Turkey Economy: Gauging the Size of Turkey's Informal Sector

The informal sector, ranging from illicit trade to organised crime, plays a major role in Turkey's economic life. It has both pernicious and benign aspects

Hawkers displaying plastic toys or T-shirts, elbow-to-elbow on crowded shopping streets; home-workers stitching up shirts for textiles factories; repair jobs and domestic cleaning done for cash without receipt-all these are just the tip of the iceberg of Turkey's large unreported economy. As much as 70% of milk and meat is sold outside formal channels, and software piracy recently fell to "only" 58%. Manufacturers, traders and professionals commonly straddle the notional dividing line between the visible and invisible sectors, under-reporting their turnovers for tax purposes. Services and supplies are regularly outsourced to "grey-area" suppliers, and double accounting and "nylon" (false) receipts are commonplace. In 2003 US$4bn worth of goods of unspecified origin was exported to former communist countries under the guise of "suitcase trade", according to possibly conservative Central Bank of Turkey estimates. Meanwhile, a wide range of foodstuffs and cheap manufactured goods make their way into Turkey equally unrecorded. Smuggled watches are said to account for 80% of the market and contraband mobile telephones for 20-25%. In eastern provinces, livestock smuggling is a way of life, and agriculture officials attempting to register cattle have met with stiff local resistance.

No tax please

In employment, informality is rampant. Official household labour-force survey results for the second quarter of 2004 indicate that no social security contributions were paid for 90% of day-labourers or for over one-quarter of regular private sector employees-some 3.6m people in all. From the point of view of tax, the situation is little different. Investigations into income tax declarations regularly reveal that up to twice as much income has been disguised as declared. In these circumstances, the social security institutions require heavy subsidies, public services are underfunded and honest employers and taxpayers are penalised.

Over 70% of tax revenue has come to be derived from indirect taxes, particularly those paid by "captive audiences" such as vehicle-owners, drinkers, smokers and telephone subscribers. Even this is only a partial solution: smuggled, imitation cigarettes are openly and widely sold, and Yusuf Gunay, the head of the Energy Market Regulation Authority, estimates that US$2bn-4bn is being lost each year in tax revenue as a result of the smuggling of fuels from neighbouring countries. A vicious circle of high tax rates and high tax avoidance has set in. Unfair competition is rife, markets are distorted and formal investment is discouraged.

Besides the desire to evade taxes and bureaucracy, the size of the unreported economy reflects the failure of the state and private investors to create formal jobs for a growing population and the existence of millions of small firms and micro-businesses. As often as not, politicians have treated these informal enterprises-like illegal housing and property occupations-as a kind of social safety net, if not as a source of votes and even party funding. Tax laws are riddled with exemptions, and declarations of wealth have repeatedly been rejected as an intrusion on personal life and a disincentive to economic activity. Governments have consistently failed to enforce laws on tax, social security, capital markets and so on.

Reporting the unreported

Economists have attempted to calculate the amount of economic activity that fails to show up in the national income figures. It is a thankless task. There is no flawless method, and no perfect definition-should one include, for example, non-commercial household production, or the plentiful income obtained from illegal acts such as drug-running, mafia operations and Internet gambling? Most calculations of the size of the unreported economy fall short of the intuitive oft-quoted figure of 50% of official GDP.

In a World Bank-sponsored paper in 2002, Friedrich Schneider adopted a figure of 31.2% for 2000-relatively high by the standards of Europe and Asia, but only a few percentage points above Italy, Spain, Greece and Belgium, and well below many African and Latin American countries. It has to be remembered that the official GDP data are themselves based on a series of estimates, assumptions and cross-checks, and consequently do not exclude all goods and services that are untaxed or produced by informal labour. The new national income series to be published in 2005 can be expected to encompass still more of this hidden output.

Finally, the relative size of the unreported economy may ebb and flow with economic cycles, expanding at times of crisis as formal jobs are lost, as taxpayers defend their living standards by reporting less of their income, and as demand collapses in some of the best-reported sectors such as automotives or consumer durables. If this is the case, it would help to explain the depth of the 2001 recession and the rapid official growth rates in 2002-04.