Emre Burçkin, Chairman of the Board, Consulta, on the challenges of regulating the informal economy

Although the size of Turkey’s unregistered economy has diminished in recent years, it remains a major challenge for the country’s policymakers. To address this issue, the Revenue Administration (RA) has developed a five-point action plan that aims to boost volunteer contributions, improve government auditing capabilities, strengthen the deterrent effect of sanctions, enhance database sharing and increase public knowledge of the issue through awareness campaigns.

According to the RA, the unregistered economy is based on illegal economic activities and legal activities that are not recorded properly. However, since these activities and the revenue they produce cannot be taxed by the government, the RA plan does not seem to offer a comprehensive solution. Instead, the government should try to totally eliminate illegal economic activities by reconfiguring the audit mechanism. Among other things, this would involve integrating government agencies and independent audit firms to enhance coordination and organisational capacity. Training programmes should also be established for employees in the fields of accounting, auditing and finance, fraud auditing and risk management. Moreover, tax administration and enforcement mechanisms need to be enhanced, and attitudes must be changed through public awareness campaigns that highlight the link between taxes and high-quality social services.

Although the government supports small and medium-sized enterprises by financing through public banks, more must be done to extend credit facilities to such companies, which form the backbone of the Turkish economy. Doing so would reduce unregistered activity, as would extending more credit to households. Further, efforts must be taken to curtail excessive government bureaucracy and reduce high tax burdens, both of which encourage individuals and businesses to stay out of the system.

Another key contributing factor to the size of the unregistered economy is that employers in Turkey often pay only the legal minimum wage, especially for unskilled jobs. In addition, many employers hire workers off the books. As might be expected, firms manage this by paying only in cash, without using a formal payroll record.

Indeed, policymakers who would implement solutions to address the unregistered economy need to study their options carefully, given the importance of this issue to economic development. The existence of a sizeable unregistered economy, for example, can have a negative impact on inflows of foreign direct investment (FDI). When a market is characterised by unfair competition and a lack of transparency, it is quite difficult indeed for that market to attract foreign companies, especially those that are accustomed to higher standards. On the other hand, it should be noted that FDI itself could reduce unregistered activity by bringing more rule-abiding companies into the market.

Nonetheless, as a result of operations lead by the Ministry of Finance, Turkey has made some progress in addressing this problem over the last decade. As a result, from 2005-11 annual FDI increased 86% from $8.5bn to $15.9bn. Over the same period, the number of domestic companies with foreign capital jumped almost three-fold from 11,700 to 29,200. According to the A.T. Kearney’s FDI Confidence Index for 2012, Turkey is now the world’s 13th most attractive country for FDI. By the year 2023 Turkey aims to attract annual FDI inflows of $80bn, which would put the country among the top eight globally in the A.T. Kearney Index.

Turkey’s success in addressing the unregistered economy, however partial, is also evident in more direct figures. A decade ago, unregistered workers accounted for about 52% of employed persons nationwide; however, this number has now dropped to about 38% due to the government’s new employment package. The basic principle of this package is that the state, not employers, will pay social security contributions for employees specifically defined by this new application. According to the head of the Social Security Institution, a key focus of the new package is the agricultural sector, where unregistered workers remain an issue.