Unpublished study in Brazil sheds light on the underground economy


Author: Oscar Pilagallo

Source: ETCO Magazine, No. 13, August 2009

A problem that increasingly afflicts contemporary societies, the economy
underground or informal is an old phenomenon: it has the age of the State, which in turn was born along with the need for taxation. Dodging taxes is the raison d'être of the informal economy, although it is not its only cause.

Book: Underground EconomyEvil is as old as it is relatively little studied. Suffice it to say that it was only in the 70s that
The subject really entered the agenda of governments and academics, in response to the
increase in the weight of taxes, bureaucracy and corruption. In Brazil, where the tax burden is more than a third of the Gross Domestic Product (GDP), the problem is serious. There are those who estimate the weight of shadow economy at 40% of GDP.

It is opportune, therefore, the launch of the book Underground Economy, in which the world's leading experts on the subject take up arguments, originally approached at a seminar held by ETCO last year in Rio de Janeiro.

The underground economy is minefield. By its very nature, it is
refractory to measurements. Its size is cause for doubt and controversy. The Economist
Italian Vito Tanzi, who in the 80s developed a method for evaluating the
informal economy, raises an eyebrow of doubt when you hear someone estimate informality in Brazil at 40%. For him, a good part of the underground economy is captured by official accounts. “If it weren't like that, we could say that Brazil is 40% richer than it really is”, he says. And the corollary: in this case, the tax burden (calculated as a percentage of GDP) could not be considered high. The point is clear: ignorance of the shadow economy can distort the interpretation of macroeconomic data and lead to public policies
For Tanzi, informality causes a “tremendous distortion in the market”.
The result is an imbalance between companies that pay taxes and those that do not. This aspect was addressed in the presentation by André Franco Montoro Filho. “Misconducts – such as evasion, informality, smuggling, counterfeiting, adulteration and piracy – generate serious imbalances in
competition, which pollute the business environment, exclude important
investments and, consequently, reduce the pace of economic growth
country's potential, ”says the ETCO executive president.
Uncertainties about the shadow economy begin with the definition itself.
There is a comprehensive definition: would all economic activities be
registered contributions that contribute to GDP. But for the Austrian economist
Friederich Schneider, from Johannes Kepler University, the ideal would be to work
with a more precise definition: they would be the production and the service deliberately
hidden. Schneider carried out a study on informality in 21 countries of the
Latin America, in which it identifies good and bad news for Brazil. Love:
shadow economy is excessively high by world standards. The good news: it's falling relative to GDP. Among Latinos, however, informality in the
Brazil is average. Of the 21 countries, the most informal is Bolivia, where two
thirds of the economy is underground economy. At the other extreme, Chile, with
a fifth. Brazil, with just over 40%, is in the middle. (Although the proportion
has been contested by Tanzi, it is useful in allowing comparison with other
countries, since they were all evaluated by the same criterion.)
Commenting on Schneider's research in the preface, Everardo Maciel,
Secretary of the Federal Revenue in the government of Fernando Henrique Cardoso, noted that the “increase in the tax burden can only be understood as a factor that induces tax evasion and, eventually, the shadow economy when it results from an increase in the nominal rate or calculation base – which qualify as fiscal pressure”. And he concludes: “It is not uncommon for the increase in the tax burden, rather than being a cause, to be an effect of the reduction of the underground economy”.
Since when is informality falling in Brazil? Since 2005, says
Schneider. In reality, from the Real Plan onwards, the underground economy described opposite movements. Between 1995 and 2004, its participation in GDP rose from 20,71% to 42,60%. Since then, it has been falling (in 2007 it had retreated to 40,23%). The downward curve is explained by the growth of the formal economy.
Depending on the method used, the result may vary. Study shown
by economist Fernando de Holanda Barbosa Filho, from the Brazilian Institute of
Economy of Fundação Getúlio Vargas, identifies a 10% increase in the informal economy between 2003 and 2006. The economist used the Mimic method, an acronym in English for Multiple Causes and Multiple Indicators, which captures the factors that most affect the shadow economy, although not scale it. The study showed that the higher the level of activity, the greater the underground economy, as this is complementary to the formal economy. In Brazil, informality rose by almost 11% in absolute terms between 2003 and 2007, and fell by 5% in relative terms, as the economy as a whole grew by 17% in the period.
It is a small drop from a high level. The works gathered
in Underground Economics, in spite of different views, converge to the
conclusion that, without a deeper knowledge of informality, their
causes will not be adequately addressed, and it will not regress
substantial, to the detriment of competition.

Shadow Economy / Underground Economy

The chapters of the English version of the book are available here in
PDF / English texts available here:
1) Foreword: Everardo

2) André Article

3) Article Vito

4) Article
Frederick Schneider

5) IBRE-FGV / ETCO Article.

The book in Portuguese is already on sale in the best bookstores.

See more at: Books