Source: Valor Econômico - SP - BRAZIL - 02/12/2009

Folhapress, from Rio

The drop in revenue and the reduction in economic activity held back the growth of the so-called underground economy - production of goods and services not reported to the government -, which measures the informal market and illegal movements among the formals. A survey carried out by Fundação Getulio Vargas (FGV) and by the Brazilian Institute of Ethics in Competition (Etco) shows that this informal economy was practically stable in the first half of this year, with an expansion of only 1% higher than that of the Gross Domestic Product (GDP).

“The tax burden fell during the crisis. This reduces the incentive for activities to migrate to the informal economy. At the same time, the drop in the level of activity also reduces the demand for goods and services, provided by the informal economy, slowing its growth, ”said Fernando de Holanda Barbosa, responsible for the research.

If the last 12 months ending in June are taken into account, the underground economy grew by 22,5% in addition to GDP. "The strong growth, of 22,5%, is much more dependent on the second semester of last year, than on this first semester, in which it was practically with the same GDP growth", commented Barbosa.

The strong expansion of the informal economy at the beginning of the worsening of the crisis is linked to the lack of credit that has taken over the market. Barbosa explained that the formal economy is directly dependent on credit, unlike the underground economy. “At that time, the formal economy was hit and the underground economy continued to grow as if the crisis had not occurred,” noted the FGV economist.

The expectation is that, as the economy resumes growth, and the collection continues to rise, the shadow economy should expand again. Barbosa's projection is that the informal market will grow slightly more than GDP in 2010.

Barbosa recalled that, in Brazil, the underground economy normally moves in the same direction as the formal market. For him, the upward movement of the informal market shows that “something strange” happens in the Brazilian economy.

According to the survey, the underground economy is influenced by four factors: greater growth in formal economic activity, which generates demand for informal goods and services; greater tax burden, which encourages migration from the formal to the underground economy; greater perception of corruption, which also contributes to the growth of the shadow economy; and exports, which have the opposite effect, that is, the greater the volume of exports, the smaller the underground economy.