Other major reasons are excessive tax burdens, involving corporate and personal taxes, as well as social security contributions. Rigid labor market regulations also encourage unregistered economic activities. Another reason could be the reluctance of some to pay their full share of taxes if they believe the government is wasting tax revenues. Various terms are used to define economic activities, consisting of either monetary or nonmonetary transactions, which are not captured by national official statistics such as gross domestic product (GDP): Unregistered economy, informal economy, underground economy, shadow economy, and parallel economy. These activities can be either legal -- often referred to as informal economy, or illegal -- often referred to as underground economy. In either case, they escape taxation. In general, countries in which it is relatively more difficult to do business, namely developing countries, have relatively more unregistered economic activities.
Since there is no well-defined theoretical basis in defining and measuring unregistered economic activities, various different statistical methods have been used in directly or indirectly in estimating the size of the unregistered economy with either micro- or macro-economic data. This is a very difficult task since by definition the unregistered economy is hidden. Different methods of estimation often yield widely different results on the extent of unregistered economic activity. For example, according to a survey carried out by the Turkish Confederation of Employers’ Associations (TİSK) in 2003, Turkey’s unregistered economy had increased from 36 percent of the registered economy in 1985 to 66 percent in 2003. According to a 2004 Turkish Central Bank study, the unregistered economy was between 16 to 50 percent of total economic activity, with 52 percent of total employment and 37 percent the of private sector employment, excluding agriculture, estimated to be unregistered. A report released by the trade union Turk-Is in 2005 claimed that over half of the Turkish labor force was engaged in the unregistered economy.
What are the effects of the unregistered economy? It makes official statistics unreliable and economic policy-making difficult. It creates unfair competition for those firms operating in the registered economy, causing some of them to invest abroad (see my column the “Rise of Turkish Multinationals”). It deprives the government of tax revenues, often forcing it to increase the tax burden on the registered sector, which creates, in a vicious circle, more incentives to become unregistered. Furthermore, perhaps most damagingly, it weakens the respect for the legal foundations of the society. However, the unregistered economy has also certain benefits. It does create additional employment and income by increasing output outside the excessive constraints imposed by the state. The consensus, however, is that the overall costs to society exceed the benefits of the unregistered economy.
The Turkish Industrialists and Businessmen’s Association (TÜSİAD) last month released a report (<http://www.tusiad.org/turkish/rapor/buyume/kayitdisi.pdf>) titled “The Unregistered Economy and Sustainable Growth: Evaluation on the Path to the EU and Solution Proposals,” as part of its series of research on Sustainable Growth Strategies for Turkey that began in 2004. According to the most recent estimates cited in the TUSIAD report, Turkey’s unregistered economy accounts for about one-third of its GDP, about twice of that in developed OECD countries.
After analyzing the specific causes and effects of Turkey’s unregistered economy, the report, looking to the future, emphasizes the dynamic interaction between Turkey’s EU accession process and the nature of its unregistered economy, even though the unregistered economy issue is not a chapter of the acquis communautaire. It correctly argues that the widespread existence of the unregistered economy reveals the weakness of the rule of law in Turkey, which is not compatible with EU membership. The report estimates that with a significant reduction in the unregistered economy, based on its several specific proposals -- most of which are aimed at increasing the ease of doing business in Turkey -- Turkish tax revenues could be increased by a cumulative total of 100 billion euros in the next decade. I hope that the Turkish government, instead of futilely exhorting and threatening tax evaders with occasional bombastic speeches, will heed the specific recommendations of the TÜSİAD report to find effective solutions to Turkey’s chronic and urgent unregistered economy problem.
