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SHADOW PRESIDENT SHRINKING ECONOMNY SERIES
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Shadow Economy as Percent of Official GDP, 1988–2000 The results show that for all 84 countries investigated, value added in the shadow economy has reached a remarkably large amount. To estimate the size of the shadow economy, researchers have focused on a sample of 84 countries, using a variety of estimation methods. Thus, economists and government statisticians have made a variety of calculations to gauge how large the shadow economy is. But policymakers and government administrators need information about how many people are active in the shadow economy, how often underground activities occur, and the size of these activities, so that they can make appropriate decisions on resource allocation. After all, people engaged in underground activities do their best to avoid detection. Vancouver, B.C., The Frazer Institute, 1997.Ī precise definition of the shadow economy, however, is quite difficult because the shadow economy develops all the time, adjusting to changes in taxation and regulations.Įstimating the size of the shadow economy is difficult. Structure of table from Lippert and Walker, The Underground Economy: Global Evidence of its Size and Impact. Wages, salaries, and assets from unreported work related to legal services and goodsĪll do-it-yourself work and neighbor help. Trade in stolen goods drug dealing and manufacturing prostitution gambling smuggling fraud.īarter of drugs, stolen, or smuggled goods. Hence, the shadow economy comprises all economic activities that would generally be taxable were they reported to the tax authorities.

A growing shadow economy may provide strong incentives to attract domestic and foreign workers away from the official economy.Īlso called the underground, informal, or parallel economy, the shadow economy includes not only illegal activities but also unreported income from the production of legal goods and services, either from monetary or barter transactions.

(On the other hand, at least two-thirds of the income earned in the shadow economy is immediately spent on the official economy, resulting in a considerable positive stimulus effect on the official economy.) If the tax base or tax compliance is eroded, governments may respond by raising tax rates-encouraging a further flight into the shadow economy that further worsens the budget constraints on the public sector. Transactions in the shadow economy escape taxation, thus keeping tax revenues lower than they otherwise would be.

The growth of the shadow economy can set off a destructive cycle.

Policies and programs that are framed on the basis of unreliable statistics may be inappropriate and self-defeating.

A prospering shadow economy makes official statistics (on unemployment, official labor force, income, consumption) unreliable.

These are all examples of the underground or shadow economy-activities, both legal and illegal, that add up to trillions of dollars a year that take place "off the books," out of the gaze of taxmen and government statisticians.Īlthough crime and shadow economic activities have long been a fact of life-and are now increasing around the world-almost all societies try to control their growth, because of the potentially serious consequences: Some of the data, including the sample size, has been updated by Professor Schneider for this pamphlet.Ī factory worker has a second job driving an unlicensed taxi at night a plumber fixes a broken water pipe for a client, gets paid in cash but doesn't declare his earnings to the tax collector a drug dealer brokers a sale with a prospective customer on a street corner.

SHADOW PRESIDENT SHRINKING ECONOMNY DOWNLOAD

Citations for the studies reviewed are provided in the original paper, which readers can purchase ($10.00) from the IMF Publication Services, or download from Rachel Weaving prepared the text for this pamphlet. This Economic Issue is based on IMF Working Paper 00/26, "Shadow Economies Around the World: Size, Causes, and Consequences," February 2000.

SHADOW PRESIDENT SHRINKING ECONOMNY SERIES

The series draws mainly from IMF Working Papers, which are technical papers produced by IMF staff members and visiting scholars, as well as from policy-related research papers. The Economic Issues series aims to make available to a broad readership of nonspecialists some of the economic research being produced on topical issues by IMF staff.