Unofficial economy has greatly enlarged over the past years. This name, which is sometimes synonymous with underground, unordinary, shadow and gray economy has led to many challenges. It seems that if it keeps expanding over the coming years, the unofficial economy will become a crisis for official economy. Bijan Bidabad, an economic expert, has expressed his viewpoints in the following interview.

Unofficial economy is an intangible part of the economy. It is intangible because it cannot be included within the frame of statistical and supervisory regulations and bypasses official parts of the economy. Normally, conventional parts of the economy are included in statistics as well as supervisory functions of the government, but operations in unofficial part are out of the said realms. For this reason, they are considered a hidden part of the economy.

The unofficial part includes small producers and their workers, retail businesses without workers, those working in the field of trade services, transportation and so on. In developing countries, hawkers as well as small workshops lacking workers, which are mainly at personal houses and their number is high, are major manifestations of such activities.

When investment risk is high, people should think of ways to bypass those costs, for example, by paying bribes to customs officers.

The main difference between unofficial economic activities and those conducted within the frame of a household is that in unofficial activities, produced goods or services are given to other producers or are offered to end user as final commodity or service. However, in household activities, what is done at home is an economic activity, which is not considered to belong to unofficial economy. For example, housekeeping by housewives such as caring for children, cooking food and other services are household activities, which are not included in state statistics, but are not part of the unofficial economy because such services are provided at home. Unofficial part is that part of the economy whose goods and services enter market transactions one way or another. Such market transactions set prices and should be registered according to regulations of national audit system, which is not the case. On the other hand, we have other economic sectors, which are subsets of the unofficial economy. For example, unordinary economy is total economic activities whose products are legal, but activities involved in them are against domestic laws. This part is called unordinary economy. Of course, there are many names in unofficial economy such as underground economy, hidden economy as well as invisible, parallel, second, shadow or unreported economy.

The major characteristic of unordinary economy is that its products and services are legal, but production or distribution operations include illegal procedures. For example, there are many ways for tax evasion, which are considered unordinary part of evading regulations. They are classified as unordinary due to not observing safety regulations for workshops, not insuring their workers, not observing laws about minimum workers’ pay, lack of registration, lack of permit, misuses of various insurance services, collusion with tax officer, taking advantage of migrants whose employment is illegal, as well as illegal transactions in foreign exchange or similar instances. However, in illegal part, the very production of goods and services is illegal and, in other words, all economic activities in it, including production and distribution, are considered to be against the law. Illegal activities such as producing narcotics, prostitution, dealing in alcoholic drinks and so on, are not covered by national audits. Of course, some of those activities are legal or illegal depending on laws and regulations of every country.

For example, prostitution is legal in Germany, but is illegal in many countries. Growing narcotics is legal in Afghanistan, but illegal in many countries. such activities could be considered legal or illegal and include a wide range of activities such as forging documents, printing illegal credit documents, theft, pick-pocketing, production and distribution of illegal goods and services, smuggling, robbing, bribery, and so forth. All of these activities are considered illegal and most of them are prohibited in most countries. Anyway, if we classify them according to production behaviors, transactions, price or registration, the result is that production in conventional part of the economy is legal, transactions are going on, and goods have set prices and are registered in a national registry.

In household sector, production of goods is quite legal, but there is no transaction of goods and no price and production is registered in a national registry. In the unofficial economy, production of goods and services is legal and those goods and services are dealt in. However, they are not registered in a national registry and are not included in state statistics. In unordinary sector, production of goods is legal, but there are violations in production activities. In other words, goods and services are being exchanged, but there are legal violations and prices are phasic. Phasic prices are those prices are not definite because there is no clear market for such goods and services while they are registered in national registry. In the illegal sector, the whole process of production and distribution of goods and services is against the law and prices are also phasic, without being registered in the national registry. This is a general classification for recognizing hidden and underground economy. As I said before, many of those activities that I mentioned at the end are unordinary and illegal and done under hidden or underground economy.

The most important factor for creation of unofficial economy is approved laws. Approved laws change productivity of production of goods and services. Assume that a tax limitation is considered for an economic activity or insurance, social security or safety restriction is considered for a business. In that case, producers will be left with two options: first, continue production in a legal way respecting that limitation; and second, bypassing that limitation and produce the same good in an illegal way. In these two conditions, two different prices will be set for the produced commodity. The price set through the first way, which is the legal way, will be higher than the second way. As a result, production through that way will be economical because the cost price would be lower. For example, a workshop produces carpets without insuring workers because every carpet weaver should pay a lot of money as insurance premium to Social Security Organization. Therefore, workers are employed covertly and work covertly. As a result owner of the workshop evades paying 20% premiums for workers. If he bribes 2% of that figure to insurance inspectors, 18% will remain as net profit. This is a result of approved laws, which intend to interfere in any form of economic activity.

