Revisiting the Impact of Trade Openness on Informal and Irregular Employment in Egypt

Abstract

This study examines the impact of trade openness on job quality, measured by the share of informal and irregular employment in total employment. By combining a microeconomic dataset (the Egyptian Labor Market Panel Survey) with macroeconomic variables (tariffs), we assess the effect of trade reforms on informal/irregular workers in Egypt. Our main findings show that there is a positive association between tariffs and both informal and irregular employments in Egypt. This effect is likely because the least productive informal firms will be forced to exit the industry and only the most productive (formal) firms will export to the international markets. This will increase the demand for formal (and eventually regular) workers that are usually more skilled and, in turn, lead to a likely decline in informal (and irregular) employment. While this effect on informality is robust, the one on irregularity is not.

The asymmetric effects of 20 years of tariff reforms on Egyptian workers

“…Note however that several caveats can apply. First, despite the fact that our results hold across several specifications (including IV) and although trade liberalizations in Egypt followed the indications of international institutions and were implemented similarly across sectors, which should reduce the possibility of endogeneity (Salem and Zaki 2019), a strict causal interpretation is probably still not warranted at this stage, also due to data limitations. Moreover, our sample covers only part of the economy, i.e.…”

“…Yet, in the case of Egypt there are several elements suggesting that trade policy reforms are likely to be driven by external factors. First, as mentioned in the first part of the paper, the liberalization waves essentially followed the indications of the international institutions as the World Bank and the International Monetary Fund (first) and the WTO (later), or a countrywide attempt to internationalize the economy, thus making tariffs in Egypt “less likely to be endogenous than those in other countries” (Salem and Zaki 2019 ). Second, and consistently with the previous point, tariff trends were very similar across industries as shown by the correlations in Table 1 , and this co-movements of tariffs, in turn, suggests an absence of interference or lobbying from the private sector (see Erten et al 2019 ).…”

“…In summary, given that the first wave of liberalisation followed the indications of the World Bank and the International Monetary Fund and the second wave was part of a more general reform program that had the objective of improving the business and investment climate, tariff reforms in Egypt were mostly driven by external forces or, at least, not generally modulated on sector-specific demands (Salem and Zaki 2019 ). The combination of co-movements of sectoral tariffs with the role of the multilateral negotiation to which Egypt took part over the years and with the rules to be followed when you are part of structural reform programmes, reduces possible concerns on the presence of sector-specific lobbying pressures or distortions and supports the view that tariff reforms in Egypt were largely exogenous (not imposed to provide differential protection, see Erten et al ( 2019 ) for a similar argument for South Africa).…”

Globalisation and informality: The role of quality gap and social contributions

“…Using an empirical approach, many papers show that trade liberalisation decreases informality: Aleman‐Castilla (2006) shows empirically that import tariff elimination in Mexico following NAFTA led to the reduction of the likelihood of informality in the tradable sectors. Selwaness and Zaki (2015) found that trade liberalisation has reduced informality in Egypt's manufacturing sector; Salem and Zaki (2019) found that there is a positive association between tariffs and both informal and irregular employment in Egypt; Huynh et al. (2020) prove that FDI inflows help reduce shadow economy (informal economy); and Canh & Dinh Thanh, 2020 prove that export diversification and quality can reduce shadow economy when moving beyond a tipping point.…”