Author: Alexandre Rodrigues, RIO

Source: The State of S. Paulo - SP - ECONOMY - 02/12/2009

The fiscal incentives of the government's anti-crisis policy contributed to the reduction of the growth rate of the informal economy in the first half of 2009. Between December 1998 and June 2009, the informal economy evolved only 2%, according to the Underground Economy Index released yesterday by the Brazilian Institute of Economics of the Getúlio Vargas Foundation (Ibre / FGV), in partnership with the Brazilian Institute of Ethics in Competition (ETCO). In the second half of 2008, the pace of growth was 21,42%.

According to the index, the growth of the underground economy, which involves goods and services not declared to the government (with tax evasion and labor contributions) was 0,9 percentage point above the variation, of 1,1%, of the Gross Domestic Product (GDP) in the period, compared to the second half of 2008.

The GDP variation adopted by FGV technicians is not calculated by IBGE. The institute, which officially measures the evolution of the economy, does not calculate the variation in the semester compared to the previous one due to the lack of seasonal adjustment. In relation to the same period in 2008, GDP fell 1,5% in the first six months of 2009, according to IBGE data.

The FGV index shows a strong slowdown in the growth of the informal economy. Considering the 12 months preceding June 2009, growth is 21,5%. According to FGV researcher Fernando de Holanda Barbosa Filho, the economy that is outside of what is measured by GDP is directly influenced by the formal economy, since the increase in income leads people to consume products and services in both sectors.

As it is not vulnerable to fluctuations in the financial market, the informal economy detached itself from the formal economy at the first moment of the crisis and only absorbed its effects this year. However, says Barbosa, informality tends to grow again with the economic recovery and the end of incentives.

Barbosa attributed the deceleration in the pace of expansion of the informal economy, mainly to the reduction of taxes, considered the main incentives for informality.

“At the same time, the drop in the level of activity reduces the demand for goods and services provided by the underground economy, reducing its growth rate”, observes Barbosa.

As informality is difficult to measure, the methodology developed by FGV crosses variables such as tax burden, level of labor market rigidity (which leads to unregistered hiring), exports (whose bureaucracy discourages the formalization of activities) and the perception of corruption.