unofficial economy: There are lies, damn lies and GDP statistics, The

Teaching Business & Economics, Autumn 2003 by Thomas, Rob

Traffic lights in Accra, the capital of Ghana, offer an interesting shopping experience (or should I say, retail therapy?). When the lights change to red, young men and women walk down the lines of vehicles selling food, drink, clothing, electronic goods and even toilet paper. Another example of the market mechanism at work; it is not Tesco or Sainsbury but the essentials of demand and supply are the same - the end result is a market transaction.

Well, not quite the same end in that whereas the transactions in a UK supermarket are documented and eventually recorded in the official figures of national income and expenditure, it is unlikely that the sale of a bag of water at a set of traffic lights in Accra will find its way into the national accounts of Ghana; the seller is unlikely to be a registered business or pay tax, so s/he will not have kept any record of the transaction.

A few bags of water may go undeclared but it hardly seems to matter when national income is many millions or even trillions of whatever currency is being used for measurement. However, using figures for 1998, The Economist estimated that whilst the global output of goods and services (Gross Domestic Product, GDP) was US$39 trillion, there was another US$9 trillion of economic activity that went undetected - "a volume of output equivalent to another America"[1]. The estimates also indicate that economic activities go undetected in developed economies with sophisticated methods for measuring national income as well as in developing economies.

A measurement error of over 23 percent seems pretty significant. Yet the subject of undetected economic activity is given scant attention in the introductory economics texts - about a page or so as part of the discussion of GDP and the national accounts plus, in some cases, a brief analysis of the 'black economy'[2]. But the matter is important.

Recall that economists measure the sense of satisfaction that people receive, or "utility" as we call it. We know that some of this utility is not closely related to material things. People derive utility from love and friendship for example. But the part of utility that is derived from the things we receive can be measured by income. At a national level we can say that a society's level of utility is dependent upon its income, or what amounts to the same thing, national output. After all, the basis of valuing this figure is the use of market prices. Prices reflect what consumers are willing to pay for goods and services - what they think it is worth. So an assumption is often made that welfare is linked to National Income per head.

However, the relationship of income to national income is far from perfect and a range of considerations makes us treat this link with caution. One problem is the existence of an economy that is not recorded in the official accounts. In this article we take a closer look at this unofficial economy.

Admittedly, in attempting to measure activities that most of the participants want to keep from view means that the size of the 'unofficial' economy is difficult to estimate. And in any case, it may not be that important, especially if the unofficial economy remains a constant proportion of the official or measured economy over time for the same economy and between economies at different stages of development.

However, before we can consider these empirical issues, we must firstly define what we mean by the 'unofficial economy'.

UNOFFICIAL ECONOMY: DEFINITION

The objective is to measure the output of goods and services produced in an economy or region - that is, the aggregate of all economic activities that generate goods and services. What has so far been termed the 'unofficial economy' comprises activities that are not measured in the official figures.

This simplicity of thought is deceptive. An immediate indication of the measurement problems comes in the lack of agreement about the terminology to be used. Even a cursory look at the literature produces a long list of terms (used as precursors to economy/sector/activity):

Black/ Clandestine/ Criminal/ Grey/ Hidden/ Household/ Illegal/ Illicit/ Irregular/ Informal/ Parallel/ Shadow/ Subterranean/ Underground/ Unofficial/ Unrecorded/ Unreported.

Whilst some of these terms are straightforward, others are defined in different ways by different authors, and this includes in official reports. For example, the Grabiner Report on the informal economy in the UK uses the terms 'hidden economy' and 'informal economy' interchangeably even though the International Labour Organization states that the two terms should be differentiated[3].

Some movement to a consensus has been achieved via a behavioural approach that focuses on the institutional rules in a country (or region): those participating in the official sector operate within the rules whilst those in the unofficial sector ".. circumvent, escape or are excluded from the institutional system of rules"[4].

Of course, different countries and regions have different rules and the rules change over time. Thus, what may constitute an unofficial activity at a point in time in one country may not be counted as such at another time in the same country or in another country. The most obvious examples relate to criminal activities such as drugs and prostitution.