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Shadow economic activities in Turkey: A review of the
literature
Vasileios A. Vlachos
University of Macedonia, Dept. of International and European Studies, E-mail:
[email protected]
Aristidis P. Bitzenis
University of Macedonia, Dept. of International and European Studies, E-mail:
[email protected]
Panagiotis D. Kontakos
University of Macedonia, Dept. of International and European Studies, E-mail:
[email protected]
[Note: THALES Programme has been co-financed by the European Union (European
Social Fund - ESF) and Greek national funds through the Operational Program
“Education and Lifelong Learning” of the National Strategic Reference Framework
(NSRF). The current paper is presented under the auspices of the Programme].
Abstract
This study surveys the literature on size of the shadow economy, its determinants,
informal labour, tax evasion, the relationship between the shadow and the formal
economy, and the determinants of corruption and its relation with the shadow
economy in the case of Turkey.
Keywords: Shadow economy, literature review, Turkey.
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International Conference on Business & Economics of the Hellenic Open University 2015,
Hotel Titania, February 6, 2015 – February 7, 2015
JEL Classification codes
O17 - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
E26 - Informal economy; Underground Economy
D0 – Microeconomics
1. Introduction
The aim of this study is to survey the literature on size of the shadow
economy, its determinants, informal labour, tax evasion, the relationship between the
shadow and the formal economy, and the determinants of corruption and its relation
with the shadow economy.
The report is formatted as follows. The next section gives an overview of
some stylized facts concerning the shadow economy, i.e. its synthesis and
determinants, the methods to quantify it, its impact on the official economy and its
relation with corruption for a sample of countries which are under review in our wider
project. The same section also gives information about the studies reviewed. Section 3
refers to the case of Turkey. A conclusion follows in the last section.
2. Stylized facts and scope of the study
The commonly found macro estimations of the shadow economy in the
international literature is based on cross-country panel estimates of the multiple
indicators multiple causes (MIMIC) approach that succeeded the currency demand
approach1 (see the work of Schneider). The commonly explored determinants of the
MIMIC approach are the tax burden (+), the self-employment quota (+), the
unemployment rate (+), regulations (+), the quality of formal institutions measured (-)
and the level of tax morale (-).2
With regard to the countries of interest to this report, the average estimates for
the period 1999-2007 are 9.8 percent of GDP for Austria, 15 percent of GDP for
France, 16 percent of GDP for Germany, 27 percent of GDP for Italy, 22.5 percent of
GDP for Spain, 8.5 percent of GDP for Switzerland and 31.3 percent of GDP for
Turkey (Schneider et al., 2010).
The studies reviewed in this report focus on one of the economies described in
the previous paragraph (and the title of this report). Although the aim is to review
studies that generate results from data concerning single countries, studies which
focus on a small set of countries for comparative purposes (e.g. 2 to 4 countries) and
1
In fact, researchers employing the MIMIC approach use the currency demand approach to calibrate
the MIMIC estimates. Therefore, it can be said that the MIMIC approach requires the estimates of a
currency demand model.
2
The signs in brackets signify the relation of the determinants with the shadow economy.
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generate for that reason their estimations from cross-country panel data sets, are also
reviewed. Reference is also made to studies which generate estimations from large (in
terms of number of countries) cross-country panel data sets, but only about their
special focus (if there is any) on a country of interest to this report (every such
reference is stated clearly in the text in order to avoid confusions). The aim is to avoid
references to generalized estimates and conclusions that may be the outcome of
analyses of data which concern a large number of countries. Drawing generalized
conclusions from cross-cultural comparisons is not ideal (despite its practicality due
to issues concerning data availability) because institutional and cultural frameworks
that typify specific countries influences the size of the shadow economy and the
significance of its determinants.
Moreover, the studies included in this report either generate estimates on the
shadow economy and discuss relevant issues that concern shadow economic activity
from the year 2000 onwards, or have been heavily cited (in the case that their findings
and discussion concerns a period before the year 2000).
