Category: Underground economy

Underground economy grows in Brazil

The shadow economy's share in the Brazilian economy reached around 17,8% of GDP in 2022, as shown by the Underground Economy Index (IES). This result is higher than that observed in 2021 (17,4%) and points to a return to the pattern of elevations observed in the pre-pandemic period. The index built in a partnership between the Brazilian Institute of Ethics and Competition, ETCO, and FGV IBRE measures the evolution of the underground economy since 2003 and seeks to capture the evolution of activities that operate outside the laws and regulations that affect formal activities in the country .

The increases observed in the indicator up to 2019 were a consequence of the crisis that began in mid-2014, which reduced the formal sector of the economy, and the slow recovery of economic activity, concentrated in its most flexible part, the informal economy, which was pulling the employment in the country. At the same time, the reduction in interest rates and the slow increase in income softened the shadow economy's growth scenario, which would be stronger in the absence of these factors.

However, the events of recent years associated with the Covid-19 pandemic increased the level of uncertainty in relation to the performance of the economy in an extraordinary way. The negative impacts on economic activity and on the labor market affected informal workers more intensely, compared to formal workers. This change in the composition of the labor market, with a greater weight of formalization, combined with the sharp reduction in the level of economic activity, contributed to the decline in the Underground Economy Index (IES) in 2020.

After the most acute phase of the pandemic, the process of normalization of economic activity began, stimulating both the formal and informal economy, recording a return of informality to the standards observed in the pre-pandemic period, partly caused by the faster recovery of informal employment , which was to be expected given the greater flexibility in this type of bond, thus, the Underground Economy Index (IES), since 2021, has grown again, reversing the drop observed in 2020.

In the last two years, the return of economic activity has meant that both the formal and informal economy have seen a strong recovery. However, the informal part of the labor market showed stronger recovery in relative terms, causing the IES to present growth in the period, more than offsetting the drop that occurred in the pandemic.

In order to understand this topic in more depth, ETCO (Brazilian Institute of Ethics in Competition) and IBRE/FGV have developed a index for monitoring shadow economy providing an indicator of the evolution of informal activities. Shadow economy is defined as the production of goods and services not reported to the government, deliberately, to: evade taxes; evading social security contributions; circumvent compliance with labor laws and regulations; avoid costs arising from the rules applicable to each activity.

The index starts in 2003, with the highest value of the historical series, around 21% of the Brazilian GDP. Between 2003 and 2014, in the period of strong expansion of formal employment, the Underground Economy Index showed a strong downward trend, reaching its lowest value in 2014 (16,1%). Since then, as a result of the 2015/2016 crisis, the index has shown an upward trend, interrupted by the COVID 19 crisis. The normalization of economic activity signals a further increase in the index.

Several structural factors stimulate the formalization of the labor market: an increase in the average level of schooling among Brazilians; simplification measures of legal rules that reduce the cost of formalization, such as the implementation of electronic invoices (NFes), SIMPLES, MEIA and the expansion of the credit market reduced the shadow economy in the country in the 2000s, expanding economic activities in accordance with the law.

It is a fact that the economic situation has a strong impact on the underground economy. The 2015/2016 crisis led to the growth of informal employment, stimulating successive increases in the Underground Economy Index between 2015 and 2019.

The advance of the Covid-19 pandemic generated a strong reduction in the space for informal workers, causing the index to decline in 2020, with the change in the composition of the labor market, with a greater weight of formalization, combined with a strong reduction in the level of economic activity .

Since 2021, due to the beginning of economic normalization and the faster recovery of the informal sector, we have noticed an increase in the Underground Economy Index, indicating a return to the pattern of increases observed before the pandemic. In particular, in the year 2022, the weight of shadow economy in GDP was 17,8%. This value observed in 2022 shows that the shadow economy in Brazil moved something close to R$ 1,7 trillion reais, close for example to Sweden's GDP, which correspond to something close to 18% of Brazilian GDP, according to IMF data. .

Due to lower costs, the recovery of the labor market was encouraged by informal employment, with the possibility of a further increase in the shadow economy indicator in the coming years. Therefore, the decrease in the index will depend on the speed of recovery of the economy and the progress of the necessary reforms to stimulate the economy.

