Growth in Informal Sector Undermining Iran's Economy

EghtesadOnline: When state presence in an economy becomes overbearing and recession eats away wages, many move out of the government sights seeking jobs wherever they can find them. In other words, the informal economy—the part of the economy that neither pays tax nor is monitored in any form by governments—thrives.

News ID: ۷۶۸۹۳۳

22 August 2016

The grey economy’s expansion has created a vicious cycle the government is trying to contain. With the government unable to collect tax from the informal sector, and with its increasing list of liabilities, public services face funding shortages, making the informal sector all the more attractive.

Iran’s informal sector employs a third of the workforce and generates a fifth of economic output. It accounts for an estimated 18.9% of the GDP, the secretary of Iran Urban Economics Association Seyyed Mohsen Tabatabai Marzabadi told ISNA on Saturday.

Workers in the informal sector typically earn less, have unstable income, and do not have access to basic protection and services.

One of the Top Employers

The number of jobs the sector creates outweighs its significance as a share of economic output. “For every two formal jobs there is an informal job,” the Minister of Cooperatives, Labor and Social Affairs Ali Rabiei said in a conference in May. The International Labor Organization says half to three-quarters of all non-agricultural employment in developing countries comes from the informal economy. Iran is in the middle of that range.

There are 22.5 million people currently employed in Iran, according to the labor minister. Sixteen million of them are formally employed. That leaves an estimated 6.5 million grey economy jobs. Most work for cash without contract, healthcare or pension, according to Financial Tribune.

In Iran, the sector expanded during the 2000s as lax government oversight and a bubbling economy from the injection of petrodollars led to increased corruption. The recession during 2012 and 2013 accelerated the growth of the sector.

Today Tehran’s subway is full of people peddling cheap goods to the commuters. A tube ride without offers of bubblegum and socks are rare. Informal employment most often means poor employment conditions and is associated with increasing poverty, according to ILO. However, it is hard to generalize the quality of such jobs. There are many highly paid consultants that get most of their income from under the table.

Regardless, tax revenues always take a hit. Today, lack of a comprehensive economic data, widespread tax exemption and evasion, cumbersome laws and regulations, along with a general failure to uphold the law are keeping tax revenues at the minimal, according to the Economy Minister Ali Tayyebnia.

Small wonder tax revenues are below 7% of GDP, according to the former head of the National Tax Administration, Ali Askari. This is while tax revenues account for 25-30% of GDP in most developed countries. The lost tax income is manifesting itself more than ever before with oil prices near historic lows and the government struggling to find income for its fiscal plans.

As the saying goes: better late than never.  The government is now overhauling the tax system to increase its oversight of the economy. The administration has also shown interest in streamlining business regulations to reduce the cost of doing business legally.

Call to Integrate Street Vending in Formal Economy

A group of economists have called for including street vending in the formal economy in a letter to Tehran Mayor Mohammad Baqer Qalibaf and the chairman of the Tehran City Council, Mehdi Chamran.

With the economy under recession, companies out of business, joblessness taking its toll and many struggling to make ends meet, temporary markets can help households escape the poverty trap its social ramifications, the ten signatories said.

Calling on Tehran Municipality to recognize street vending as a legal job and allocate specific places to hawkers, the economists said, “Street vending and selling home-made products under the supervision of municipalities is widely accepted in successful economies. Many prominent entrepreneurs the world over  started out as salespeople in makeshift markets. Needless to say, street vending is not a goal but a means to later have a decent business,” ILNA reported.

Earlier the Tehran governor general’s office had objected to the crackdown on hawkers on the premise that “the move would prompt them to get involved in illegal activities, such as smuggling.”

Recalling that most street vendors provide the main source of income for their families, the director for socio-cultural affairs at the Tehran governorate, Siavash Shahrivar said, “Street vendors should be given identity cards and even pay some form of tax.”