Underground Economy moves BRL 1,7 trillion in Brazil and returns to the pre-pandemic pattern

The underground economy increased its participation in the Brazilian economy and reached 17,8% of the GDP, which represents approximately R$ 1,7 trillion reais. The result is part of Underground Economy Index (HEI), a partnership between the Brazilian Institute of Ethics in Competition (ETCO) and FGV/IBRE, which since 2003 has followed the evolution of activities that operate outside the laws and regulations that affect formal activities in the country.

The indicator, higher than that observed in 2021 (17,4%), points to a return to the pattern of increases caused by the events of recent years associated with the covid-19 pandemic, which raised the level of uncertainty in relation to the performance of the economy.

The end of the most acute phase of the pandemic and the beginning of the process of normalization of economic activity favored a faster recovery of informal employment, which reacts more quickly, contributing to the increase in the Underground Economy Index (IES) 2021 the year.

According to Edson Vismona, president of ETCO, this increase in the IES points to the new government the need to strengthen the economic fundamentals, with a tax reform that stimulates the formalization of the economy and the generation of jobs.

Making a historical rescue, the increases observed in the indicator until the year 2019 were a consequence of the crisis that started in mid-2014, which reduced the formal sector of the economy. At the same time, the reduction in interest rates and the slow increase in economic activity softened the shadow economy's growth scenario, which would be stronger in the absence of these factors.






The Graph shows the evolution of the Underground Economy Index since 2003 - Source: Prepared by ETCO and FGV / IBRE

FGV/IBRE economist Fernando de Holanda Barbosa Filho points out that the last few years associated with the COVID-19 pandemic crisis have disproportionately affected informal workers compared to formal workers.

“Because it is more flexible, it is very likely that employment will recover, as we have already seen, due to stronger increases in the informal labor market, which may lead to further increases in the shadow economy indicator in the coming years. . Therefore, the dynamics of the indicator will depend on the speed of recovery of the economy, which will depend on the progress of the reforms necessary to stimulate the economy”, concludes Barbosa Filho.

Vismona and Barbosa Filho agree that the structural factors that led to the reduction of the shadow economy remain present in the Brazilian economy, but caution is needed in assessing the evolution of the indicator, as its dynamics will depend on the speed of economic recovery, which will depend on the progress of reforms needed to stimulate the economy.

Evolution of the Index

ETCO and FGV/IBRE developed a index for monitoring 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, about 21% of the Brazilian GDP and since then, it has shown a strong downward trend, reaching its lowest value in 2014 (16,1%). However, from 2015 onwards, the indicator worsened, with an increase of more than 1 percentage point between 2015 and 2019.

The reduction in the index in the country in the 2000s is related to several structural factors that stimulated the formalization of the labor market and made it difficult for companies to operate outside the law. Among the factors that helped to increase the formalization of the economy, we can mention the increase in the credit market and the expansion of the average schooling of Brazilians.

In addition, measures to simplify legal standards help to reduce the cost of formalization, stimulating a reduction in the shadow economy. In this sense, measures with the implementation of electronic invoices (NFes), SIMPLES and MEI tend to formalize the economy more.

Between the second quarter of 2014 and the fourth quarter of 2016, Brazil faced a long period of recession (11 quarters) according to the Economic Cycle Dating Committee (CODACE). One of the consequences of this loss of dynamism in the economy was the increase in the number of people engaged in informal activities.

We can see (Graph) a worsening in the Shadow Economy Index between the years 2015 and 2019. In this period, there was an increase of more than 1 percentage point in the Shadow Economy Index, so that it went from 16,2% in 2015 to 17,3% in 2019.

Between 2016 and 2019, there was a recovery of employment, albeit informal, whose work relations are much more flexible, generating increases in the number of people without a formal contract and in the share of this group's income in the total income.

Therefore, the increase in informality observed in this period made the impact via the labor market greater, thus leading to successive increases in the Underground Economy Index between the years 2015 and 2019.

In 2022, it was possible to notice an increase of 0,4 percentage points in the indicator, explained by the return to the pattern of elevations observed before the pandemic. 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 corresponds to something close to 18% of Brazilian GDP, according to data from the IMF.