The terms included in this report are shadow/informal/underground economy,
which have the same meaning. The total hidden or total unobserved economy includes
criminal activities. The formal/official economy are terms that have the same
meaning. Informal employment/labour and undeclared work have the same meaning
and constitute part of the shadow economy. Informal employment (either in the form
of a complementary-secondary job or a main job due to high unemployment) and its
obvious association with irregular immigration is a whole strand of literature in the
subject of the shadow economy. Another term of particular importance that should not
be confused with the shadow economy is tax evasion. The shadow economy is more
than tax evasion as it is the sum of all forms of tax non-compliance which are
irrelevant to tax evasion, such as tax avoidance and concerns other activities
generating concealed income such as bribery (criminal activities are excluded thus the
illegal economy is something completely different). Tax evasion has also developed
into an autonomous literature strand.
Another issue discussed in this paper is the relation/effect of the shadow
economy on the formal economy. It assumed that the shadow economy may be procyclical (i.e. follow) or counter-cyclical to the business/economic cycle. Based on this
notion a theory has been developed that the shadow economy and the formal economy
may be substitutes (counter-cyclical shadow economy) or complementary (procyclical shadow economy). For example, Schneider (2005) finds a negative
correlation between the shadow and the official economy for developing countries
and a positive relationship for developed and transition countries.
Finally, the determinants of corruption and more importantly its relation with
the shadow economy also concern the literature. With regard to its determinants, both
personal and country characteristics determine the likelihood of being asked for a
bribe (Mocan, 2008). For example, males, wealthier and more educated individuals
are more likely to be asked for a bribe. Moreover, the strength of institutions in the
country (e.g. as measured by the rule of law) has the benefit of reducing the extent of
corruption in the country.
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As far as the relation between the shadow economy and corruption is
concerned, the literature concedes on two main conclusions. Firstly, not only the
shadow economy grows primarily due to weak institutions and rule of law, but
institutional quality is also responsible for the levels of corruption. Secondly, the
country-specific formal and informal institutions, which are primarily responsible for
the sizes of both, corruption and the shadow economy, foster a complementary
relationship for the mature economies in a fashion similar to that of transition
economies.
3. Turkey
The common features of the estimations of the Turkish shadow economy from
papers published in the 1990s to mid-2000s, is that they range greatly and that they
occurred via the currency demand approach.3 For the period of 1963-1990,
Kasnakoglu (1993) finds that the shadow economy ranges from 0 to 23 percent of
GDP. For the period of 1970-1997, Halicioglu (1999) finds that the shadow economy
ranges from 0 to 10 percent of GNP. For the period of 1971-1999, Ogunc and Yilmaz
(2000) find that the shadow economy ranges from 11 to 22 percent of GNP. For the
period of 1968-1993, Cetintas and Vergil (2003) find that the shadow economy ranges
from 17 to 31 percent of GNP. For the period of 1970-1997, Us (2003) finds that the
shadow economy ranges from 3 to 12 percent of GDP.
MIMIC estimates of the shadow economy range from 10 to 45 percent of GDP
for the period of 1970-1998 (Savasan, 2003) to 32 to 35 percent of GDP for the period
of 1999-2005 (Schneider and Savasan, 2007).4 In other approaches, Karanfil and
Ozkaya (2007) explore environmental indicators and report that the shadow economy
ranges from 12 to 30 percent of GDP for the period 1973-2003 and Davutyan (2008)
adopts the Pissarides-Weber expenditure approach and finds that the shadow economy
was 21 percent of GDP in 2005.
Dell'Anno and Halicioglu (2010) emphasize on the criticisms about the
reliability of currency demand estimations and adopt an autoregressive distributed lag
approach to cointegration analysis (with the combination of causality tests). Based on
data for the period of 1987-2007, the authors find that the shadow economy expanded
from 10.7 percent of GDP in 1987 to 18.9 percent of GDP in 2007 (with a peak of
27.4 percent of GDP in 2004). These figures are lot less than the commonly found
MIMIC macro estimations of the shadow economy in the international literature
(Schneider et al., 2010). The authors also find that the shadow economy is procyclical with respect to the formal economy, supporting the hypothesis that they are
complements rather than substitutes.
The discussion about the determinants of the shadow economy and its effects
on the formal economy should not include findings based on the MIMIC approach for
3
The estimates discussed in this paragraph concern the particular approach. The papers discussed in
this paragraph also present estimates from other approaches (which also range greatly).