The good news is that the structural factors that led to the reduction of shadow economy remain present in the Brazilian economy. In particular, the process of simplifying norms and regulations remains active (with prospects of expansion by the current government), the average Brazilian education continues to increase and the credit market should return to its growth trajectory. In addition, the effects of the labor reform should continue to stimulate the formalization of the labor market, reducing its cost. On the other hand, the creation of the PIX should strengthen, in the coming years, the use of formal payment mechanisms, facilitating the measurement of economic activities and, therefore, in the long term, allowing the reduction of the informal share in the Brazilian GDP.

* Edson Luiz Vismona (president of ETCO – Brazilian Institute of Ethics in Competition) and Fernando de Holanda Barbosa Filho – economist at FGV/IBRE

Underground Economy moves BRL 1,7 trillion in Brazil and returns to the pre-pandemic pattern

The underground economy increased its participation in the Brazilian economy and reached 17,8% of the GDP, which represents approximately R$ 1,7 trillion reais. The result is part of Underground Economy Index (HEI), a partnership between the Brazilian Institute of Ethics in Competition (ETCO) and FGV/IBRE, which since 2003 has followed the evolution of activities that operate outside the laws and regulations that affect formal activities in the country.

The indicator, higher than that observed in 2021 (17,4%), points to a return to the pattern of increases caused by the events of recent years associated with the covid-19 pandemic, which raised the level of uncertainty in relation to the performance of the economy.

The end of the most acute phase of the pandemic and the beginning of the process of normalization of economic activity favored a faster recovery of informal employment, which reacts more quickly, contributing to the increase in the Underground Economy Index (IES) 2021 the year.

According to Edson Vismona, president of ETCO, this increase in the IES points to the new government the need to strengthen the economic fundamentals, with a tax reform that stimulates the formalization of the economy and the generation of jobs.

Making a historical rescue, the increases observed in the indicator until the year 2019 were a consequence of the crisis that started in mid-2014, which reduced the formal sector of the economy. At the same time, the reduction in interest rates and the slow increase in economic activity softened the shadow economy's growth scenario, which would be stronger in the absence of these factors.

 

 

 

 

 

The Graph shows the evolution of the Underground Economy Index since 2003 - Source: Prepared by ETCO and FGV / IBRE

FGV/IBRE economist Fernando de Holanda Barbosa Filho points out that the last few years associated with the COVID-19 pandemic crisis have disproportionately affected informal workers compared to formal workers.

“Because it is more flexible, it is very likely that employment will recover, as we have already seen, due to stronger increases in the informal labor market, which may lead to further increases in the shadow economy indicator in the coming years. . Therefore, the dynamics of the indicator will depend on the speed of recovery of the economy, which will depend on the progress of the reforms necessary to stimulate the economy”, concludes Barbosa Filho.

Vismona and Barbosa Filho agree that the structural factors that led to the reduction of the shadow economy remain present in the Brazilian economy, but caution is needed in assessing the evolution of the indicator, as its dynamics will depend on the speed of economic recovery, which will depend on the progress of reforms needed to stimulate the economy.

Evolution of the Index

ETCO and FGV/IBRE developed a index for monitoring shadow economy providing an indicator of the evolution of informal activities. Shadow economy is defined as the production of goods and services not reported to the government, deliberately, to evade taxes; evading social security contributions; circumvent compliance with labor laws and regulations; avoid costs arising from the rules applicable to each activity.

The index starts in 2003, with the highest value of the historical series, about 21% of the Brazilian GDP and since then, it has shown a strong downward trend, reaching its lowest value in 2014 (16,1%). However, from 2015 onwards, the indicator worsened, with an increase of more than 1 percentage point between 2015 and 2019.

The reduction in the index in the country in the 2000s is related to several structural factors that stimulated the formalization of the labor market and made it difficult for companies to operate outside the law. Among the factors that helped to increase the formalization of the economy, we can mention the increase in the credit market and the expansion of the average schooling of Brazilians.

In addition, measures to simplify legal standards help to reduce the cost of formalization, stimulating a reduction in the shadow economy. In this sense, measures with the implementation of electronic invoices (NFes), SIMPLES and MEI tend to formalize the economy more.

