Underground economy grows in Brazil

The share of the underground economy in the Brazilian economy reached around 17,8% of GDP in 2022, as shown by the Underground Economy Index (IES). This result is higher than that observed in 2021 (17,4%) and points to a return to the pattern of elevations observed in the pre-pandemic period. The index built in a partnership between the Brazilian Institute of Ethics and Competition, ETCO, and FGV IBRE measures the evolution of the underground economy since 2003 and seeks to capture the evolution of activities that operate outside the laws and regulations that affect formal activities in the country .

The increases observed in the indicator up to 2019 were a consequence of the crisis that began in mid-2014, which reduced the formal sector of the economy, and the slow recovery of economic activity, concentrated in its most flexible part, the informal economy, which was pulling the employment in the country. At the same time, the reduction in interest rates and the slow increase in income softened the shadow economy's growth scenario, which would be stronger in the absence of these factors.

However, the events of recent years associated with the Covid-19 pandemic have extraordinarily raised the level of uncertainty regarding the performance of the economy. The negative impacts on economic activity and on the labor market affected informal workers more intensely, compared to formal workers. This change in the composition of the labor market, with a greater weight of formalization, combined with the sharp reduction in the level of economic activity, contributed to the decline in the Underground Economy Index (IES) in 2020.

After the most acute phase of the pandemic, the process of normalization of economic activity began, stimulating both the formal and informal economy, recording a return of informality to the standards observed in the pre-pandemic period, partly caused by the faster recovery of informal employment , which was to be expected given the greater flexibility in this type of bond, thus, the Underground Economy Index (IES), since 2021, has grown again, reversing the drop observed in 2020.

In the last two years, the return of economic activity has meant that both the formal and informal economy have seen a strong recovery. However, the informal part of the labor market showed stronger recovery in relative terms, causing the IES to present growth in the period, more than offsetting the drop that occurred in the pandemic.

In order to understand this topic in more depth, ETCO (Brazilian Institute of Competition Ethics) and IBRE/ FGV, developed an index to monitor the shadow economy, providing an indicator of the evolution of informal activities. Shadow economy is defined as the production of goods and services not reported to the government, deliberately, to: evade taxes; evading social security contributions; circumvent compliance with labor laws and regulations; avoid costs arising from the rules applicable to each activity.

The index starts in 2003, with the highest value of the historical series, around 21% of the Brazilian GDP. Between 2003 and 2014, in the period of strong expansion of formal employment, the Underground Economy Index showed a strong downward trend, reaching its lowest value in 2014 (16,1%). Since then, as a result of the 2015/2016 crisis, the index has shown an upward trend, interrupted by the COVID 19 crisis. The normalization of economic activity signals a further increase in the index.

Several structural factors stimulate the formalization of the labor market: an increase in the average level of schooling among Brazilians; simplification measures of legal rules that reduce the cost of formalization, such as the implementation of electronic invoices (NFes), SIMPLES, MEIA and the expansion of the credit market reduced the shadow economy in the country in the 2000s, expanding economic activities in accordance with the law.

It is a fact that the economic situation has a strong impact on the underground economy. The 2015/2016 crisis led to the growth of informal employment, stimulating successive increases in the Underground Economy Index between 2015 and 2019.

The advance of the Covid-19 pandemic generated a strong reduction in the space for informal workers, causing the index to decline in 2020, with the change in the composition of the labor market, with a greater weight of formalization, combined with a strong reduction in the level of economic activity .

Since 2021, due to the beginning of economic normalization and the faster recovery of the informal sector, we have noticed an increase in the Underground Economy Index, indicating a return to the pattern of increases observed before the pandemic. In particular, in the year 2022, the weight of shadow economy in GDP was 17,8%. This value observed in 2022 shows that the shadow economy in Brazil moved something close to R$ 1,7 trillion reais, close for example to Sweden's GDP, which correspond to something close to 18% of Brazilian GDP, according to IMF data. .

Due to lower costs, the recovery of the labor market was encouraged by informal employment, with the possibility of a further increase in the shadow economy indicator in the coming years. Therefore, the decrease in the index will depend on the speed of recovery of the economy and the progress of the necessary reforms to stimulate the economy.

