MNeagle
1st August 2010, 05:19 PM
A report identifies countries with the largest shadow economies, many of which are half as large as official GDP—a huge loss in tax revenue.
It turns out that countries have two economies: the official one and a shadow version. The official economy is the one that governments and banking institutions measure with gross domestic product, tax receipts, social security contributions, employment identification numbers, and the like. The shadow economy is all the money and jobs generated outside the official economy, whether legally or illegally. In more than 50 countries around the world, the shadow economy is at least 40 percent the size of documented GDP.
In percentage terms, the biggest shadow economy relative to official economic activity is in the former Soviet republic of Georgia. In 2007, the last year for which data were available, revenue from all Georgia's goods and services generated off the books amounted to 72.5 percent of official GDP. In other words, the government is losing out on billions of taxable dollars it could use to improve the national infrastructure, service debt, build schools and roads, even hire better tax collectors . At the other end of the scale, the U.S. shadow economy equaled only 9 percent of the country's official economy. Given U.S. GDP of $14.26 trillion, the world's largest, that could still be as much as $1.2 trillion in taxes that slip through Uncle Sam's fingers each year.
The size of a shadow economy can be vitally important. As became painfully clear during the Greek economic crisis, one of the factors that nearly drove the country into bankruptcy was that Greek workers and companies skirted more than 31 billion euros in taxes, which is more than 10 percent of GDP.
In an updated report, Shadow Economies All Over the World: New Estimates for 162 Countries from 1999 to 2007, Greece comes across as a model of fiscal responsibility when compared with dozens of other nations. In the report's ranking from least to most shadowy, Greece is No. 57, with a shadow economy equal to 31 percent of GDP in 2007.
Wide Margin of Error
Nailing down shadowy numbers is difficult, of course. According to Friedrich Schneider, an economics professor at Austria's Johannes Kepler University of Linz who co-authored the study, the margin of error baked into the results is about 15 percent. Therefore, while the report says Georgia's shadow GDP in 2007 was 72.5 percent, that number could be less—or even more. What we do know is that Georgia's official GDP, according to the CIA's World Factbook, is approximately $20.3 billion, but if the shadow economy were added, it could potentially be as much as $30 billion or so.
Schneider points out that for the purposes of his study, he and his colleagues, Andreas Buehn of Technische Univerität Dresden, and Claudio E. Montenegro of the World Bank and the Universidad de Chile, excluded what they call "typical underground, classical economic crime activities," such as burglary and drug-dealing. They also did not focus on tax evasion. What they did focus on was what "all market-based legal production of goods and services that are deliberately concealed from public authorities" to avoid payment of taxes, social security obligations, and labor laws. That means basically small and large businesses, doctors, contractors, nannies, grocers, and others from a broad swathe of the economy who choose not to report income and transactions.
One notable finding is that from 1999 to 2007, shadow economies appear to be on the rise in nearly every country the study ranked. For example, America's shadow economy in 1999 was 8.6 percent and climbed to 9.0 percent in 2007. (The number was higher for developing countries, where shadow economies increased from an average of 36.6 percent in 1999 to 38.6 percent in 2007, as opposed to an increase of 16.8 percent to 18.7 percent for the 25 high-income OECD countries.) The reason behind the rising numbers? "Taxation and regulation increased in most countries" over the past 10 years, says Schneider. As he writes in his report: "reducing the tax burden is the best policy measure to reduce the shadow economy, followed by a lessening of fiscal and business regulation."
When the Shadow is Real
But for many developing nations like Peru, the huge shadow economy results from growing urbanization and more commerce, says Daniel Córdova, dean of the graduate school at Universidad del PacÃ*fico and director of the Invertir Institute, an NGO that promotes entrepreneurship.
"What you call the shadow economy is the real economy" in Peru and other countries in Latin America, says Córdova. In the study, Peru has the fourth-largest shadow economy.
Many Peruvians do not have social security numbers and are not on a formal payroll, says Córdova. With a labor-intensive bureaucracy, it can be difficult to start a formal business. In Peru, the poor population's assets amount to $90 billion, according to the website of the Instituto Libertad y Democracia, a think tank in Lima.