Between the second quarter of 2014 and the fourth quarter of 2016, Brazil faced a long period of recession (11 quarters) according to the Economic Cycle Dating Committee (CODACE). One of the consequences of this loss of dynamism in the economy was the increase in the number of people engaged in informal activities.

We can see (Graph) a worsening in the Shadow Economy Index between the years 2015 and 2019. In this period, there was an increase of more than 1 percentage point in the Shadow Economy Index, so that it went from 16,2% in 2015 to 17,3% in 2019.

Between 2016 and 2019, there was a recovery of employment, albeit informal, whose work relations are much more flexible, generating increases in the number of people without a formal contract and in the share of this group's income in the total income.

Therefore, the increase in informality observed in this period made the impact via the labor market greater, thus leading to successive increases in the Underground Economy Index between the years 2015 and 2019.

In 2022, it was possible to notice an increase of 0,4 percentage points in the indicator, explained by the return to the pattern of elevations observed before the pandemic. This value observed in 2022 shows that the shadow economy in Brazil moved something close to R$ 1,7 trillion reais, close, for example, to Sweden's GDP, which corresponds to something close to 18% of Brazilian GDP, according to data from the IMF.

This increase in the indicator in 2022 is associated with the beginning of economic normalization and the change in the composition of the labor market. With the pandemic under control, there was a faster recovery in the informal sector compared to the decline observed in formal workers, which led to an increase in informality.

The positive side is that the structural factors that led to the reduction of shadow economy remain present in the Brazilian economy. The process of simplifying norms and regulations remains active (with prospects of expansion by the current government), the average Brazilian education continues to increase and the credit market should return to its growth trajectory.

In addition, the effects of the labor reform tend to stimulate the formalization of the labor market, reducing the relative cost of formalization, stimulating the return of formal employment. The recent creation of the PIX should also strengthen, in the coming years, the use of formal payment mechanisms, facilitating the measurement of economic activities and, therefore, allowing the reduction of the informal share in the Brazilian GDP in the long term.

 

Informality is on the rise again in the country

The informal economy has returned to growth in the country. This is what the new edition of the survey by ETCO and the Brazilian Institute of Economics of the Getulio Vargas Foundation (FGV-IBRE) shows, which calculates the Underground Economy Index (HEI) since 2003. This year, according to the study, the total of goods and services produced and sold in the country without the monitoring of official agencies totaled R$ 1,3 trillion, equivalent to 16,8% of the Brazilian GDP and higher than GDP of countries like Sweden and Ireland.

The result represents an increase of 0,1 percentage point in the last year's Index and shows the return of informality to the upward trajectory that began in 2015. Until that date, IES recorded eleven consecutive years of decline, having fallen from the 21% level of the GDP in 2003 to the historic low of 16,1% in 2014. In that period, experts pointed to economic growth and measures to promote formalization, such as the Electronic Invoice and the Individual Microentrepreneur (MEI) regime, among the reasons that explained the fall in the Index.

The turnaround began with the 2015 recession and continued in the following years due to low economic growth and rising unemployment, which put pressure on companies and workers towards informality. In this sense, the significant reduction observed in 2020, when the IES fell from 17,3% to 16,7% of GDP, is considered a point outside the curve caused by the limitations imposed by the pandemic.

“The movement restrictions during the most critical months of the pandemic took people off the streets, significantly harming street vendors, app drivers and informal traders”, explains ETCO executive president Edson Vismona. “This population had its activity interrupted abruptly and this had a strong economic and social impact.”

Economist Paulo Peruchetti, from FGV/IBRE, recalls that the government has adopted several measures to protect companies and formal workers, such as the Emergency Employment Preservation Benefit (BEM). In the case of informal workers, Emergency Aid brought income, but did not support economic activity and work, temporarily reducing the underground economy.

Increase must continue

With the reopening of the economy, informal work began to grow again. “It's a job where the person has no guarantee, doesn't pay anything, doesn't have any assistance or social security, is an underemployed. We have to offer conditions for it to formalize itself and escape illegality”, says Vismona.

The expectation is that this movement will accentuate even more from now on. “Because it is more flexible, it is very likely that the recovery of employment will occur due to the stronger growth of opportunities in the informal labor market, which may lead to new increases in the underground economy indicator in the coming years”, says Peruchetti. .

The IES is calculated based on IBGE research on informality in the labor market and data on the amount of paper money in circulation in the country. The underground economy uses more money in its financial transactions.

