Author: Fernando de Holanda Barbosa Filho

Source: JB Online, 14/05/2009

RIO - On a daily basis, a significant part of the Brazilian economy operates outside the reach of the State. Activities range from selling umbrellas on the streets, to making homemade bread, employing workers without a wallet, and partially reporting the sale of commercial establishments. Activities like these are part of what we call underground economics. It is noted that the definition is quite broad, making its study complex.

For years, the shadow economy was considered residual. From the 70s, it was realized that the size of activities not measured by the State could represent an important share in the countries' GDP. A usual definition of the underground economy is “all production of goods and services not declared to the government deliberately in order to: a) evade taxes; b) evade contributions to social security; c) evade compliance with labor laws and regulations and; d) avoid costs resulting from compliance with the rules applicable in a given activity ”. All of these activities reduce the collection of taxes and the credibility of official statistics, make it difficult to choose public policies and lead to unequal competition between firms in the official and underground economies. The reduction of the tax collection base implies higher rates on those who pay taxes.

In Brazil, a large part of the labor force is in the underground economy. Official data indicate how regulated the labor market is, which places around 27,5% of employees without a formal contract. The development of the shadow economy means something wrong with the institutional apparatus. The activity expands because the costs associated with the official economy are high enough to provide gains for those who operate outside it. In addition to offering parallel goods and services, the underground economy generates jobs, income, and has its own dynamics resulting from market forces that seek more flexibility in economic activity.

Brazil needs reforms to discourage the growth of the underground economy, such as reducing the tax burden and attracting agents to the formal economy.

* Fernando de Holanda Barbosa Filho is a professor at the Brazilian Institute of Economics at Fundação Getulio Vargas