4
These studies may be based on cross country panel data sets, but they have a special focus on Turkey.
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reasons already stressed. The findings of only one such study will be stressed here,
since it has a special focus on Turkey and the data set concern only neighbouring
countries. Schneider and Savasan (2007) find that the shadow economy is positively
linked (in terms of statistically significant observations) primarily to the direct
taxation and social security burden and to a lesser extend by indirect taxation. The
authors also indicate a positive relationship of the shadow economy with
unemployment and a negative with GDP per capita, which both signal for a countercyclical trend.
Dereli (2011) emphasizes on the importance of the tax burden,5 the
inefficiency of the auditing and inspection mechanisms (which according to the
author is partly due to the rather complicated tax legislation which frequently
undergoes changes in Turkey), the political intervention that results in tax amnesties
on a regular basis, income inequality (low wages force individuals to find a second
job in the shadow economy in order to fulfil their needs) and the perceptions
regarding the quality of public services.
Turning to informal labour through the lens of irregular migration, an EU
funded study (Icduygu, 2006) about the relationship between irregular migration
flows and the Turkish shadow economy reveals two broad phenomena. On the one
hand, irregular immigrants benefit from the opportunity to get easily absorbed by the
country’s vast shadow economy and end up doing less desirable jobs. On the other
hand, irregular immigrants may fall prey to criminal trafficking networks or be
subjected to forced labour. Nevertheless, the preceding scenarios concern the lesser
part of irregular migration flows, because given its geographical position at the
crossroads of Asia, Africa and Europe, Turkey is more transit than a destination
country.
Turning to the issues of deterrence and tax compliance, McGee et al. (2011)
explore the ethics of tax evasion by surveying 176 Turkish accounting practitioners.
The authors find that opposition to tax evasion is weakest in cases where the
government is perceived as corrupt or oppressive or where the system is perceived as
being unfair or wasteful and in that sense, highlight the significance of tax morale.
Moreover, the authors indicate the presence of a gender effect (male practitioners are
significantly more opposed to tax evasion than females) and an age effect (younger
practitioners are less opposed to tax evasion than the older).6
Sezgin et al. (2011) explore the ethics of tax evasion by surveying students in
Turkey (251 interviewees) and Kyrgyzstan (253 interviewees) universities. The
authors report on average, low tax evasion ethics and indicate that tax evasion is
justified when there are incidences of corruption (thus highlighting the influence of
tax morale).
5
Dereli (2011) states that high inflation rates also become important in conjunction with the tax
burden, by diminishing disposable income at a higher pace.
6
Similar findings are reported in other works of the authors engaged in McGee et al. (2011), by
employing the same method on different samples. These works are from Benk et al. (2009) and McGee
and Benk (2011).
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An interesting revelation is that subsidizing the cost of low-income workers
does not lead to the expansion of economic activity but rather increases the
formalization of existing firms and jobs (Betcherman et al., 2010).
As far as the issues of informal employment are concerned, although most of
the factors determining it have already been stressed, i.e. social security contributions
from the employers’ part and the tax burden from the employees’ perspectives, Dereli
(2011) asserts that the mix of high and rapid rate of population increase, regional
underdevelopment and increasing unemployment rates is also a key driver.
By addressing the main features of the Turkish informal labour market,
Ozdemir et al. (2004) emphasize on the problem that rapid urbanisation is not
accompanied by employment creation in technology or manufacturing sectors. As a
result, the majority of families depend on non-industrial, unskilled work and have to
face the continuous inflow of irregular immigrants.
Tansel and Oznur Kan (2012) explore the transition probabilities of
individuals moving across the labor market states of formal-salaried, informalsalaried, formal self-employed, informal self-employed, unemployed and inactive
state, and the respective impact of their characteristics. The authors assert one-way
flows from informality to formality, as they find that informal salaried individuals
demonstrate a higher level of mobility than the formal-salaried individuals7, with a
probability of transition from informal-salaried to formal-salaried about 5 times of the
probability of reverse transition.
