Business
Mar 18, 2020

Can E-Commerce formalize the informal sector in North Africa?

When we think of urban life in North African cities, certain words spring to mind. One might think “big”, “busy”, “lively” or “sprawling".

When we think of urban life in North African cities, certain words spring to mind. One might think “big”, “busy”, “lively” or “sprawling.” If we were to dig deeper beneath those broad attributes and ask why those adjectives create the image of North African urbanity, one might mention the following: markets, street vendors, parking attendants and other forms of informal work.

The informal economy, or the concept of informality in general, can be met with differing levels of acceptance. On the one hand, it can be viewed as a means of survival for the under-skilled or uneducated in developing states. On the other hand, it may involve more rational choice than we give it credit for; those working informally arguably have more individual autonomy, despite working in a seemingly precarious way.

How this phenomenon intersects in the age of digitization is particularly interesting. We live in an era where access to information and different technologies in developing economies is wider than access to basic resources or welfare.  How does this impact informal enterprises? We investigate this by paying closer attention to E-commerce and informal enterprise in two North African countries: Egypt and Morocco. What we find is that while E-commerce may assist certain informal industries, the vast majority of informal workers risk being further left behind in this digital development wave.

aerial view of big canal between city

The emergence of the concept of informality is often separated into two elements; settling (housing) and economy. Here, we will delve into the subject of informal economies, and more specifically, how informal economies and technology intersect in North Africa. In the age of the “fourth industrial revolution” of technology, this is particularly important.

Informal industries remain at large in North Africa, contributing greatly to their GDPs. Although it is difficult to appropriately measure the exact size of countries’ informal economies, Ilahiane and Sherry (2008) comment that “…it is impossible to hope to do business in emerging economies without understanding some of the dynamics of the informal sector.” (Ilahiane and Sherry: 245).

Despite often painted as being “precarious” or “uncertain”, the informal labour market can, in some cases, provide more job security than formal wage employment.  However, in a world where emerging economies are continuously dependent on global supply-and-demand, the informal sector’s sustainability perhaps allows it to sustain external shocks. As posited by the International Labour Office (ILO), working in the informal sector can pose a series of risks for some individuals. One of the he more obvious risks here is that informal workers operate outside of formal regulation, meaning that their job security is limited.  Additionally, they cannot always guarantee when they will make profit on their enterprise, and how much this will be, unlike a waged or salaried role.

E-commerce, the method of using the internet to acquire or sell goods or services, may have the power to refashion the traditional, physical operations of informal economies. With more people than ever before in possession of mobile phones, information and markets are easier to access. Therefore, more informal enterprises hold the potential to broaden their initially local markets to the wider world.

Source: GSMA | Smartphone connections in MENA

As can be seen from research conducted by the Global System for Mobile Communications (or GSMA), smartphone usage in the North African region as a whole is set to increase by over 20% by 2025. With E-commerce becoming more and more optimized for mobile phone usage, the possibility of selling online becomes easier.

Egypt 🇪🇬

According to the World Bank, 52% of the Egyptian population was working informally as of 2017, a significant rise from 42% in 2015. Besides, the International Monetary Fund (IMF) claims that the informal economy contributes to 34.2% of Egypt’s GDP.

In a report on Egyptian E-commerce initiatives, UNCTAD state that the aims of the Egyptian government’s e-commerce strategy should be to incentivize informal enterprises to formalize, so as not to create competition with formal industries. The chart below shows that domestic online goods consumption is growing, therefore there is definitely an online demand that these enterprises could tap into.

Source: Ministry of Communications and Information Technology, Egypt
assorted baskets on stair

Morocco 🇲🇦

Although in decline, approximately 36% of the Moroccan population work informally. As a crucial element of the Moroccan national economy, the informal industry represents 11.5% of the country’s GDP. (IMF, 2018).  

E-Commerce has boomed significantly in the Moroccan market, with over $2 billion being spent online by Moroccans in 2017 alone. According to WebInterpret, the main goods of interest at air tickets, books, entertainment and travel services.

Obstacles 

Some outlets have noted that potential barriers exist in allowing more informal enterprises to embrace the information age. For example, some banks in MENA countries require minimum deposits to open accounts. As a result, many lower-income groups in certain countries, notably Egypt, do not have bank accounts. Therefore, to access the next phase of informal enterprise development, informal business owners will need to boost their revenue to meet this threshold. As the world moves towards creating an increasingly cashless system, informal enterprises that do not jump aboard the e-commerce train risk falling behind in their opportunity to access different markets. Some commentators are even looking into the future of global e-commerce, noting that the e-commerce bubble might burst.  In its place, “social commerce”, i.e. selling products through social platforms, is likely to take over.

Additionally, the question of job security which is supposedly provided through formal wage employment remains. The regulation of one’s operations relies on a platform, and more so, the customer services being provided to sellers on that platform, should there be any issues.  The line between the rights of platform users and formal labor rights provided by the state becomes ambiguous.

E-commerce markets in the countries we have examined also tend to be dominated by services industries, as opposed to goods. This leads us to consider the consumer side of the discussion - do consumers wish to buy goods online? If governments are wishing to incentivize informal enterprise owners to move their operations online, it requires also encouraging commercial activity from the population. The move from governments to incorporate informal enterprise into E-commerce platforms also assumes business some level of savviness from informal business owners and workers. Without knowledge or assistance in marketing their online stores, business owners could become lost amongst the competition. 

Another discussion is whether current informal sellers would actually wish to utilize these online platforms or not.  Working informally is not necessarily a means of pure survival for some, but instead a rational choice. A key motive for governments to establish greater labor formalization is to generate a wider tax base, ideally for redistributive policy purposes. If taxation infrastructure and institutions of the state are not well-equipped enough to invest in greater tax enforcement, informal workers are not likely to opt-out of their current, physical informal work. Moving informal operations online may allow governments to greater assess the incomes of informal enterprises, but it does not necessarily mean that these enterprises can receive benefits from being formally taxed.

Therefore, to relay back to the initial question posited by this article, it is worth asking: Should E-commerce formalize the informal sector?

Continue reading

Our newsletter

Get great curated articles every week.

Receive unique insights on how to make it big in the content world
No spam!

Build content rapidly with over 35,000 talented writers