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Economic Shadows and Light

ANKARA – If it is true that we live in a “global village,” bound to one another through commercial, financial, and social ties, then it is also true that informal economic activity in one part of the world has a negative impact elsewhere. That means that formalizing every economy should be viewed as a global public good. The G-20 and other international entities should take the lead in ensuring the coordination and cooperation needed to provide it.

The biggest losers of the informal economy are ordinary citizens, because informality inhibits long-term economic growth and productivity gains; creates unfair competition; hinders the growth of small and medium-size enterprises (the main sources of employment); and leaves millions of workers without basic rights, such as health insurance and pensions. It also leads to significant tax-revenue losses, reducing both the quality and quantity of public services. Income inequality and social injustice invariably increase as well.

Reducing the scope of the formal economy may seem to be a national task; and governments should indeed act. They should reduce the tax burden, simplify tax systems, and reduce regulatory compliance costs, while strengthening enforcement. Likewise, they should eliminate barriers to competition, simplify business registration processes, increase the transparency of public procurement, and improve access to credit.

But combating the informal economy requires international cooperation as well. According to the European Commission, “non-cooperative” and “non-transparent” jurisdictions – also known as tax havens – cost the European Union’s member states more than $1 trillion in revenue every year. Controlling and decreasing the risks that these jurisdictions pose can happen only at the global level.