An earlier study covering the 1990s reveals that education is adversely related
with informal employment (Tansel, 2001). Moreover, the same study reveals that
wages for males were greater in the case of formal than informal employment, at the
same time as they were equal across both forms of employment for females.
Further studies of informal employment in Turkey focus either on the
economic decisions of informal agents with no intention, however, to identify the
factors determining informal labour (see Varcin, 2000), or on the vulnerable position
of women, which forces them to engage in informal labour (see Esim, 2000;
Dedeoglou, 2010).
Last but not least, Turkey is affected by the phenomenon of corruption as
several case studies reveal. However, according to the Corruption Perceptions Index
results for 2013, Turkey is placed on the 53rd position which is far better than
eurozone countries such as Italy and its neighbour, Greece.
A study focusing exclusively on the determinants of corruption in Turkey has
not been published to date. As a result, information on the subject concerning
exclusively its Turkish dimension arise from case studies (such as Velioglu and
Argan, 2005), one of which is discussed here, and from the business literature (with
respect to its ability to hinder business activity).
Tatar et al. (2007) explore with a questionnaire the belief that a considerable
amount of out-of-pocket payment in the health sector in Turkey is informal, which
until the publication of their study, was based on anecdotal evidence and not field
7
Who turn out to be the most reluctant to leave their state, and this, according to the authors, confirms
the traditional theory which sees formal employment as the ultimate desirable labour market state.
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research data. Their study is based on a sample of 3,727 subjects (face to face
interviews were carried out in a medium size city in 2002). The authors report that 25
percent of total out-of-pocket payments were informal and that each amount of both
formal and informal payments was of equal size. The authors state that the majority of
out-of-pocket informal payments in public sector health care providers was for drugs
and was followed by respective payments for physicians’ surgical services. The
authors argue that this finding implies the effect of underinsurance and the misuse of
power by professionals (surgeons in particular) for private benefit. Finally, the authors
assert that the motive behind out-of-pocket informal payments was for getting more
attention at the time of treatment or in the future.
4. Conclusion
The content of this manuscript is a byproduct from an ongoing EU funded
project titled “The Shadow Economy (Informal Sector) in Greece: Size, Causes and
Consequences”.
Our wider project, named as THALES, aims to achieve numerous objectives,
among which the development of a theoretical background and framework that will
facilitate the understanding of the reasons of black/shadow economy in Greece, the
typology of Greek taxpayers and of the factors that influence and shape his/her
behavioural dynamics, perform cross-country comparisons at regional level, but also
with country groups by advanced taxation systems (e.g. Austria, Germany,
Switzerland, France), other Mediterranean countries (Italy, Spain), South Eastern
(Bulgaria) and transition and developing economies (Turkey, Peru). A mixture of
suggestions and structural policies are expected to be provided to the Greek
Government at the conclusion of the research, for the efficient conduct of
black/shadow economy and tax evasion in Greece.
5. References
5.1 English
Benk, S., McGee, R.W. and Ross, A. (2011). An empirical study of ethical opinion in
Turkey. Journal of Accounting, Ethics and Public Policy, 10 (1): 83-99.
Betcherman, G., Meltem Daysal, N. and Pages, C. (2010). Do employment subsidies
work? Evidence from regionally targeted subsidies in Turkey. Labour
Economics, 17 (4): 710-722.
Cetintas, H. and Vergil, H. (2004). Causality between measured economy and
underground economy. Yapi Kredi Economic Review, 15: 21-28.
Davutyan, N. (2008). Estimating the size of Turkey's informal sector: An expenditurebased approach. Journal of Economic Policy Reform, 11 (4): 261-271.
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International Conference on Business & Economics of the Hellenic Open University 2015,
Hotel Titania, February 6, 2015 – February 7, 2015
Dedeoglou, S. (2010). Visible hands – invisible women: Garment production in
Turkey. Feminist Economics, 16 (4): 1-32.
Dell'Anno, R. and Halicioglu, F. (2010). An ARDL model of unrecorded and
recorded economies in Turkey. Journal of Economic Studies, 37 (6): 627-646.
Dereli, T. (2011). Informal employment in Turkey. Sosyal Siyaset Konferansları
Dergisi, 53 (2): 65-82.
