Taming the Unregistered

Turkey

Economic News

22 Jul 2010
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It comes as possibly the most difficult challenge of all in Turkey's drive to secure itself a place among the world's most developed economies. Almost a year ago during the World Economic Forum in Istanbul, Turkey's then minister of state, Ali Babacan, openly confessed that the government had made limited headway in pushing back the size of the unregistered economy. That is the sizeable segment of economic activity which ducks beneath the taxman's radar screen, manned by an undocumented army of employers and employees. Since then the government has put together a multi-pronged strategy to confront the challenge.



The government's programme for 2008 identifies the unregistered economy as a major area of concern and one that will be addressed. "Measures include strengthened coordination between government bodies, a strengthening of inspections and more effective use of banking,"AK Security's chief economist Hakan Aklar told OBG. On the latter point, Kemal Unakitan, the minister of finance, recently announced that all employers would soon be obliged to deposit the salaries of their workers into bank accounts. The challenge of course is to get unregistered businesses to register first.



But the government has not just sprung from the starting blocks in its endeavour to tackle the unregistered segment. In June 2007, Unakitan prepared a five-year plan to reduce the size of the unregistered economy by 2% per annum. If 50% of Turkey's active workforce is unregistered - as held by most economists - then it would take at least 25 years for this unregistered segment of the labour force to evaporate.



The minister of finance at the time also pointed to a series of measures to ensure the gradual shift away from unregistered activity including the removal of tax exemptions and a reduction in the number of bureaucratic transactions, along with the implementation of a more effective auditing system and measures to limit the cash economy - which are expected to gain force over the coming two years.



Social security reform - which aims to reduce national unemployment in the registered economy by reducing social security premium payment rates by registered employers - is also on the cards. In an important move the government intends to cut social security premium payments charged to businesses for their employers by 5% some time next year, though when exactly this will be applied is not known. The high social security payments which companies are forced to cough up to the government has driven Turkey's smaller entities to avoid registration or minimise new recruitment, analysts say.



"Although the informal economy supports employment because of high costs, it has a negative effect on employment and the financial sector in the long-run," Central Bank governor Durmus Yilmaz told the press. Tahir Uysal, the chairman of the International Investors' Association of Turkey (YASED), has also previously referred to the unregistered economy as "the mother of all problems". So long as economic activity is unregistered it can not be guided and standards can not be set - a prerequisite for economic development.



That said, the unofficial economy has one selling point. Economists believe that the unregistered business buffers the Turkish economy from large-scale economic shocks, with workers less likely to lose their jobs. It is a symptom of the informal and strong social relationships that have allowed Turkish families and the society at large to withstand periods of hardship.



"Everyone in an Anatolian village knows who will finance a new undertaking but they know by word of mouth rather than the individual's official credentials," according to one Istanbul-based businessman. "Turkey will retain its strong social bonds but we need greater control and regulation."

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