This increase in the indicator in 2022 is associated with the beginning of economic normalization and the change in the composition of the labor market. With the pandemic under control, there was a faster recovery in the informal sector compared to the decline observed in formal workers, which led to an increase in informality.

The positive side is that the structural factors that led to the reduction of shadow economy remain present in the Brazilian economy. 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 tend to stimulate the formalization of the labor market, reducing the relative cost of formalization, stimulating the return of formal employment. The recent creation of the PIX should also strengthen, in the coming years, the use of formal payment mechanisms, facilitating the measurement of economic activities and, therefore, allowing the reduction of the informal share in the Brazilian GDP in the long term.


Informality advances, but at a slower pace

Falling interest rates, the slow recovery of formal employment and activity are beginning to contain the faster 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 in the country today. In 2019, the informal economy advanced for the fifth straight year, but at a slower pace than the previous one. In the 12 months through June, the informal economy moved 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 trillion. However, this year there is the first sign of a slowdown. That's what points Underground Economy Index (HEI), calculated by the Brazilian Institute of Economics (Ibre) of the Getúlio Vargas Foundation (FGV) in partnership with the Brazilian Institute of Ethics in Competition (ETCO). In the criteria used by FGV , shadow economy includes the production of goods and services not declared to the government to evade taxes and contributions, in order to reduce costs.


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.


We cannot let the underground economy grow again

Evandro Guimaraes


Each year, a volume of money almost equal to the sum of GDP in Rio de Janeiro and Minas Gerais changes hands in Brazil through informal economic activities. It evades inspection, puts consumers' health at risk, pays no taxes and disrupts the businesses of companies that act within the law. The underground economy represents one of the greatest challenges for the growth of the economy and the fair distribution of its benefits among the entire population.

Although in recent years Brazil has managed to advance in the fight against this evil, there is still a long way to go. Statistics show that, after a decade of continuous reduction, informality has parked at 16% of GDP. Just stopping decreasing is a dangerous sign. Even more worrying is to imagine the possibility of a setback in the levels of business formalization, common in times of economic crisis and tax increases like the current one. If we Brazilians intend to resolve the obstacles that hinder the development of the economy in a vigorous and lasting way, avoiding this risk is an inexorable mission.

To fight effectively, you need to understand the problem first. The underground economy is not an exclusive feature of Brazil and its causes and consequences have already been well studied. An important part of businesses that hide from the light is related to criminal activities. Smuggling, drug trafficking, cargo theft, counterfeiting of products and piracy are the main sources of illicit resources in the hold of the economy. For these activities, the only acceptable solution is the fierce and persistent combat, with inspection, policing and punishment of those involved.

There is, however, a part of informality that does not involve criminal actions, but it does not fail to cause serious consequences for the country and the population, especially the poorest. It is embodied in attitudes such as that of the doctor who charges cheaper for an appointment without a receipt, of the property owner who does not declare income from rent, of the industry that produces without proper licenses, of the company that imports under-invoiced products, of the merchant who does not declare its sales.

This type of informality encourages opportunistic behaviors, creates an environment of violation of the rules and, with this, reduces the quality of investments in the country. In addition, it harms public finances by withdrawing government resources that could be used for social programs and infrastructure projects.

From the collection point of view, it is easy to calculate the size of the loss. Last year, the underground economy moved around R $ 830 billion in Brazil without paying tax. Considering that the Brazilian tax burden is around 37% of GDP, it can be deduced that the country stopped collecting in just 12 months more than R $ 300 billion in taxes, equivalent to 12 years of Bolsa Família or 23 years of public funding for higher education, FIES.

But informality also hinders the development of the productive sector and the country. When a company has to face competitors that do not comply with rules or pay taxes, it loses confidence and stops investing in more modern and efficient factories. Productivity falls, the country loses competitiveness and growth is compromised.

