Question

• What is the average anticipated size of Informal GDP or Shadow economy as a % of Official GDP of an economy?

Answer 1

Here, I have taken example of the year 1999-2000 and latest period as 2002-03

How the Calculation Is Done ?

Using various statistical procedures, estimates about the size of the shadow economy in 110 developing, transition and OECD countries are presented. The average size of the shadow economy (in percent of official GDP) over 1999-2000 in developing countries is 41%, in
transition countries 38% and in OECD countries 18.0%. An increasing burden of taxation and social security contributions combined with rising state regulatory activities are the driving forces for the growth and size of the shadow economy. If the shadow economy increases by one percent the annual growth rate of the “official” GDP of a developing country (of a industrialized and/or transition country) decreases by 0.6% (increases by 0.8 and 1.0 respectively).

Gathering statistics about who is engaged in underground activities, the frequencies with which these activities are occurring and the magnitude of them, is crucial for making effective and efficient decisions regarding
the allocations of a country’s resources in this area. Unfortunately, it is very difficult to get accurate information about these underground (or as a subset shadow economy) activities on the goods and labor market, because all individuals engaged in these activities wish not to be identified. Hence, the estimation of the shadow economy activities can be considered as a
scientific passion for knowing the unknown.
Hence, the goal of this paper is to undertake the challenging task to estimate the shadow economy for 110 countries, to provide some insights about the main causes of the shadow economy.

Definition Of Shadow Economy

Most authors trying to measure the shadow economy face the difficulty of how to define it.
One commonly used working definition is all currently unregistered economic activities that
contribute to the officially calculated (or observed) Gross National Product.

Economist Smith defines it as ,market-based production of goods and services, whether legal or illegal that
escapes detection in the official estimates of GDP.“

Or to put it in another way, one of the broadest definitions of it, includes…”those economic activities and the income derived from them that circumvent or other wise government regulation, taxation or observation”.

As these definitions still leave open a lot of questions, table 2.1 is helpful for developing a better
feeling for what could be a reasonable consensus definition of the legal economy and the illegal underground (or shadow) economy.
From table 2.1, it becomes clear that the shadow economy includes unreported income from
the production of legal goods and services, either from monetary or barter transactions – and so includes all economic activities that would generally be taxable were they reported to the state (tax) authorities. A more precise definition seems quite difficult, if not impossible as the
shadow economy evolves over time adjusting to taxes, enforcement changes, and general societal attitudes.

The Size of Shadow Economies All Over The World - Findings for 110 Countries

For single country and sometimes for a group of countries research has been undertaken to estimate the size of the shadow economy using various methods and different time periods. In tables 3.1 to 3.6, an attempt is made to undertake a consistent comparison of estimates of the
size of the shadow economies of various countries, for a fixed period,for the shadow economy for 110 countries all over the world for the year 2000.

Developing Countries

Table 3.1

The physical input (electricity) method, the currency demand and the model (DYMIMIC) approach are used for the developing countries.The results for 24 African countries are shown in table 3.1.; and on average, the size of the shadow economy in Africa was 41% of “official” GDP for the year 1999/2000.

Zimbabwe, Tanzania and Nigeria (with 59.4, 58.3 and 57.9% respectively) have by far the largest shadow economies; in the middle are Mozambique, Cote d’Ivoire and Madagascar with 40.3, 39.9 and 39.6%; at the lower end are Botswana with 33.4, Cameroon with 32.8 and South Africa with 28.4%.The sizes of the shadow economies in Africa are typically quite large.

Table 3.2

In table 3.2 the results for Asia are shown, recognizing that it is somewhat difficult to treat all Asian countries equally because Japan, Singapore and Hongkong are highly developed countries and the others more or less developing countries.

If we consider these 26 Asian countries, where the results are shown in table 3, Thailand has by far the largest shadow economy in the year 2000 with the size of 52.6% of official GDP; followed by Sri Lanka (44.6%) and the Philippines (43.4%). In the middle range are
India with an estimated shadow economy of 23.1% of official GDP, Israel with 21.9% and Taiwan and China11) with 19.6%. At the lower end are Singapore (13.1%) and Japan (11.3%).
On average the Asian countries have a size of the shadow economy of 26% of official GDP for the year 1999/2000. One realizes that the average size of the Asian shadow economies is considerably lower compared with the ones of African and South and Latin American States –
partly due to the fact that in Asia we have a number of highly developed industrialized countries with low shadow economies.

Table 3.3

In table 3.3 the results of the sizes of the shadow economies for the year 2000 for 17 South and Latin American countries are shown. The average size of shadow economy of these 17 countries is 41% of official GDP.

The largest shadow economy is in Bolivia with 67.1%, followed by Panama (64.1%) and Peru (59.9%). The smallest shadow economies are in Chile (19.8%) and Argentina (25.4%).
Overall the average sizes of the shadow economies of South and Latin America and of Africa are generally similar and somewhat larger than in Asia – mostly due to the fact that in Asia we have a number of highly industrialized and developed countries (Japan, Singapore, etc.)

Transition Countries

In this the sizes of the shadow economies of the transition countries which have been estimated the year 2000 using the DYMIMIC approach, are presented in table 3.4.

Table 3.4

23 transition countries have been investigated and the average size of the shadow economy relative to official GDP is 38% for the year 1999/2000. Georgia has the by far largest shadow economy at 67.3% of GDP, followed by Azerbaijan with 60.6% and Ukraine with 52.2%. In the
middle field are Bulgaria and Romania (36.9 and 34.4%, respectively) and at the lower end are Hungary (25.1%), the Czech Republic (19.1%) and the Slowac. Republic (18.9%).

Highly developed OECD-Countries

OECD countries typically have a smaller shadow economy than the other country groupings. For 21 OECD countries the results are not only shown for the year 2000, but also over an extended time period, i.e. from 1989 to 2002/2003; the results are presented in table 3.5.

Table 3.5

For the 21 OECD countries a combination of the currency demand method with the DYMIMIC method is used.Considering again the latest period 2002/2003, Greece has with 28.3% of official GDP the largest shadow economy, followed by Italy with 26.2% and Portugal with 22.3%. In the middle-field are Germany with a shadow economy of 16.8% of official GDP, followed by Ireland with 15.5% and France with 14.8% of official GDP. At the
lower end are Austria with 10.8% of GDP and the United States with 8.6% of official GDP.
For these OECD countries one realizes over time a remarkable increase of the shadow economies during the 90s. On average the shadow economy was 13.2% in these 21 OECD states in the year 1989/90 and it rose to 16.4% in the year 2002/2003. If we consider the
second half of the 90s, we realize that for the majority of OECD countries the shadow economy is not further increasing, even (slightly) decreasing, like for Belgium from 22.5% (1997/98) to 21.5% (2002/2003), for Denmark from 18.3% (1997/98) to 17.5% (2002/2003)
or for Finland from 18.9% (1997/98) to 17.6% (2002/2003) or for Italy from 27.3% (1997/98)
to 26.2% (2002/2003). For others, like Austria, it is still increasing from 9.0% (1997/98) to 10.8% (2002/2003), or Germany from 14.9% (1997/98) to 16.8% (2002/2003).

Conclusion

Hence, one can’t draw a general conclusion whether the shadow economy is further increasing or
decreasing at the end of the 90s. It differs from country to country but in some countries some efforts have been made to stabilize the size of the shadow economy and in other countries (like Germany) these efforts were not successful up to the year 2003.