How Iran can address its Informal Economy

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.

On a practical level, the most visible strategy that the administration of President Hassan Rouhani has pursued since 2013 has been the improvement of the investment climate. Indeed, the World Bank’s 2018 Doing Business Report highlights progress in a number of areas where government reforms have improved the overall business conditions. Notwithstanding, Iran needs a lot more reforms to address the informal sector — and the government is aware of some of the remedies.

For example, Iran was party to an International Labor Organization (ILO) conference in Geneva in 2015 where the so-called Recommendation 204 was presented by ILO. This document provides valuable guidance on reforms needed to “facilitate the transition of workers and economic units from the informal to the formal economy,” “promote the creation, preservation and sustainability of enterprises and decent jobs in the formal economy” and “prevent the informalization of formal economy jobs.”

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