Understanding the Dynamics of Household Enterprises in Egypt: Birth, Death, Growth and Transformation

Caroline Krafft Department of Economics, St. Catherine University MENA Chief Economist Office Seminar Series June 15, 2016

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Motivation • Micro and small household enterprises (MSEs) play a

crucial role in developing economies such as Egypt •  More than a quarter of employed Egyptians have membership/

ownership in a household enterprise •  Almost two-thirds of Egyptians who engage in private wage work

are in enterprises with 1-9 employees

•  The (in)ability of MSEs to grow is a crucial part or symptom of economic development •  “Missing middle” debate •  MSEs cited as crucial to job creation and job quality •  Self-employment and entrepreneurship are also considered crucial

to reducing unemployment and creating businesses

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MSEs: The knowledge gap • MSEs are important to the economy and employment

generation, but relatively little is known about the dynamics of the sector in the developing world and Egypt

• Research on MSEs in developing countries tends to rely on formal or registered firms while most MSEs are informal

•  This paper: •  Uses panel data on Egyptian households •  Information on all their non-farm enterprises •  An advance in understanding the dynamics of household

enterprises and their role in the economy

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Research questions •  In Egypt:

•  What are the patterns of household enterprise creation, survival, and growth?

•  How are these affected by enterprise, household, and individual characteristics, such as household assets or entrepreneur gender?

•  How have household enterprises been impacted by the economic downturns precipitated by the global financial crisis and the January 25th 2011 revolution?

•  What policies or programs could support the creation and growth of household enterprises?

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The landscape in Egypt •  Labor market in general is rigid

•  This work was part of a larger project by the Economic Research Forum to study labor dynamics in the Middle East and North Africa (MENA)

• Public sector employment is preferred

• Start dates for existing MSEs suggest one of the more dynamic sectors

• Problems in the MENA region with crony capitalism, weak connections between productivity, profit, and employment creation

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Data •  The Egypt Labor Market Panel Survey (ELMPS) follows a

panel of households over time •  Rounds in 1998, 2006, 2012 •  Can assess dynamics over two periods •  Split households tracked, refresher samples added

•  All 3 rounds include a section on non-agricultural household enterprises for households with self-employed or employer members

•  Rich information on enterprises, households, and individuals

•  Allows for an analysis of enterprise dynamics that includes enterprise creation

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Measuring dynamics • Challenge: creating a panel of enterprises from household

survey data •  Can assess on individual, household, or enterprise level •  Having an enterprise does not mean it is the same enterprise

• Survival of an enterprise is at least one base-round household member still having an enterprise of the same economic activity (20 categories) in the subsequent round

• Statistics calculated on rates of birth (creation), survival vs. switch vs. closure, and growth

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Modeling dynamics •  Formation of household enterprises

•  For individuals or households not previously engaged in HH ent. •  Binary outcome, probit model

•  Persistence, switch, or exit from household enterprises •  Enterprise: Binary outcome, probit model •  Household, Individual: categorical outcome, multinomial logit model

•  Growth of household enterprises •  Among enterprises observed in two rounds: Does employment in firms

contract, remain the same, or grow? •  Ordered probit model

•  Estimated separately to compare two periods: 1998-2006 and 2006-2012

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What forces can affect MSE dynamics? An onion model

•  Nested model for factors affecting dynamics and upgrading

•  (Potential) entrepreneur characteristics include human capital, demographics, psychological profile

•  Enterprise characteristics include firm size, age, sector, location

•  Networks can reduce uncertainty and link value chains

•  Business environment includes legal and regulatory framework, access to finance, macroeconomic and political environment

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Covariates to explain dynamics •  Individual, household, and enterprise characteristics

•  Measured in the base of a pair of base years •  Or as changes between one period and the next

•  Individual: education, age group, gender •  Individual business networks: father’s education and father’s

work status •  Household: Wealth quintile, changes in relative household

wealth, changes in household composition •  Enterprise: Formality, ownership structure, location, enterprise

age, capital, economic activity, outside workers, # of outside workers, # of household workers

•  Estimate over 1998-2006 and 2006-2012 to reflect different macroeconomic and political environments

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Engagement with household enterprises

20.4

13.2

2.6

21.3

14.5

3.0

18.3

14.0

2.5

0

5

10

15

20

25

Households Males (15-64) Females (15-64)

Perc

enta

ge in

ent

erpr

ises

1998 2006 2012

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Characteristics of enterprises •  In 2012:

•  Less than half are licensed •  Less than a third are registered •  Around 10% keep accounting books •  Around 10% are owned in partnership

•  Start years are mostly over the preceding two decades

•  Most common location is a shop (36%), own home (14%), mobile worker (13%)

•  The most common activities are wholesale/retail trade (48%), manufacturing (13%), transportation and storage (13%), construction (9%)

•  Wide range of capital levels, from none/low to high (>10x typical monthly income)

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Enterprise dynamics

13

4

44

16

40

14

41

15

44

51

62

4

36

11

53

12

34

11

55

61 61

0

10

20

30

40

50

60

70

Enter Persist Switch Exit Enter Persist Switch Exit Dissolve New

Indiv. prev. not in ent.