The good news is that the structural factors that led to the reduction of shadow economy remain present in the Brazilian economy. In particular, the process of simplifying norms and regulations remains active (with prospects of expansion by the current government), the average Brazilian education continues to increase and the credit market should return to its growth trajectory. In addition, the effects of the labor reform should continue to stimulate the formalization of the labor market, reducing its cost. On the other hand, the creation of the PIX should strengthen, in the coming years, the use of formal payment mechanisms, facilitating the measurement of economic activities and, therefore, in the long term, allowing the reduction of the informal share in the Brazilian GDP.

* Edson Luiz Vismona (president of ETCO – Brazilian Institute of Ethics in Competition) and Fernando de Holanda Barbosa Filho – economist at FGV/IBRE

Informality advances, but at a slower pace

Falling interest rates, the slow recovery of formal employment and activity are beginning to contain the more rapid growth of the informal economy. Despite being on the margins of legality and the payment of taxes, the informal economy has played an important role in guaranteeing some income for the large mass of unemployed people that exist today in the country. In 2019, the informal economy advanced for the fifth consecutive year, but in slower pace than the previous one. In 12 months until June, the informal economy generated the equivalent of 17,3% of the country's Gross Domestic Product (GDP). It is still a very significant portion of the economy, the largest in the last eight years and corresponding to R $ 1,2, XNUMX trillion. However, this year there is the first sign of a slowdown. This is what the Underground Economy Index (IES) points out, calculated by the Brazilian Institute of Economics (Ibre) of the Getúlio Vargas Foundation (FGV) in partnership with the Brazilian Institute of Competition Ethics (ETCO). In the criterion used by FGV, the underground economy includes the production of goods and services not declared to the government to evade taxes and contributions in order to reduce costs.

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Underground economy rises for the fourth consecutive year and reaches R $ 1,173 trillion in 2018, according to ETCO and FGV / Ibre

Study shows that production of unreported goods and services to the government rose with the economic crisis and the increase in informal work

 

The economic crisis that has hit Brazil in recent years causes more damage, in addition to the increase in unemployment and the consequent reduction in the purchasing power of Brazilians. It also rekindles the so-called underground economy, the production of goods and services not reported to the government deliberately, with the aim of evading taxes, evading social security contributions, circumventing compliance with labor laws and regulations and avoiding costs arising from compliance with standards applicable to each activity.

The Underground Economy Index, calculated by the Brazilian Institute of Competition Ethics (ETCO) in partnership with the Brazilian Institute of Economics of the Getúlio Vargas Foundation (FGV / Ibre), points to the growth of informality for the fourth consecutive year. In the 12-month period ended in July, the underground economy moved R $ 1,173 trillion, equivalent to 16,9% of the Brazilian Gross Domestic Product (GDP).

The amount handled by the underground economy in Brazil is higher than the GDP of countries like Denmark and Ireland and is close to the Gross Domestic Product of South Africa and Israel.

ETCO's Executive President, Edson Vismona, points out that the consecutive growth of the underground economy is a severe institutional blow to the country. “This economy that lives on the margins of the State brings direct damage to society, creates an environment of transgression, stimulates behavior opportunistic economic growth, with a drop in investment quality and a reduction in the growth potential of the Brazilian economy ”, he says.

For the executive, the best way to change this scenario is to fight its causes, reducing the incentives that make people and companies choose to work outside the law. "We need to make further progress in major reforms, such as tax simplification, and in the improvement of the inspection and control apparatus, such as the electronic invoice, which proved to be a very positive measure", explains Vismona.

After reaching 21% of GDP in 2003, the Underground Economy Index had been falling year on year until reaching its lowest historical level in 2014, when it represented 16,1% of the country's production. Since 2015, the study of ETCO and FGV / Ibre points to a change in the trend line. With the four consecutive increases, informality increased by 0,8 percentage points.

