Author: Ana Carolina Saito

Source: Gazeta Mercantil, 19/11/2008

São Paulo, November 19, 2008 - The informal economy - the sum of the production of goods and services that are beyond the control of the government - kept pace with the expansion of the country's activity level in the first half. From December last year until June 2008, the so-called “underground economy” as a fraction of the Gross Domestic Product (GDP) advanced 4,7%, according to a survey conducted by the Brazilian Institute of Economics of the Getulio Vargas Foundation (Ibre / FGV) at the request from the Brazilian Institute of Competitive Ethics (Etco).

The increase in the level of general activity in the country was mainly responsible for the acceleration of the Underground Economy Index, contributing 41,7% of the increase in the period. According to FGV researcher Fernando de Holanda Barbosa Filho, contrary to what can be imagined, the increase in the formal market did not result in less growth in the underground economy. As it does not comply with the rules, the underground economy is much more flexible, hiring or firing more quickly.

“When the level of activity is high, there is an effect of substituting the informal market, but also of increasing demand. The effect of demand is greater than that of formalization ”, completes Ibre director Luiz Guilherme Schymura. For him, this advance of the underground economy could be minimized with the reduction of the country's “bureaucratic burden”, reducing, for example, the time to open a company. "Most people want to formalize, but it is very difficult."

The indicator covers the production of goods and services not reported to the government deliberately with the objective of evading taxes, contributions, compliance with labor laws and regulations and avoiding costs arising from rules applicable to the activity. Illegal activities such as drug trafficking and smuggling were not included.

To analyze the behavior of the activity, the Underground Economy Index was set at 100 points in March 2003, beginning of the series. According to Barbosa Filho, the informal economy grew above GDP until September 2004, reaching 99,2 points. “Since then, the index has declined, due to two effects: a strong decrease in the perception of corruption associated with the increase in manufactured exports”, he explained.

Export and taxes

From December to June this year, the indicator rose from 94,9 to 99,4 points. In addition to the higher level of activity, the fall in the share of manufactured exports in relation to GDP had a great impact on the acceleration of the underground economy in the first half of the year. The contribution of the variable at the 4,7% increase was 28,9%. To export, the company needs to follow formality standards. "The greater the share of exports in GDP, the smaller the underground economy", he summarizes.

The high tax burden also stimulated the underground economy, contributing 29,4% of the indicator. The corruption variable had no impact on the formation of the index in the period.

(Gazeta Mercantil / Caderno A - Page 4)