Indiv. prev. in ent. HH prev. not in ent.

HH prev. in ent. Enterprises

Perc

enta

ge in

ent

erpr

ises

1998-2006 2006-2012

Enterprise level models of enterprise closure

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1998-2006 2006-2012 Sex Age-group * * Education level * Father's ed. * Father's work status Region Wealth quintile Formal * Owned in partnership * Location Start Year Capital * * Outside Emp. *

Econ. Act. * * N 819 1584

* Indicates significant at 5% level for at least one coef. in category

Individual level models of enterprise dynamics (HH similar) 15

Enter 1998-2006 2006-2012 98-06 06-12 Persist Switch Exit Persist Switch Exit

Sex * * * * * * Age-group * * * * * * Education level * * * * * * Emp. status (entry) * * Father's ed. * * * Father's work status * Region * * * * * * Wealth quintile * * * Change in wealth * * * * * HH. had an enterprise * Added an adult * Lost an adult * Ent. Formal * * * Owned in partnership * * * * Location * * Start Year Capital * * * * Outside Emp. * * Econ. Act. * * * * * HH Ent. lost adult N 13559 21128 938 938 938 1740 1740 1740

Employment in enterprises •  Around 29% of enterprises employ outside workers

•  Changes in number of workers in the past three years show: •  Fewer firms with increases in 2012 •  More with decreases in 2012

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6,377

4,207

2,170

236

287

7,185

4,091

3,094

519

312

5,607

3,390

2,218

348

270

0 1000 2000 3000 4000 5000 6000 7000 8000

Total employment

Household member employment

Out of household employment

Workers added in the past year

Workers lost in the past year

Employment, in Thousands

1998

2006

2012

Enterprise growth (# employees) among surviving enterprises

•  Substantial change comparing 1998-2006 and 2006-2012

•  Likely related to deteriorating economic and political conditions

•  Much stronger evidence of cyclical impact than other standard measures such as unemployment

•  Model shrinking, same size, or growth in the number of employees (both household and outside employment) •  Use characteristics of highest-ranked

member in base round who persisted in the enterprise

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16.6 34.1

52.0

52.5

31.4 13.5

0 10 20 30 40 50 60 70 80 90

100

1998-2006 2006-2012

Perc

enta

ge o

f sur

vivi

ng

ente

rpri

ses

Contract Same Grow

Ent. level models of enterprise growth (# emp.) 18

1998-2006 2006-2012 Shrink Same Grow Shrink Same Grow

Sex Age-group Education level Father's ed. * * * Father's work status * * Region Wealth quintile * * Ent. Formal Partnership * * Location * * * Start Year * * Capital * * Outside Emp. * * * Econ. Act. * * * N 405 405 405 624 624 624

Key Findings • MSE sector has a crucial role in the Egyptian economy

• One of the more dynamic sectors in the Egyptian economy •  Between survey rounds, approx. half of enterprises close •  Comparisons of dynamics over 1998-2006 and 2006-2012 show

the downside of this dynamism: more closures, fewer employees •  Sensitive to business environment, macroeconomic conditions

• Not strong patterns of dynamics by some of the typical measures •  Firm size, firm age do not matter much

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Potential Policy Implications •  There are some important dynamics in regards to capital

•  Not causal, but given the landscape (lack) of financing for MSEs, suggests finance could potentially be helpful

•  Wealthier households more likely to enter, no differences in survival or growth

•  Important dynamics by human capital •  More educated less likely to enter and more likely to exit •  MSE sector does not appear to reward formal education •  May provide opportunity for less educated to prosper

•  Important role of the MSE sector for promoting social justice?

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Future Directions • Relationship between dynamics and:

•  Changes over time in individuals’ characteristics and households’ composition (getting married, involuntary job loss)

•  Additional characteristics of enterprises (borrowing and debts, main buyers)

• Are household enterprises a fallback or a lucrative opportunity? •  Especially whether changes represent higher or lower wages/

income

• Any other ideas welcomed! •  For this paper or larger future research agenda on labor demand

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