Pandemic affects informal activity in Brazil and brings down indicator

Underground economy in Brazil, moved something close to R $ 1,2 trillion reais, higher than the GDP of countries like Switzerland and Sweden

The underground economy suffered a small drop in participation in the Brazilian economy and reached 17,1% of GDP, which represents about R $ 1,2 trillion reais. The result is part of the Underground Economy Index (IES), a partnership between the Brazilian Institute of Ethics in Competition (ETCO) and IBRE / FGV that has been monitoring, since 2003, the evolution of activities that operate outside the laws and regulations that affect formal activities in the country.

The indicator, slightly lower than that observed in 2019 (17,3%), points to an interruption in the successive increases observed since 2015, caused by the events associated with the covid-19 pandemic that raised the level of uncertainty in an extraordinary way in relation to the performance of the economy.

The negative impacts on economic activity and the labor market affected informal workers more intensely, compared to formal workers, contributing to the fall of the Underground Economy Index (HEI) in 2020.

According to Edson Vismona, president of ETCO, the drop observed in the index, unlike what happened in the past, is not associated with the increase in formal activity.

“It is a reduction that we cannot celebrate. Circulation restrictions during the most critical months of the pandemic have taken people off the streets, significantly disrupting street vendors, application drivers and informal traders. This population had its activity stopped abruptly and this brought a strong economic and social impact ”, completes the executive.

 

The Graph shows the evolution of the Underground Economy Index since 2003 - Source: Prepared by ETCO and FGV / IBRE

Making a historic rescue, the highs observed in the indicator up to 2019 were a consequence of the crisis that started in mid-2014, which reduced the formal sector of the economy, and the slow recovery of economic activity, concentrated in its most flexible part the informal economy , which was pulling jobs in the country. At the same time, the reduction in interest rates and the slow increase in income alleviated the growth situation in the shadow economy, which would be stronger in the absence of these factors.

IBRE / FGV economist Paulo Peruchetti believes that the current crisis, with unique characteristics, the formal worker was more protected, mainly due to the Emergency Job Preservation Benefit (BEm). Regarding informal ones, the emergency benefit guaranteed income, but not employment.

“As it is more flexible, the recovery of employment over the next year is likely to occur due to stronger increases in the informal labor market, which may reverse the decline in the underground economy indicator in the coming years”, concludes Peruchetti .

Vismona and Peruchetti agree that structural factors that led to the reduction of the underground economy between 2014 and 2019 remain present in the Brazilian economy, but that caution is needed when assessing the evolution of the indicator, as its dynamics will depend on the speed of economic recovery, which advancing the reforms necessary to stimulate the economy.

 Evolution of the Index

ETCO and IBRE / FGV developed an index to monitor the underground economy, providing an indicator of the evolution of informal activities. The underground economy is defined as the production of goods and services not reported to the government, deliberately, to: evade taxes; evade social security contributions; circumvent compliance with labor laws and regulations; avoid costs arising from the rules applicable to each activity.

The index starts in 2003, with the highest value in the historical series, about 21% of the Brazilian GDP and since then, it has presented a strong downward trend, reaching in 2014 its lowest value (16,1%). However, as of 2015, however, there was a worsening in the indicator, with an increase of more than 1 percentage point between 2015 and 2019.

The reduction in the index in the country in the 2000s is related to several structural factors that stimulated the formalization of the labor market and made it difficult for companies to operate outside the law. Among the factors that helped to increase the formalization of the economy, we can mention the increase in the credit market and the expansion of the average schooling of Brazilians.

In addition, measures to simplify legal standards help to reduce the cost of formalization, stimulating a reduction in the shadow economy. In this sense, measures with the implementation of electronic invoices (NFes), SIMPLES and MEI tend to formalize the economy more.

Between the second quarter of 2014 and the fourth quarter of 2016, Brazil faced a long period of recession (11 quarters) according to the Economic Cycle Dating Committee (CODACE). One of the consequences of this loss of dynamism in the economy was the increase in the number of people engaged in informal activities.

We can see (Graph) a worsening in the Shadow Economy Index between the years 2015 and 2019. In this period, there was an increase of more than 1 percentage point in the Shadow Economy Index, so that it went from 16,2% in 2015 to 17,3% in 2019.