What is clear is that regardless of what taxpayers believe, the countries with the most efficient tax collection and enforcement systems are the ones that tend to have the smallest shadow economies.
Schneider goes even further. He and his co-authors suggest that the solution is not just more efficient tax collecting and lighter regulation, but also to find a way to make work in the official economy more attractive and reduce the incentives to participate in the shadow world. At a time when official economies around the globe are dealing with high unemployment, it might be some time before shadow economies lose their appeal.
The Countries with the Biggest 'Shadow Economies'
Global Tax Evasion
Despite what many might argue, paying taxes is one of the cornerstones of a healthy economy. More and more citizens around the world are avoiding taxes by operating businesses off the data grid. The boom in "shadow economies" leaves governments insufficient revenue to provide adequate public services, whether that means health care, roads, education, or even better tax collection. In fact, a new report estimates that in 2007, in 162 countries, an average of 35.5 percent of official gross domestic product slipped through the cracks–not counting any fruits from such illegal activities as drug dealing or organized crime. Friedrich Schneider, an economics professor at Austria's Johannes Kepler University of Linz and a co-author of the report, "Shadow Economies All Over the World: New Estimates for 162 Countries from 1999 to 2007," emphasizes that the study's numbers refer only to the amount unpaid by individuals and businesses avoiding taxes or legal labor requirements. The problem is on the rise both in developed and developing nations. The worst offender is the former Soviet republic of Georgia, where an estimated 72.5 percent of GDP was untaxed in 2007. The U.S., while not immune to shadow economic problems, is the world's least-affected country, with a mere 9.0 percent of legally derived GDP escaping the IRS that year.
1. Georgia
Bloomberg
Percent of GDP in Shadow Economy: 72.5*
Official GDP: $20.29 billion**
Population: 4,600,825
Labor Force by Occupation:
Agriculture: 55.6 percent
Industry: 8.9 percent
Services: 35.5 percent (2006 est.)
Industries: steel, aircraft, machine tools, electrical appliances, mining (manganese and copper), chemicals, wood products, wine
Exports: scrap metal, wine, mineral water, ores, vehicles, fruits and nuts
*For all slides this figure is the result for 2007.
**All data for population, GDP, labor force by occupation, industries and exports for all captions is from the CIA's World Factbook, 2010 ed.
2. Bolivia
Bloomberg
Percent of GDP in Shadow Economy: 70.7
Official GDP: $45.11 billion
Population: 9,947,418
Labor Force by Occupation:
Agriculture: 40 percent
Industry: 17 percent
Services: 43 percent
Industries: mining, smelting, petroleum, food and beverages, tobacco, handicrafts, clothing
Exports: natural gas, soybeans and soy products, crude petroleum, zinc ore, tin
3. Azerbaijan
Bloomberg
Percent of GDP in Shadow Economy: 69.6
Official GDP: $86.03 billion
Population: 8,303,512
Labor Force by Occupation:
Agriculture: 38.3 percent
Industry: 12.1 percent
Services: 49.6 percent
Industries: petroleum and natural gas, petroleum products, oil field equipment, steel, iron ore, cement, chemicals and petrochemicals, textiles
Exports: oil and gas (90 percent), machinery, cotton, foodstuffs
4. Peru
Bloomberg
Percent of GDP in Shadow Economy: 66.3
Official GDP: $253 billion
Population: 29,907,003
Labor Force by Occupation:
Agriculture: 0.7 percent
Industry: 23.8 percent
Services: 75.5 percent
Industries: mining and refining of minerals, steel, metal fabrication, petroleum extraction and refining, natural gas, fishing and fish processing, textiles, clothing, food processing
Exports: copper, gold, zinc, crude petroleum and petroleum products, coffee, potatoes, asparagus, textiles, fishmeal
5. Tanzania
Bloomberg
Percent of GDP in Shadow Economy: 63.0
Official GDP: $57.89 billion
Population: 41,892,895*
Labor Force by Occupation:
Agriculture: 80 percent
Industry and Services: 20 percent (2002 est.)
