How Iran can address its informal economy

Al Monitor | : All countries face the phenomenon of an “informal economy.” Focusing on the definition of that term — which means all economic activities that are not covered or are insufficiently covered by formal arrangements, not including illicit activities — a World Bank report finds: “Informality arises both from a lack of development and poor governance, and each of them to a different extent for every country.” While these two factors, as well as tax evasion, play a role in the formation and sustainability of the informal sector in Iran, some legal and cultural aspects — such as the strict women’s dress code and extensive cultural prohibitions like the ban on satellite dishes — also contribute to the size of the informal economy. Assessing the extent of Iran’s informal economy is very difficult; however, the most serious and reliable estimates state that about 30% of economic activity in Iran is unaccounted for. A recent study believes that about 38% of the economic activity in the Iranian calendar year 1393 (which ended on March 20, 2015) belonged to the informal sector, which translates to unrealized tax revenues for the government amounting to 43 trillion Iranian rials ($12.3 billion), i.e., the annual funds that the government pays to citizens as cash handouts.

As mentioned, some of the activities are not necessarily illegal, but rather legal occupations conducted outside the visible economic structures, such as civil servants working as taxi drivers in their free time or housewives working as tailors and hairdressers from home. On the illegal side, smuggling and trade in prohibited goods represents the most significant informal activities. Experts believe that some $10-$15 billion worth of goods are smuggled across Iranian borders annually, though there are signs that the volume of smuggling has been in decline. According to reliable estimates, an institutionalization of the smuggling in legal goods would create some 200,000 job opportunities in the country. This is where the various border markets come to the fore, but weak governance of such markets has undermined their actual potential.

According to Ahmad Meidari, the deputy minister of the Ministry of Cooperatives, Labor and Social Welfare, about 6 million Iranians are active in the country’s informal economy. The figure is derived from the fact that from a population of 23 million working people, only 17 million are insured by the Social Security Organization. This doesn’t mean that all of these individuals are engaged in illicit activity, but that their economic contribution is unaccounted for. Another state institution, the Ministry of Economic Affairs and Finance, estimates that 36.5% of the country’s economic activity is attributed to the informal sector.

While no one denies that the extent of the informal sector is very damaging to the country, the key question is what the government is doing to contain it. One thing is certain, and that is the increase in public comments by key stakeholders about tax evasion and also lost job opportunities resulting from the extent of the country’s informal economy. However, the existing patterns lead to phenomena that expand rather than decrease the size of the informal sector. For example, in order to compensate for tax evasion, the government moves to tax the formal economy more heavily, which in turn pushes formal players into the informal sector.

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