Between 2016 and 2019, there was a recovery of employment, albeit informal, whose work relations are much more flexible, generating increases in the number of people without a formal contract and in the share of this group's income in the total income.

Therefore, the increase in informality observed in this period made the impact via the labor market greater, thus leading to successive increases in the Underground Economy Index between the years 2015 and 2019.

In the year of 2020, it was possible to notice a decrease of 0,2 percentage points in the indicator, explained by the change in the composition of the labor market, with a greater weight of formalization, combined with the expectation of a strong reduction in the level of economic activity. This value observed in 2020, shows that the underground economy in Brazil, moved something close to R $ 1,2 trillion reais, greater for example than the GDP of countries like Switzerland and Sweden, which correspond to something close to 16% of the Brazilian GDP , according to IMF data.

The drop in the indicator in 2020 is associated with a change in the composition of the labor market. With the advance of the Covid-19 pandemic, there was a greater relative reduction in informal workers compared to the drop observed in formal workers, which generated an increase in formalization.

The positive side is that the structural factors that led to the reduction of the underground economy remain present in the Brazilian economy. The process of simplifying rules and regulations remains active (with prospects for expansion by the current government), the average schooling of Brazilians continues to increase and the credit market should return to its growth trajectory. In addition, the labor reform carried out in the previous government tends to stimulate the formalization of the labor market, reducing the relative cost of formalization, stimulating the return of formal employment.

Historical index

Informality brings direct damage to society, creates an environment of transgression, stimulates opportunistic economic behavior, with a drop in the quality of investment and a reduction in the growth potential of the Brazilian economy.

In 2022, the Underground Economy moved BRL 1,7 trillion, returning to the pre-pandemic pattern.

How it is calculated

The size of the underground economy is estimated from two indicators:
The Shadow Economy Index is calculated by averaging two important indicators of the economy. Monetary method Raising the currency due to the tax burden and informal work. Informal work Percentage of workers without a formal contract and income from informal work.

Informal activity tries to remain unobserved by the authorities and, consequently, has a higher demand for money than formal activities, which use more banking instruments for their transactions. Thus, the increase in informal activity will raise the demand for money through two channels:

    • Increase in the proportion of workers without a license.
    • Higher taxation.

The hypothesis is that the increase in taxation induces an increase in the underground economy, which also generates an increase in the demand for currency

Based on the PNAD, the average is calculated between the percentage of informal workers and the percentage of income from work that is informal.

The level of the underground economy is the average between the two methods: monetary method and informality in the labor market.

The Illegal Market and the Underground Economy in Brazil were themes of the CONIMAQ meeting

“There is no developed country that does not have an ethical vision and the defense of the law as its foundation,” said Edson Luiz Vismona, president of the Institute of Ethics in Competition (ETCO), during a meeting with members of the National Council of the Machinery Industry (CONIMAQ) in last February 21st, at ABIMAQ headquarters, in São Paulo.
Vismona presented a survey conducted by the FNCP that shows a total loss of more than R $ 146 billion involving only 15 productive sectors with the illegal market (R $ 100 billion) and tax evasion (R $ 46 billion) in 2017. “The survey, carried out since from 2014, it was done in order to sensitize the media, society and the government to the theme, as we cannot accept deviations from this amount for a country that wants and needs to resume growth ”.
ABIMAQ's executive president, José Velloso, based on the data presented, stressed that the high tax burden and all other accessory obligations charged to companies, are the “iron ball” tied to the feet of Brazilian businessmen, to paraphrase the minister of Economy Paulo Guedes.
According to him, after the pension reform, the approval of a Tax reform must be worked hard by the Federal Government so that we can simplify and relieve companies, allowing them to invest in their businesses. Another point commented on was the importance of compliance for companies and associations, citing as an example the Code of Conduct and Ethics, prepared by ABIMAQ.
Finishing its participation, Vismona stressed that companies are concerned and committed to strengthening the ethical culture, so that these rules are observed by customers, suppliers and business partners to remain competitive in the national and international market, while facing the challenges internal and external taxes imposed on those who undertake in Brazil. In his view “For all the adversities to be overcome daily, the Brazilian entrepreneur has a heroic posture of demonstrating competence”.