Author: Aguinaldo Novo

Source: O Globo, 17/04/2008

SÃO PAULO - The underground economy, which considers the sum of the production of goods and services that escape official controls, grew more than the formal economy in 2007. This is shown by the Underground Economy Index, calculated by FGV at the request of the Institute Brazilian Competition Ethics Committee (Etco). According to the survey released on Thursday, the underground economy registered growth of 8,7% last year, above the 5,4% variation in GDP in the period.

Among the factors that contributed most to this result are the level of activity (with a 2,75 percentage point share in the final result) and tax burden (3,61 points). In general, when the formal economy advances, the informal economy retreats. In Brazil, however, the behavior found by FGV was different. As the regulation of the formal market is large, the underground economy has become a more “flexible” option in absorbing investments and labor. This scenario would be reinforced by the high tax burden, now close to 40% of GDP.

Due to the methodology used in the calculation, the Underground Economy Index does not include only the economic activities of the so-called informal labor market. According to FGV, the underground economy reflects the production of goods and services not reported to the government deliberately to evade taxes, social security contributions and compliance with labor laws and regulations and to avoid costs arising from norms applicable to productive activity.

Illicit activities such as smuggling and drug trafficking are excluded.

For researchers, the trend is that the shadow economy will continue to grow this year at a faster pace than the formal economy. The overall level of economic activity (which remains at levels close to last year), the tax bite and the perceived increase in corruption rates weigh in favor of this scenario. The underground economy is linked to tax evasion activity. A higher level of corruption would reduce the chances of punishment - “once detected, there is still a way out”, explain FGV researchers.

The objective stated by Etco is for the new index to serve as a reference for public policies that create mechanisms to bring this slice of the economy to formality.