in Egypt. Thus, combining a microeconomic dataset (the Egyptian Labor Market Panel Survey) with some macroeconomic variables (tariffs), we try to assess to what extent trade reforms affected the informal sector in Egypt. Our main findings show that trade liberalization has indeed decreased informality in Egypt. In fact, trade liberalization (i.e. lower trade costs) implies that some firms will find it more profitable to enter the formal sector rather to remain informal. The least productive informal firms will be forced to exit the industry and only the most productive (formal) firms will export to international markets. Moreover, the degree of labor market flexibility associated to the labor reform of 2003 is likely to be one of the reasons behind this change.

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Paper provided by Economic Research Forum in its series Working Papers with number 759.

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Length: 28
Date of creation: Jun 2013
Date of revision: Jun 2013
Publication status: Published by The Economic Research Forum (ERF)
Handle: RePEc:erg:wpaper:759
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  1. Fatma El-Hamidi, 2008. "Trade Liberalization, Gender Segmentation, and Wage Discrimination: Evidence from Egypt," Working Papers 414, Economic Research Forum, revised 06 Jan 2008.
  2. Koujianou Goldberg, Pinelopi & Pavcnik, Nina, 2003. "The response of the informal sector to trade liberalization," Journal of Development Economics, Elsevier, vol. 72(2), pages 463-496, December.
  3. Benedikt Heid & Mario Larch & Alejandro Riaño, 2011. "Maquiladoras and Informality: A Mixed Blessing," CESifo Working Paper Series 3689, CESifo Group Munich.
  4. Norbert Fiess & Marco Fugazza, 2008. "Trade Liberalisation and Informality: New stylized facts," Working Papers 2008_34, Business School - Economics, University of Glasgow.
  5. G. S. Maddala, 1987. "Limited Dependent Variable Models Using Panel Data," Journal of Human Resources, University of Wisconsin Press, vol. 22(3), pages 307-338.
  6. Bosch, Mariano & Goñi-Pacchioni, Edwin & Maloney, William, 2012. "Trade liberalization, labor reforms and formal–informal employment dynamics," Labour Economics, Elsevier, vol. 19(5), pages 653-667.
  7. Paz, Lourenco, 2012. "The effect of trade liberalization on payroll tax evasion and labor informality," MPRA Paper 39545, University Library of Munich, Germany.
  8. Currie, Janet & Harrison, Ann E, 1997. "Sharing the Costs: The Impact of Trade Reform on Capital and Labor in Morocco," Journal of Labor Economics, University of Chicago Press, vol. 15(3), pages 44-71, July.
  9. Chahir Zaki, 2014. "On Trade Policies and Wage Disparity: Evidence from Egyptian Microeconomic Data," International Economic Journal, Taylor & Francis Journals, vol. 28(1), pages 37-69, March.
  10. Moulton, Brent R, 1990. "An Illustration of a Pitfall in Estimating the Effects of Aggregate Variables on Micro Unit," The Review of Economics and Statistics, MIT Press, vol. 72(2), pages 334-338, May.
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