How Iran can address its Informal Economy

By , for Al-Monitor. Any opinions expressed are those of the author, and do not necessarily reflect the views of Iran Business News.

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.

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