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

Teaching Business & Economics, Autumn 2003 by Thomas, Rob

Whilst the above is presented as a consensus, differences in terminology certainly remain and so the definitions being used should be identified when considering any particular set of figures - to which we now turn.

UNOFFICIAL ECONOMY: ESTIMATES

Problems of measurement

One aspect that all agree on is that measuring the unofficial sector is fraught with difficulty: the household sector cannot be directly measured because the economic transactions are not observable; the informal sector is outside the formal measurement systems; and both the irregular and the criminal sectors deliberately hide their activities.

Of course, that has not stopped researchers attempting the exercise[11] though it should warn us all about the trust to be placed in the estimates. Three main approaches have been adopted[12]: anecdotal/case studies; surveys of participation in the shadow economy; and measuring differences between expected and actual levels of activities (the so-called discrepancy approach).

As noted in many a research methods text, case studies offer the opportunity to obtain detailed and complex information on a subject. Certainly in respect of this topic, case studies have added to knowledge and aided the classification presented above. However, because they adopt different approaches and are carried out for different regions/countries at different points in time, they do not produce estimates that can be generalised to the country as a whole, to other countries or over time.

The survey method relies on identifying (via sampling) relevant respondents who are willing to answer truthfully. As well as the possible reliability problems associated with case studies, in at least two sectors of the unofficial economy (the irregular and criminal), respondents have an interest in concealing the truth.

Various data have been employed to measure the hidden economy by the discrepancy approach. The starting point is the assumption (heroic?) that in much of the underground economy cash is used because it does not involve a record of the transaction. It also assumes (even more heroically) that a base year can be identified when all cash transactions related to the official economy. Then, estimates of the expected use of cash are made and compared with the actual level for subsequent years - the difference being a measure of the hidden economy.

Other data employed in the discrepancy approach have been electricity usage (though its hard to believe that all shadow economy activities require electricity) and tax receipts (at best measures the irregular and criminal sectors only).

Estimates

Whilst the Grabiner Report for the UK shied away from a precise estimate[13], others have attempted to estimate at least part of the shadow economy. The Economist estimate noted at the beginning of this article was based on the work of Austrian economist, Friedrich Schneider.

Schneider and Enste[14] adopts a discrepancy approach utilising electricity and currency data. Calculating their definition of the shadow economy (which more closely resembles the hidden economy as defined here) as a percentage of the country's GDP, the findings support the view that the shadow economy is relatively more important in developing, low income economies than in developed, high income economies. Thus, whereas the shadow economy is estimated to be between 68 and 76% of GDP in Nigeria and Egypt, the range for the UK and France is 13 to 23%[15] . and as low as 8 to 10% in Japan and the US. However there are exceptions, with estimates of between 9 and 16% for Romania and Slovakia.