For Fernando de Holanda Barbosa Filho, a researcher at FGV / Ibre, the result reflects the impact of the economic crisis, which aborted formalization in the labor market. “Brazil is not structurally worse than at the time when the indicator showed a downward trend. In recent years, several measures have been taken, such as the approval of the labor reform, which in the long run will favor the formalization of business in Brazil. We believe that, as the economy recovers, we will also be able to measure the resumption of the downturn in the underground economy. ”

 

About the Shadow Economy Index 

 ETCO believes that knowing the size of the problem is critical to tackling it. Much is said, but little is known, about informality, piracy and evasion, as, as illegal activities, they are difficult to measure. The ETCO, in conjunction with the Brazilian Institute of Economics of the Getúlio Vargas Foundation (FGV / Ibre), has since 2007 published the Underground Economy Index, a study that estimates the values ​​of activities deliberately not declared to public authorities, with the objective of evading taxes, and those of those who find themselves in the informal sector due to excessive taxation and bureaucracy.

 

 

 

According to a study by ETCO and FGV / Ibre, stability in informality this year reflects the economic recovery

After growing for two consecutive years, the underground economy stabilized in 2017 and returned to represent 16,6% of the Gross Domestic Product (GDP). The calculation is from the Underground Economy Index (IES), a study carried out in partnership by the Brazilian Institute of Ethics in Competition (ETCO) and the Brazilian Institute of Economics of the Getúlio Vargas Foundation (FGV / Ibre).

Informality in the country generated, in the 12 months ended in July, the equivalent to R $ 1,077 trillion. The number represents the GDP of countries like Colombia and South Africa. The underground economy is the production of goods and services not reported to the government deliberately, with the aim of evading taxes, evading social security contributions, circumventing compliance with laws and labor regulations and avoid costs arising from compliance with the rules applicable to each activity.

The IES has been held since 2003 and, until 2014, registered a constant improvement in the level of formalization of business in Brazil. During this period, the shadow economy fell from 21% to 16,1% of GDP. In 2015, the index suffered its first setback since the beginning of the historical series, a situation that worsened last year.

GRAPHIC IESSize of the underground economy

An important point for the resumption of the formal economy to take place, and to continue in the coming years, is labor reform. “ETCO's expectation is that the new CLT rules will bring about a safer environment for employers and workers. As a consequence, the judicialization of contracts tends to decrease and there will be more incentives to increase the number of employees with a formal contract ”, says ETCO's executive president, Edson Vismona.

Despite the prospect of future improvement, Vismona points out that the country cannot be content with just recovering what was lost in the past two years, without further progress. “A country that intends and needs to attract investments in order to develop cannot accept living with such high levels of informality”, he adds.

According to Fernando de Holanda Barbosa Filho, a researcher at FGV / Ibre, the informal market stopped growing with the end of the recession, but that was not enough to reverse the downward trend of the index. "With the prospect of GDP growth of more than 2,5% for 2018, the trend is for the economy to improve as a whole and positively impact the formalization of business in Brazil," he highlights.

 

About the Shadow Economy Index 

ETCO believes that knowing the size of the problem is critical to tackling it. Much is said, but little is known, about informality, piracy and evasion, as, as illegal activities, they are difficult to measure. The ETCO, in conjunction with the Brazilian Institute of Economics of the Getúlio Vargas Foundation (FGV / Ibre), has since 2007 published the Underground Economy Index, a study that estimates the values ​​of activities deliberately not declared to public authorities, with the objective of evading taxes, and those of those who find themselves in the informal sector due to excessive taxation and bureaucracy.

Slice of the informal economy in Brazilian GDP grows in 2016, says study

photo-informalityThe participation of the informal market in the Brazilian economy grew again in 2016, reflecting the economic crisis in the country, which has affected formal employment, according to a survey released on Monday.

The so-called underground economy - production of goods and services not reported to the government deliberately - reached 16,3 percent of GDP, against 16,2 percent in 2015, according to a study carried out by the Brazilian Institute of Ethics in Competition (ETCO) and the Brazilian Institute of Economics at Fundação Getulio Vargas (FGV / IBRE).

Comparatively, the participation of the informal economy in GDP exceeds that of the Northeast (12,3%), Midwest (9,5%) and North (5,8%) regions.

In nominal terms, the informal market moved 983,283 billion reais in 2016, compared to 956,96 billion reais in the previous year.

According to FGV / IBRE researcher, Fernando de Holanda Barbosa Filho, responsible for the study, the informal market is also affected by the crisis, but, as it manages to dampen a little more than the formal market, it has increased its relative weight in the economy .

