The underground economy, that is, the set of activities intentionally not reported to the government in Brazil, has been shrinking year after year, since it was estimated in 2003 by the Brazilian Institute of Ethics in Competition (ETCO) in partnership with the Brazilian Institute Economics of Fundação Getúlio Vargas (FGV / IBRE). This reduction is credited to the improvement of the institutional environment, which has benefited in recent years from advances in the performance of the economy and other factors that contributed to the formalization of companies and employment ties.
In the most recent estimate of the institutes, released on the 12th, however, a worrying trend was observed. The 2014 Underground Economy Index was estimated at 16,2% of GDP, just 0,1 percentage point lower than that measured in 2013. In absolute numbers, it is R $ 833 billion, compared to R $ 787 billion in 2013. This is the smallest reduction in the index ever seen since the beginning of the survey (in 2003, the index was 21%). According to the experts responsible for the index, the trend for the coming months is that the pace of decline in informality will slow down, especially if the economic growth forecasts observed so far are confirmed.
The trend towards stabilization in the reduction of informality indicates that some corrections are necessary at this time. If, until now, tax exemptions promoted to alleviate the tax burden in various sectors have collaborated with the formalization of the economy, from this moment on, tax simplification may have a more comprehensive role in reducing informality. There is no denying the importance of exemptions for the economy as a whole. But, as far as can be seen, its effectiveness with regard to formalization tends to stabilize. Thus, tax simplification can enhance the effects of tax relief more broadly on the productive sectors of the economy.
It is also necessary to continue and accelerate the structural changes that we seek for society, such as, for example, increasing the educational level and reducing the unemployment rate. The growth of the formal labor market is close to its limit. Two major bottlenecks hinder the continuity of this evolution. One of them, well known, is the labor laws that bind the economy. The other, less obvious, but with a lot of impact on reducing informality, is the level of education of Brazilians.
In the past decade, informality in the labor market has dropped by more than 10 percentage points, from 33% to less than 22% of the total employed population. The increase in the average education level of Brazilian workers can account for up to 64% of this drop. The positive relationship between schooling and formalization brings positive perspectives with regard to reducing informality in the future.
If, on the one hand, softening rigid labor laws is an increasingly essential mission, investing in education is much more than a goal, it is an obligation for the nation to become more competitive and position itself better among the main economies in the world . Finally, it is necessary to simplify and rationalize the tax system; modernize the collection system and make compliance with the law less painful for the population.
*Evandro Guimaraes is executive president of the Brazilian Institute of Ethics in Competition (ETCO) and Fernando de Holanda Barbosa Filho is an economist and researcher at FGV / IBRE