Underground Economies In OECD Countries Or How The Government Burden Is Underreported

About Underground Economies

It has been known for decades that high tax developed countries have also developed a substantial underground (aka informal, unobserved, black market, hidden) economies measuring anywhere from a few percentag points up to 40% of GDP. One of the main motivations is evading taxation or regulation. An underground economy is not to be confused with criminal activities, but consists of largely legitimate economic transactions that escape statistical measurement and taxation, although there are likely grey arreas.

A Recent OECD Study

According to an article published originally in the Neue Zuericher Zeitung (NZZ) and republished by the Swiss think tank Avenir Suisse titled “Staatsquote ist nicht gleich Staatsquote” (the article is in German) on 7/1/2012 by Gerhad Schwarz, international comparisons of GDP are complicated by the fact that some countries officially or inofficially include some measurement of their underground economy to boost their GDP. The details of the procedures appear to be murky.

This article refers to a 2011 OECD study, but does not give details as to the source. Thus, I was not able to identify the underlying study.

Italy

For decades, Italy has been known to have an extensive underground economy. Italy has been a textbook case. Officially, Italian government statistics include about 16% of GDP as contributed by the underground economy. Other, conservative estimates are about 26% of Italian GDP. According to the above mentioned article, Italy supposedly introduced some upward corrections of national GDP at the time of its accession to the European Monetary Union (EMU) to meet the so called Maastricht criteria. Very convenient.

Key Economic Indicators Become Less Reliable

Measuring the underground economy is difficult at best. Arbitrary or ulterior intentions creep into government statistics.

The share of government in the economy becomes deceptive or at least underreported. The official economy is under a much more severe government burden when the share of the underground economy is large.

The share of government taxation becomes deceptive or underreported.

Solution

Instead of mixing the observable economy and the underground economy by hard to understand means it is better to have a separate national account statistics for the underground economy. More honesty would be better.