Legal punishments considered for various crimes affect cost of violations. Therefore, if somebody evades tax under conditions where the fine will be equal to the tax that he has not paid, it would be wiser not to pay tax because if they are caught, the fine will be equal to what they should have paid under normal circumstances. Now let’s assume that punishment for evading tax is as much as the money he has paid as tax. In that case, mathematical possibility for not paying tax will be low. From a statistical viewpoint, if a person evades tax for one or two or three times and is caught after the sixth instance of tax evasion, he will have to pay as much as ten times his legal tax. As a result, the cost of not paying tax would be so high as to make tax payment more reasonable. This is the case in advanced countries, if you cross a red light, the fine will be as high as, say, one million tomans. Therefore, it is better to wait one minute behind the red light than to have to pay that high figure. When the fine is high, offense will become too costly. Another point is that supervisory systems should be healthy. For example, if insurance inspectors could be bought for a small bribe, then tax evasion rate will be high. But if supervisors are tough it will be difficult for offenders to grease their palms.

First, we must try to reduce government’s control over the economy. The government should not interfere in all people’s affairs. For example, when cement price increased over the past week, the government interfered on behalf of consumers, added the cement to protection basket and banned cement exports. That is, it ignored the rights of cement investors, most of whom are ordinary people holding stocks, in favor of consumers. This is interference in people’s affairs.

In other words, it is interference in people’s ownership rights, interference in investment security, and finally, interference in all future investment grounds. This interference is considered a risk factor for investment. When investment risk is high, people should think of ways to bypass those costs, for example, by paying bribes to customs officers. We have been complaining about smuggling for years while a large amount of foreign goods are being sold in Tehran and other cities. The question is how a shipment of goods has easily crossed southern, northern and western borders to enter the country and be distributed all across Iran despite the fact that it is still considered smuggling? Therefore, commodities that have found their way into Tehran are either permitted or have reached here after bypassing security officer. It means that the government has issued permits against general regulations at certain junctures for entry of those goods, or smugglers have greased the palms of security and customs officers.

Otherwise, this high quantity of smuggled goods cannot reach Tehran aboard helicopters. Anyway, legal limitations lead to illegal activities and the more those limitations are reduced; economic activities will become more transparent.

If taken as illegal economy, unofficial economy would be different from unordinary economy. In unordinary economy, production and distribution of goods in a legal form is of no objection. However, illegal production and distribution of those goods will be forbidden. For example, production of alcoholic drinks or narcotics and their distribution is forbidden in Iran. Production of textile is not forbidden. When we use unofficial economy it means those conditions when production of a commodity is legal, but its transaction is not registered, such as what hawkers do. These are examples of unofficial economic activities, which are not illegal, but they are called unofficial because production and distribution of those goods is not registered anywhere and such activities are not covered by official statistics and analyses. Unordinary economy, however, is that apart of economic activities where production and transaction of goods is originally lawful, but violations occurring afterwards.

The value of labor is different in various activities. Unofficial activities are common in traditional economic sectors. In semi-industrial activities, unordinary activities increase while illegal activities are more common with regard to special commodities.

According to figures announced by the United Nations anti-drug headquarters, a lot of illicit drugs produced in Afghanistan are stored in Iran. Due to price difference of narcotics between western and eastern borders, that difference stands at about 40,000 billion rials. The value of narcotics trafficked in the world in 1980s alone has been estimated to be above the value of global oil exports. It is true about Iran too. Earning through drug transit or sales has been roughly equal to Iran’s oil revenues in 2001 and 2002. In other words, 76% of opium as well as 10% of heroine and morphine and 5% of hashish produced in the world is being stored in Iran. During the same year, estimated money laundered in Iran amounted to 35,000 billion rials. According to another report by Anti-Drug Headquarters in 2001, the figure stood at about 35,000-40,000 billion rials. If we added earning through transit of drugs, which is about 40,000 billion rials, total revenues through drug trafficking would amount to 80,000 billion rials, which is very close to oil revenues during the same year, which stood at about 100,000 billion rials. The same is true about other special commodities. For example, smuggling humans, alcoholic drinks, and cigarettes are other illegal commodities that account for a profitable trade worldwide. Financial turnover of mafia, which works through 3,000-5,000 members in 25 families, has been estimated at about $200 billion per year with resultant profits netting $75 billion. Other goods (cigarettes, alcoholic beverages) follow a similar pattern. According to figures produced by head of Iran Tobacco Company, between $800 million to $1 billion were spent on buying foreign cigarettes in 2001 and 2002. When it comes to prostitution, current estimates indicate that about 200 million women and young girls are working in international prostitution networks and share of revenues earned through Internet sex activities in 2002 alone, has been estimated at about 7-13 billion dollars.

Other items include automobiles and home appliances. Automobiles are smuggled into neighboring countries and home appliances enter the country. Sugar smuggling was so intense that 450,000 tons domestically produced sugar was not sold. During that year (2002), total sugar smuggled was estimated at about 300,000 tons, worth about 1,400 billion rials. Textiles smuggled into the country have been valued at about 0.5 billion dollars or about 4,000-5,000 billion rials. Smuggled textile sometime accounts for up to 60% of domestic consumption. Tea smuggling is another instance and during some years, about 200,000 tons tea is smuggled into the country. Smuggled tea enters the country through transit. In some instances, for example with regard to computer parts, the smuggled goods enter Mehrabad Airport, but are not offloaded. Then the plane flies to another city and when passengers board the plane, it goes back to Tehran. In that case, the cargo is considered domestic and does not have to go through customs offices.