Source: O Globo - Column Míriam Leitão - 04/07/2012

The shadow economy has shrunk by almost one percentage point of GDP and has even fallen in absolute numbers. From 2003 to 2011, it declined every year, rising from 21% of GDP to 16,8%. The organizers of the indicator - Etco, Instituto de Ética Concorrencial, and Fundação Getulio Vargas (FGV) - think that the process of progress is running out. They detected signs that informal employment has stopped decreasing.

The concept of shadow economy is more sophisticated than the informality measure. He tries to capture even the unregistered movement of a formal company and the undeclared income of registered workers. The best known case is that of waiters with tips.

The biggest component of the Shadow Economy Index is informality in the labor market. To compose the data, FGV works not only with PME, but also with Pnad. It was there that they found evidence that the virtuous circle is wearing thin. In the graph below, it can be seen that the index fell every year, even in difficult ones.

- The downward trend in informality may be reaching its limit, due to the loss of dynamism in the economy and the labor market and by the reduction in the pace of credit growth - said Ambassador Roberto Abdenur, president of Etco.

Researcher Fernando Holanda Barbosa Filho, from FGV, responsible for the index, confirms this impression.

- An important part of the drop in informality is that of the labor market, which, in the last six months, has stopped falling. This is one of the reasons for our impression that this virtuous circle may be reaching its limit - said the researcher.

Etco and FGV have made a serious effort to measure and diagnose the problem of the undeclared economy. The first time they measured, they compared the size of Brazil's underground economy with Argentina. Fortunately, the neighbor grew and the underground economy in Brazil decreased, so the comparison can no longer be this.

Even so, the size of the shadow economy is estimated by them to be R $ 695,8 billion, more than one Sweden.

- Part of this positive downward movement in the underground economy was a consequence of the expansion of credit, which is now decreasing due to the increase in household indebtedness - said Fernando Holanda.

Even so, he says that it is not just cyclical factors that explained the improvement. In another study not yet concluded, the economist already has evidence that part of this advance has to do with the improvement in Brazilian education. The increase in the level of education boosted formalization.

Even though the improvement in education was small, it already makes a difference on topics like this, informality.

What makes Brazil have such a large undeclared economy or in the gray area, where part is in the legality, part is not?

Abdenur presents the reasons: high tax burden, complexity of paying taxes, rigidity of legislation for those who work in legality, especially in the labor market.

- Between 1988 and 2005, the Brazilian tax burden increased by 88%, according to the Brazilian Institute of Tax Planning - said Abdenur.

The problem is that it has increased unevenly. Some sectors pay too much tax, others are encouraged at a discount.

- Worse is the complexity of paying taxes - says the ambassador.

Etco is based on saying that in a World Bank study. Comparing the countries, he concluded that Brazil had the worst result in the world. A standard Brazilian company spends 2.600 hours a year just paying taxes. In Bolivia, which also performs poorly in this indicator, it is 1.080 hours. In Brazil, 554 standards are issued per day. It's crazy.

So this whole topic is more complicated than it looks. There is an overlap between the legal and the non-legal, between the formal and the informal, between light and shadows in the Brazilian economy.

Even measuring is a difficult effort. Etco started doing the calculation in 2003 and at least so far the news is good. It is to hope that this shadow remains falling.