Fatih Özatay, PhD - [Archive]

Starting with the informal economy? 02/08/2009 - Viewed 1392 times

Economic policies to increase domestic savings rate are discussed increasingly in the recent period. Korkmaz İlkorur, who frequently emphasizes that Turkey has to go through a radical economic transformation to achieve a higher sustainable growth rate and underlines that there are several reform areas to serve this purpose in particular at micro level, addressed this issue in his column in Radikal daily on Thursday.

As far as I am concerned, he is proposing a private social security system based on personal savings. He states that the system can be supported with tax incentives. This is a recommendation worth discussing. For instance, this system can be established besides the currently implemented system. If I am not mistaken, this was among the alternatives in the studies carried out after the first social security reform in the second half of 1990s. The project conducted with the consultancy of International Labor Organization (ILO) also made long term financial viability assessments for the alternatives.

The report must be accessible in the relevant departments of Undersecretariat of Treasury as well as the Social Security Institution. The discussions can be constructed on this report, for instance. The ongoing crisis has proved once again that Turkey needs a large transformation process. Fundamental questions are: How can we ensure a long-lasting rapid growth period (For instance 7 percent growth over a decade consecutively)? How can we accomplish this with minimum foreign fund requirement? How can we reduce unemployment rate to 6 percent level? Regardless of the reforms it will contain, recommended program must definitely cover the solution of this problem: informal economy. Resolving informal economy is a prerequisite for increasing domestic savings through the public sector. Informal economy has several harms on Turkey which should be eliminated. What are these?

First, tax revenues are reduced. Therefore, we cannot temp to launch the required reforms as the some of these reforms will lead to losses in tax revenues. If sufficient amount of taxes could have been collected, revenue loss would not lead to a problem. Second, tax base is narrow; and thus we collect taxes from whoever we can reach. And this automatically leads to unfair competition among firms. Third, unproductive firms in the informal economy can survive as they do not pay taxes or underpay taxes. Unproductiveness is encouraged through the state. In other words, the 'shame' of unproductiveness is masked by not paying taxes. This naturally reduces the international competitiveness. Fourth, as we cannot collect sufficient level of indirect taxes, we rely heavily on direct taxes. This damages social justice in particular against the poor.

However, eliminating informal economy is not that easy in political terms. If the participants of informal economy constitute a substantial proportion of your vote base, you cannot dare launching such a reform easily. Furthermore, you do not even think on such an option if early election is possible. Of course this is not the only political risk to be faced when a tax reform is launched. Another issue affecting the political feasibility of such a reform is the employment issue. There is a potential risk of employment losses. I will address this issue on the basis of the results of a study.

This commentary was published in Radikal daily on 02.08.2009