Industries: agricultural processing (sugar, beer, cigarettes, sisal twine), diamond, gold, and iron mining, salt, soda ash, cement, oil refining, shoes, apparel, wood products, fertilizer
Exports: gold, coffee, cashew nuts, manufactures, cotton
*Estimates for this country explicitly take into account the effects of excess mortality due to AIDS; this can result in lower life expectancy, higher infant mortality, higher death rates, lower population growth rates, and changes in the distribution of population by age and sex than would otherwise be expected.
6. Ukraine
Bloomberg
Percent of GDP in Shadow Economy: 58.1
Official GDP: $294.3 billion
Population: 45,415,596
Labor Force by Occupation:
Agriculture: 15.8 percent
Industry: 18.5 percent
Services: 65.7 percent
Industries: coal, electric power, ferrous and nonferrous metals, machinery and transport equipment, chemicals, food processing
Exports: ferrous and nonferrous metals, fuel and petroleum products, chemicals, machinery and transport equipment, food products
7. Thailand
Bloomberg
Percent of GDP in Shadow Economy: 57.2
Official GDP: $538.6 billion
Population: 66,404,688*
Labor Force by Occupation:
Agriculture: 42.4 percent
Industry: 19.7 percent
Services: 37.9 percent
Industries: tourism, textiles and garments, agricultural processing, beverages, tobacco, cement, light manufacturing such as jewelry and electric appliances, computers and parts, integrated circuits, furniture, plastics, automobiles and automotive parts, world's second-largest tungsten producer and third-largest tin producer
Exports: textiles and footwear, fishery products, rice, rubber, jewelry, automobiles, computers and electrical appliances
*Estimates for this country explicitly take into account the effects of excess mortality due to AIDS; this can result in lower life expectancy, higher infant mortality, higher death rates, lower population growth rates, and changes in the distribution of population by age and sex than would otherwise be expected.
8. Zimbabwe
Bloomberg
Percent of GDP in Shadow Economy: 56.1
Official GDP: $332 million
Population: 11,651,858*
Labor Force by Occupation:
Agriculture: 66 percent
Industry: 10 percent
Services: 24 percent
Industries: mining (coal, gold, platinum, copper, nickel, tin, clay, numerous metallic and nonmetallic ores), steel, wood products, cement, chemicals, fertilizer, clothing and footwear, foodstuffs, beverages
Exports: platinum, cotton, tobacco, gold, ferroalloys, textiles/clothing
*Estimates for this country explicitly take into account the effects of excess mortality due to AIDS; this can result in lower life expectancy, higher infant mortality, higher death rates, lower population growth rates, and changes in the distribution of population by age and sex than would otherwise be expected.
9. Uruguay
Bloomberg
Percent of GDP in Shadow Economy: 56.0
Official GDP: $44.52 billion
Population: 3,510,386
Labor Force by Occupation:
Agriculture: 9 percent
Industry: 15 percent
Services: 76 percent (2007 est.)
Industries: food processing, electrical machinery, transportation equipment, petroleum products, textiles, chemicals, beverages
Exports: meat, rice, leather products, wool, fish, dairy products
10. Guatemala
Bloomberg
Percent of GDP in Shadow Economy: 55.0
Official GDP: $69.21 billion
Population: 13,550,440
Labor Force by Occupation:
Agriculture: 50 percent
Industry: 15 percent
Services: 35 percent (1999 est.)
Industries: sugar, textiles and clothing, furniture, chemicals, petroleum, metals, rubber, tourism
Exports: coffee, sugar, petroleum, apparel, bananas, fruits and vegetables, cardamom
link (http://finance.yahoo.com/banking-budgeting/article/110204/shadow-economies-on-the-rise-around-the-world;_ylt=Am0gut.GKcFLZ7z_Dkz46CBO7sMF;_ylu=X3oDM TE5YTg1aTBkBHBvcwMyBHNlYwN3ZWVrZW5kRWRpdGlvbgRzbGs DdGhldG9wMTBzaGFk)
It turns out that countries have two economies: the official one and a shadow version. The official economy is the one that governments and banking institutions measure with gross domestic product, tax receipts, social security contributions, employment identification numbers, and the like. The shadow economy is all the money and jobs generated outside the official economy, whether legally or illegally. In more than 50 countries around the world, the shadow economy is at least 40 percent the size of documented GDP.