Esim, S. (2000). Solidarity in isolation: Urban informal sector women's economic
organizations in Turkey. Middle Eastern Studies, 36 (1): 140-152.
Halicioglu, F. (1999). The Black economy in Turkey: an empirical investigation.
Review of Political Sciences of Ankara University, 53 (1): 175-191.
Icduygu, A. (2006). The Labour Dimensions of Irregular Migration in Turkey
(CARIM Research Report No. 2006/05). San Domenico di Fiesole: Robert
Schuman Centre for Advance Studies (European University Institute).
Karanfil, F. and Ozkaya, A. (2007). Estimation of real GDP and unrecorded economy
in Turkey based on environmental data. Energy Policy, 35 (10): 4902-4908.
Kasnakoglu, Z. (1993). Monetary approach to the measurement of unrecorded
economy in Turkey. METU Studies in Development, 20 (1): 87-111.
McGee, R.W. and Benk, S. (2011). The ethics of tax evasion: A study of Turkish
opinion. Journal of Balkan and Near Eastern Studies, 13 (2): 249-262.
McGee, R.W., Benk, S., Yildirim, H. and Kayikci, M. (2011). The ethics of tax
evasion: A study of Turkish tax practitioner opinion. European Journal of
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Mocan, N. (2008). What determines corruption? International evidence from
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Ogunc, F. and Yılmaz, G. (2000). Estimating Underground Economy in Turkey
(Discussion Paper No.15). Ankara: Central Bank of the Republic of Turkey.
Ozdemir, A.M., Yücesan-Ozdemir, G. and Erel, D. (2004). Rethinking the informal
labour market in Turkey: A possible politics for the trade unions. South-East
Europe Review for Labour and Social Affairs, 3/2004: 79-92.
Savasan, F. (2003). Modeling the underground economy in Turkey: Randomized
response and MIMIC models. Journal of Economics (MVEA), 29 (1): 49-76.
Schneider, F. (2005). Shadow economies around the world: What do we really know?
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Schneider, F., Buehn, A. and Montenegro, C.E. (2010). New estimates for the shadow
economies all over the world. International Economic Journal, 24 (4): 443461. A lengthier version is published as a World Bank Policy Research
Working Paper (No. 5356).
Schneider, F. and Sarvasan, F. (2007). Dymimic estimates of the size of shadow
economies of Turkey and of her neighbouring countries. International
Research Journal of Finance and Economics, 9: 126-143.
Sezgin, S. Yildiz, S. and Ayyildiz, A. (2011). The ethics of tax evasion: A
comparative study of Turkey and Kyrgyzystan. Journal of Applied Business
and Economics, 12 (3): 75-90.
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International Conference on Business & Economics of the Hellenic Open University 2015,
Hotel Titania, February 6, 2015 – February 7, 2015
Tansel, A. (2001). Wage Earners, Self-Employment and Gender in the Informal
Sector in Turkey (Policy Research Report on Gender and Development
Working Paper Series No. 24). Washington D.C.: World Bank.
Tansel, A. and Oznur Kan, E. (2012). Labor Mobility across the Formal/Informal
Divide in Turkey: Evidence from Individual Level Data (IZA Discussion Paper
No. 6271). Bonn: Institute for the Study of Labor.
Tatar, M., Ozgen, H., Sahin, B., Belli, P. and Berman, P. (2007). Informal payments
in the health sector: A case study from Turkey. Health Affairs, 26 (4): 10291039.
Varcin, R. (2000). Competition in the informal sector of the economy: The case of
market traders in Turkey. International Journal of Sociology and Social
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Velioglu, M.N. and Argan, M. (2005). An ethical problem of the human medicine
sector in Turkey: Bribery. South-East Europe Review for Labour and Social
Affairs, 4/2005: 105-122.
5.2 Turkish
Us, V. (2004). Kayıtdışı ekonomi tahmini yöntem önerisi: Türkiye örneği (Arastirma
Makalesi No. 17). Ankara: Türkiye Ekonomi Kurumu.
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International Conference on Business & Economics of the Hellenic Open University 2015,
Hotel Titania, February 6, 2015 – February 7, 2015