"The crisis disturbs everyone," Barbosa Filho told Reuters, adding that this worsening should stop when the economic crisis in the country passes.

For now, however, the signs are not optimistic. The IBGE announced last week that Brazilian GDP shrank 0,8 percent in the third quarter compared to the previous three months, in the seventh quarter followed by contraction and with the biggest retraction in the year on this basis of comparison.

In the same vein, the Ministry of Labor's General Register of Employed and Unemployed (Caged) showed that 751.816 formal vacancies were closed in Brazil in the first ten months of the year, in the adjusted series.

(By Paula Arend Laier)

Reuters - 06/12/2016

KNOW MORE: UNDERSTAND THE UNDERGROUND ECONOMY INDEX (HEI)

Driven by the crisis, the informal market corresponds to 16,3% of GDP and is higher than the GDP of the North, Northeast and Center-oste regions

image-post-ies

The underground economy continued in 2016 the growth seen in 2015 and exceeded the Gross Domestic Product (GDP) of three of the five regions of the country, according to the Underground Economy Index (IES), a study carried out in partnership by the Brazilian Institute of Ethics Competition (ETCO) and the Brazilian Institute of Economics of Fundação Getulio Vargas (FGV / IBRE). The main reason for the trend reversal, after 11 years of decline, is the Brazilian economic crisis, which had a major impact on formal employment.

According to the ETCO and FGV / IBRE study, in 2016, the informal market generated R $ 983 billion, corresponding to 16,3% of Brazilian GDP. It was an increase of 0,1 percentage point, but confirms the growth trend seen in the previous survey.

The underground economy is the production of goods and services not reported to the government deliberately, with the objective of evading taxes, evading social security contributions, circumventing compliance with labor laws and regulations and avoiding costs resulting from observing the rules applicable to each activity .

In comparison with the economic performance of the five regions of the country, the underground economy has a higher percentage of GDP than that of the North (5,8%), Northeast (12,3%) and Central-West (9,5%) %). With the current 16,3%, the ETCO and FGV / IBRE indicator is also very close to the GDP of the South Region, which in the 2013 IBGE survey accounted for 16,9% of the gross domestic product.

ETCO Executive President Edson Vismona says that combating informality must be a constant effort on the part of the authorities and society itself. “The informal economy has an impact on the whole of society, insofar as there is no payment of taxes. All investments are compromised and, in addition, an environment conducive to transgression and crime is created. ”

FGV / IBRE researcher Fernando de Holanda Barbosa Filho, responsible for the study, explains that the duration of the macroeconomic crisis leads the informal economy to continue growing. “The economic crisis interrupted the process of formalizing the Brazilian economy, reduced the number of companies, formal jobs and reduced the payment of taxes. The deep crisis that affects the entire economy has caused an increase in informality even with the mechanisms that stimulated the further formalization of the economy still in force. ” For the researcher, the resumption of growth should provide a return to the downward trend of the index. However, until that happens, the shadow economy must grow.

About the Shadow Economy Index 

ETCO believes that knowing the size of the problem is critical to tackling it. Much is said, but little is known, about informality, piracy and evasion, as, as illegal activities, they are difficult to measure. The ETCO, in conjunction with the Brazilian Institute of Economics of the Getúlio Vargas Foundation (FGV / IBRE), has been publishing since 2007 the Underground Economy Index, a study that estimates the values ​​of activities deliberately not declared to public authorities, with the objective of evading taxes, and those of those who find themselves in the informal sector due to excessive taxation and bureaucracy.

 

 

 

Repercussion of the Underground Economy Index grows 138%

In June, ETCO-Instituto Brasileiro de Ética Concorrencial released the Subterranean Economy Index (IES), from the research it conducts in partnership with the Brazilian Institute of Economics of Function Getúlio Vargas (FGV / IBRE). The IES measures the size of informal activities, which include smuggling, counterfeiting, tax evasion and other illegal practices combated by ETCO.

The release of the index draws the attention of society and authorities to the problem. The most recent study, showing stagnation in the rate of decline in informality, obtained media coverage of 138% more vehicles than the previous survey. Next, see the highlights of the impact of IES in the media.

UNDERGROUND ECONOMY INFO