In percentage terms, the biggest shadow economy relative to official economic activity is in the former Soviet republic of Georgia. In 2007, the last year for which data were available, revenue from all Georgia's goods and services generated off the books amounted to 72.5 percent of official GDP. In other words, the government is losing out on billions of taxable dollars it could use to improve the national infrastructure, service debt, build schools and roads, even hire better tax collectors . At the other end of the scale, the U.S. shadow economy equaled only 9 percent of the country's official economy. Given U.S. GDP of $14.26 trillion, the world's largest, that could still be as much as $1.2 trillion in taxes that slip through Uncle Sam's fingers each year.
The size of a shadow economy can be vitally important. As became painfully clear during the Greek economic crisis, one of the factors that nearly drove the country into bankruptcy was that Greek workers and companies skirted more than 31 billion euros in taxes, which is more than 10 percent of GDP.
In an updated report, Shadow Economies All Over the World: New Estimates for 162 Countries from 1999 to 2007, Greece comes across as a model of fiscal responsibility when compared with dozens of other nations. In the report's ranking from least to most shadowy, Greece is No. 57, with a shadow economy equal to 31 percent of GDP in 2007.
Wide Margin of Error
Nailing down shadowy numbers is difficult, of course. According to Friedrich Schneider, an economics professor at Austria's Johannes Kepler University of Linz who co-authored the study, the margin of error baked into the results is about 15 percent. Therefore, while the report says Georgia's shadow GDP in 2007 was 72.5 percent, that number could be less—or even more. What we do know is that Georgia's official GDP, according to the CIA's World Factbook, is approximately $20.3 billion, but if the shadow economy were added, it could potentially be as much as $30 billion or so.
Schneider points out that for the purposes of his study, he and his colleagues, Andreas Buehn of Technische Univerität Dresden, and Claudio E. Montenegro of the World Bank and the Universidad de Chile, excluded what they call "typical underground, classical economic crime activities," such as burglary and drug-dealing. They also did not focus on tax evasion. What they did focus on was what "all market-based legal production of goods and services that are deliberately concealed from public authorities" to avoid payment of taxes, social security obligations, and labor laws. That means basically small and large businesses, doctors, contractors, nannies, grocers, and others from a broad swathe of the economy who choose not to report income and transactions.
One notable finding is that from 1999 to 2007, shadow economies appear to be on the rise in nearly every country the study ranked. For example, America's shadow economy in 1999 was 8.6 percent and climbed to 9.0 percent in 2007. (The number was higher for developing countries, where shadow economies increased from an average of 36.6 percent in 1999 to 38.6 percent in 2007, as opposed to an increase of 16.8 percent to 18.7 percent for the 25 high-income OECD countries.) The reason behind the rising numbers? "Taxation and regulation increased in most countries" over the past 10 years, says Schneider. As he writes in his report: "reducing the tax burden is the best policy measure to reduce the shadow economy, followed by a lessening of fiscal and business regulation."
When the Shadow is Real
But for many developing nations like Peru, the huge shadow economy results from growing urbanization and more commerce, says Daniel Córdova, dean of the graduate school at Universidad del PacÃ*fico and director of the Invertir Institute, an NGO that promotes entrepreneurship.
"What you call the shadow economy is the real economy" in Peru and other countries in Latin America, says Córdova. In the study, Peru has the fourth-largest shadow economy.
Many Peruvians do not have social security numbers and are not on a formal payroll, says Córdova. With a labor-intensive bureaucracy, it can be difficult to start a formal business. In Peru, the poor population's assets amount to $90 billion, according to the website of the Instituto Libertad y Democracia, a think tank in Lima.
