Yesterday I mentioned how fighting with informal economy becomes more unavoidable for Turkey day by day. And obviously, the way to start the fight is launching a tax reform. Implementing such a reform might have significant political costs. There are also other risks that reduce the possibility for politicians to initiate tax reforms.

It is apparent that we cannot say that the majority of firms operating in informal economy are productive and innovative firms making quality-production. For instance, it is quite difficult for informal firms to access banks credits through normal channels. This alone is a significant impediment preventing them from growing. If this argument is correct, then it is necessary to accept that a considerable part of the labor force working in firms in informal sector is unskilled. Why would a firm, who itself is not productive and has a production system containing no technological innovations, employ skilled personnel?

Political practicability of fighting with informal economy will decrease at the degree that this statement is valid for the firms in informal sector because with the inclusion of the firms, who benefited from the 'tax advantages' created by operating in the informal sector, in the formal economy the mentioned advantage will disappear. It will become more difficult for them to compete with firms that have already been operating in the formal economy. Those failing to overcome this challenge will shut down soon.

However, if these firms stop production, their employees will lose their jobs. Please note that the personnel of the mentioned firms were not skilled. Therefore, a significant proportion will have difficulty in finding new job. Of course it is expectable that firms already operating in the formal sector will be encouraged to take a step further as they 'get around' the rivals competing unfairly. Capacity-building investments they make can generate new employment. But there is no guarantee that a rise in labor demand driven by this channel will be met by those lost their jobs due to the abolishing of informal sector. At least they need to improve their skills.

In brief, abolishing the informal economy does not only mean carrying out a tax reform. Tax reform is the indispensible prerequisite. However, it represents only the first step of a complicated process. How the disturbance created in the labor market by this complicated process is equally important. Newly unemployed will most probably not be benefiting from any social security scheme as they were employed informally. So they cannot use unemployment benefits. This problem should be advanced on. In the meanwhile, these people also need skill-developing training. On the other hand, alternatives to provide them with social security must be sought.

Only starting to think on the process and roughly listing the alternatives proves how hard to accomplish the task is. Of course the first step is even harder; I just said 'eliminating and registering the informal economy'. This task also poses important technical challenges.

And in the climate of the global crisis, we have an observation. It reads: We did not expand the scope of unemployment benefit and did not increase the amount of unemployment benefits. Under which conditions? Under the conditions of severe crisis, in a period where domestic demand came to halt and such a measure would have stimulate domestic demand at a certain degree. We failed to accomplish this even for those working in the formal economy.

Taking departure from this observation, do you believe that the process will be administered properly when there is no crisis, i.e. 'out of nowhere'? Put aside administering the process; do you even believe that someone will dare to initiate the process? I hope this remains as a 'personal' observation. As we cannot derive prospective conclusions out of a personal observation, it does not constitute a reason to lose hope. Do, brave reformers step in and initiate the reform. Yes, let us hope so...

By the way, I would like to remind that there is a recent and interesting academic study examining the productivity and employment impacts to be created by eliminating and registering informal economy written by Erol Taymaz from METU Economics Department.

This commentary was published in Radikal daily on 03.08.2009