The size of the shadow economy has been a challenge for the Turkish government as it works to restructure the economy, but now, the size of the informal economy is decreasing.
Turkey's shadow economy has sharply decreased in size over the past 10 years, according to research by Friedrich Schneider, a professor at the Department of Economics at Johannes Kepler University in Linz, Austria.
In an interview with The Anadolu Agency on Thursday, Schneider said that the black economy was 27.2 percent of GDP in 2014, down from 32.2 percent in 2003.
But Turkey is still in fourth place in terms of the size of the shadow economy among developed countries who are members of the Organization for Economic Co-operation and Development.
The informal economy in Turkey, however, is not much larger in size than the average of the European Union nations, where it is 18.6 percent of GDP. In Greece, the shadow economy is 24 percent of GDP and in Germany, it is 13 percent.
Economic growth over most of the 11-year period, along with measures taken by the Turkish government, were largely responsible for the slowing of the informal economy.
"If the official economy is recovering or booming, people have fewer incentives to undertake additional activities in the shadow economy and to earn extra 'black' money," Schneider said.
Schneider also warned that the black economy will likely grow slightly in 2015 because of the economic slowdown in Turkey, but that it would decrease in size again once the economy picked up.
Government intervention to support the registration of businesses and illegal workers has had a considerable effect as well, according to Deloitte Turkey CEO Huseyin Gurer.
"The Turkish finance ministry has the latest technology to audit the black economy and to discover tax evasions," Gurer said in a statement released on December 30, 2014.
The reduction of informal work is critical to the Turkish economy.
The government is trying to educate workers so that they can produce knowledge-intensive products. But workers on the black do not receive benefits and training since they spend their entire careers performing basic tasks.
As the most recent report on Turkey by the Organization for Economic Co-operation and Development explained, informal jobs typically carry a sizeable wage penalty. This takes a bite out of the country's economic growth.
Second, informal jobs are significantly more unstable than formal ones, so work may be erratic. Third, informal jobs considerably limit opportunities for human capital accumulation and career progression, the report said.
Then, there are gender issues: About 60 percent of women who work in Turkey do so informally, according to the Organization for Economic Co-operation and Development report.
Moreover, the informal sector includes many self-employed workers with low levels of physical capital, which is reflected in low productivity and subsistence levels of income. All of this affects total productivity.
But, not all aspects of the shadow economy are dark.
"Understanding shadow economy entrepreneurship is incredibly important for developing countries because it is a key factor affecting economic development," said Erkko Autio, a professor of Entrepreneurship at London's Imperial College Business School. "We found that government policies could play a big role in helping shadow economy entrepreneurs transition to the formal economy."
The Turkish government has a full-scale, ongoing program to help in that transition. Finance Minister Mehmet Simsek, who gave a recent presentation on the subject, pointed out that the program combines tax incentives, improved quality of taxation services and highly developed tax controls.
Corporate tax has been reduced to 20 percent from 30 percent, and personal income tax has also been reduced to 35 percent from 39.5 percent, Simsek said.
Income tax returns are now nearly all received electronically and tax payments can be made electronically. There is an electronic registry center for businesses and an electronic audit book. Documents for paying taxes have also been simplified.
Further, businesses are now obliged to use credit card terminals and electronic cash registers.
Building cooperatives, once the worst offenders, are now being carefully monitored.
The result is that Turkey now boasts a tax loss rate of 5.7 percent, 3 points above the EU average, Simsek said.
These methods, which employ both the carrot and the stick, have proved effective in other markets. The EU has had considerable success in fostering financial inclusion in this way, Schneider said.
No country will ever completely integrate the shadow economy-there are always tasks that will provide a bit of extra cash for entrepreneurial characters. But for emerging economies like Turkey, integrating a greater number of workers is a critical challenge, one that will help the country escape from the so-called "middle income trap" as a knowledge-intensive economy is created.