What is clear is that regardless of what taxpayers believe, the countries with the most efficient tax collection and enforcement systems are the ones that tend to have the smallest shadow economies.
Schneider goes even further. He and his co-authors suggest that the solution is not just more efficient tax collecting and lighter regulation, but also to find a way to make work in the official economy more attractive and reduce the incentives to participate in the shadow world. At a time when official economies around the globe are dealing with high unemployment, it might be some time before shadow economies lose their appeal.
The Countries with the Biggest 'Shadow Economies'
Global Tax Evasion
Despite what many might argue, paying taxes is one of the cornerstones of a healthy economy. More and more citizens around the world are avoiding taxes by operating businesses off the data grid. The boom in "shadow economies" leaves governments insufficient revenue to provide adequate public services, whether that means health care, roads, education, or even better tax collection. In fact, a new report estimates that in 2007, in 162 countries, an average of 35.5 percent of official gross domestic product slipped through the cracks–not counting any fruits from such illegal activities as drug dealing or organized crime. Friedrich Schneider, an economics professor at Austria's Johannes Kepler University of Linz and a co-author of the report, "Shadow Economies All Over the World: New Estimates for 162 Countries from 1999 to 2007," emphasizes that the study's numbers refer only to the amount unpaid by individuals and businesses avoiding taxes or legal labor requirements. The problem is on the rise both in developed and developing nations. The worst offender is the former Soviet republic of Georgia, where an estimated 72.5 percent of GDP was untaxed in 2007. The U.S., while not immune to shadow economic problems, is the world's least-affected country, with a mere 9.0 percent of legally derived GDP escaping the IRS that year.
1. Georgia
Bloomberg
Percent of GDP in Shadow Economy: 72.5*
Official GDP: $20.29 billion**
Population: 4,600,825
Labor Force by Occupation:
Agriculture: 55.6 percent
Industry: 8.9 percent
Services: 35.5 percent (2006 est.)
Industries: steel, aircraft, machine tools, electrical appliances, mining (manganese and copper), chemicals, wood products, wine
Exports: scrap metal, wine, mineral water, ores, vehicles, fruits and nuts
*For all slides this figure is the result for 2007.
**All data for population, GDP, labor force by occupation, industries and exports for all captions is from the CIA's World Factbook, 2010 ed.
2. Bolivia
Bloomberg
Percent of GDP in Shadow Economy: 70.7
Official GDP: $45.11 billion
Population: 9,947,418
Labor Force by Occupation:
Agriculture: 40 percent
Industry: 17 percent
Services: 43 percent
Industries: mining, smelting, petroleum, food and beverages, tobacco, handicrafts, clothing
Exports: natural gas, soybeans and soy products, crude petroleum, zinc ore, tin
3. Azerbaijan
Bloomberg
Percent of GDP in Shadow Economy: 69.6
Official GDP: $86.03 billion
Population: 8,303,512
Labor Force by Occupation:
Agriculture: 38.3 percent
Industry: 12.1 percent
Services: 49.6 percent
Industries: petroleum and natural gas, petroleum products, oil field equipment, steel, iron ore, cement, chemicals and petrochemicals, textiles
Exports: oil and gas (90 percent), machinery, cotton, foodstuffs
4. Peru
Bloomberg
Percent of GDP in Shadow Economy: 66.3
Official GDP: $253 billion
Population: 29,907,003
Labor Force by Occupation:
Agriculture: 0.7 percent
Industry: 23.8 percent
Services: 75.5 percent
Industries: mining and refining of minerals, steel, metal fabrication, petroleum extraction and refining, natural gas, fishing and fish processing, textiles, clothing, food processing
Exports: copper, gold, zinc, crude petroleum and petroleum products, coffee, potatoes, asparagus, textiles, fishmeal
5. Tanzania
Bloomberg
Percent of GDP in Shadow Economy: 63.0
Official GDP: $57.89 billion
Population: 41,892,895*
Labor Force by Occupation:
Agriculture: 80 percent
Industry and Services: 20 percent (2002 est.)
Industries: agricultural processing (sugar, beer, cigarettes, sisal twine), diamond, gold, and iron mining, salt, soda ash, cement, oil refining, shoes, apparel, wood products, fertilizer
Exports: gold, coffee, cashew nuts, manufactures, cotton
*Estimates for this country explicitly take into account the effects of excess mortality due to AIDS; this can result in lower life expectancy, higher infant mortality, higher death rates, lower population growth rates, and changes in the distribution of population by age and sex than would otherwise be expected.
6. Ukraine
Bloomberg
Percent of GDP in Shadow Economy: 58.1
Official GDP: $294.3 billion
Population: 45,415,596
Labor Force by Occupation:
Agriculture: 15.8 percent
Industry: 18.5 percent
Services: 65.7 percent
Industries: coal, electric power, ferrous and nonferrous metals, machinery and transport equipment, chemicals, food processing
Exports: ferrous and nonferrous metals, fuel and petroleum products, chemicals, machinery and transport equipment, food products
7. Thailand
Bloomberg
Percent of GDP in Shadow Economy: 57.2
Official GDP: $538.6 billion
Population: 66,404,688*
Labor Force by Occupation:
Agriculture: 42.4 percent
Industry: 19.7 percent
Services: 37.9 percent
Industries: tourism, textiles and garments, agricultural processing, beverages, tobacco, cement, light manufacturing such as jewelry and electric appliances, computers and parts, integrated circuits, furniture, plastics, automobiles and automotive parts, world's second-largest tungsten producer and third-largest tin producer
Exports: textiles and footwear, fishery products, rice, rubber, jewelry, automobiles, computers and electrical appliances
*Estimates for this country explicitly take into account the effects of excess mortality due to AIDS; this can result in lower life expectancy, higher infant mortality, higher death rates, lower population growth rates, and changes in the distribution of population by age and sex than would otherwise be expected.
8. Zimbabwe
Bloomberg
Percent of GDP in Shadow Economy: 56.1
Official GDP: $332 million
Population: 11,651,858*
Labor Force by Occupation:
Agriculture: 66 percent
Industry: 10 percent
Services: 24 percent
Industries: mining (coal, gold, platinum, copper, nickel, tin, clay, numerous metallic and nonmetallic ores), steel, wood products, cement, chemicals, fertilizer, clothing and footwear, foodstuffs, beverages
Exports: platinum, cotton, tobacco, gold, ferroalloys, textiles/clothing
*Estimates for this country explicitly take into account the effects of excess mortality due to AIDS; this can result in lower life expectancy, higher infant mortality, higher death rates, lower population growth rates, and changes in the distribution of population by age and sex than would otherwise be expected.
9. Uruguay
Bloomberg
Percent of GDP in Shadow Economy: 56.0
Official GDP: $44.52 billion
Population: 3,510,386
Labor Force by Occupation:
Agriculture: 9 percent
Industry: 15 percent
Services: 76 percent (2007 est.)
Industries: food processing, electrical machinery, transportation equipment, petroleum products, textiles, chemicals, beverages
Exports: meat, rice, leather products, wool, fish, dairy products
10. Guatemala
Bloomberg
Percent of GDP in Shadow Economy: 55.0
Official GDP: $69.21 billion
Population: 13,550,440
Labor Force by Occupation:
Agriculture: 50 percent
Industry: 15 percent
Services: 35 percent (1999 est.)
Industries: sugar, textiles and clothing, furniture, chemicals, petroleum, metals, rubber, tourism
Exports: coffee, sugar, petroleum, apparel, bananas, fruits and vegetables, cardamom
link (http://finance.yahoo.com/banking-budgeting/article/110204/shadow-economies-on-the-rise-around-the-world;_ylt=Am0gut.GKcFLZ7z_Dkz46CBO7sMF;_ylu=X3oDM TE5YTg1aTBkBHBvcwMyBHNlYwN3ZWVrZW5kRWRpdGlvbgRzbGs DdGhldG9wMTBzaGFk)