Since 2003, the ETCO-Brazilian Institute of Ethical Competition and the Brazilian Institute of Economics of the Getúlio Vargas Foundation in Rio de Janeiro have conducted an annual survey on the size of the informal economy in the country, expressed through the Underground Economy Index (IES). During this period, there was a significant advance in the reduction of this index, which fell from 21% of GDP in 2003 to 16,1% in 2014. The progress was due to a set of factors, such as the expansion of credit, which demanded greater formality; improvements in the collection systems, such as the creation of the Electronic Invoice, which had a great effort by ETCO; tax substitution systems, in which the tax started to be collected in the main phase of the production and consumption chain; initiatives such as the National Family Agriculture Strengthening Program (Pronaf), the Simples tax regime and the institution of the figure of the Individual Microentrepreneur (MEI); the increase in public investment in education, which contributes to the reduction of informality in the labor market.

Yes, we have moved forward, but we cannot be satisfied. We must continue efforts to incorporate a volume of resources into GDP that is greater than everything that a country like Israel produces each year. The timing is crucial. In the index released last year, the shadow economy declined by just 0,1%, and since then macroeconomic conditions have deteriorated. The economy has slowed down, credit has declined, the government has reversed its policy of exemption and has been insisting on the path of increasing taxes to achieve balance in its finances.

Several studies have already shown that the moments of economic crisis and fiscal austerity bring the increase in clandestinity in tow, when people or companies affected by the crisis try to compensate their losses by fleeing their tax obligations. It is at this time that the country needs to choose the direction it intends to take: whether that of complacency with the illegal or that of compliance with the rules. One chooses the easy shortcut to further increase the tax burden of those who act within the law or take the most difficult path by engendering the necessary reforms to reduce informality and increase the taxpayer base.

The recipe for combating the shadow economy is well known. An effective ingredient is tax breaks, which diminish the advantage of tax evaders. Another measure with a proven effect is tax simplification. A World Bank survey shows that medium-sized Brazilian companies spend 2.600 hours a year to take care of all the tax bureaucracy, compared to just 620 hours of the South American average. In the information and technology age, it is not acceptable wasting our energy on useless and repetitive tasks. It is time to carry out the long-awaited tax simplification for all business segments.

Strengthening enforcement is certainly another effective initiative. We can no longer tolerate, for example, pirated or smuggled products being sold in broad daylight at noble and well-known addresses in major cities. This explicit illegality is a mockery of citizens and companies that act within the law.

Last but not least, we have to honor, support, publicize and value public policies or initiatives of any kind that allow an effective fight against counterfeiting, adulteration of products, sophisticated smuggling, such as importation through sub-invoicing. It is necessary to honor efforts, ideas and valuation movements of those who manufacture safe products for the consumer and collect the taxes due. Only then will we be able to build a richer and fairer country for all.


* Evandro Guimarães is president of ETCO-Brazilian Institute of Competition Ethics

Informal economy should exceed R $ 830 billion in 2014, estimates FGV

GRAPHIC G1Value represents 16,3% of the country's GDP, according to a survey. 
Entities see greater slowness in reducing informality.

The share of production of goods and services not reported to the government, which is outside the national gross domestic product (GDP) - as in the informal market - should reach the mark of R $ 833,9 billion this year, according to the estimate of the Brazilian Institute of Competitive Ethics (ETCO), together with the Brazilian Institute of Economics of the Getulio Vargas Foundation (FGV / IBRE), through the Underground Economy Index (IES).

The value represents 16,2% of the country's GDP - almost stable in relation to the 16,3% share that the underground economy represented in the GDP of 2013. According to the entities, the result indicates a tendency towards slowing down the reduction of informality .

Source: G1.globo.com | 12/11



Underground Economy Index falls 0,6 percentage points and reaches 16,2%

For Evandro Guimarães, ETCO's Executive President, it is necessary to simplify tax payments to avoid tax evasion and reduce the indicator.

Interview with the Chief Executive of ETCO, granted to Journalist MILTON JUNG in the Jornal da CBN, on May 27.

If you are unable to view the CBN audio player, access the interview here (mp3 audio)

Trends / Debates: The hidden economy

Source: Folha de São Paulo - 17/12/2012

A major obstacle to the development of a country is the share of the economy that comes from activities deliberately not declared to the government, to evade taxes or because they are illegal.

This portion has been estimated by the Brazilian Institute of Economics of the Getúlio Vargas Foundation (Ibre / FGV), at the request of the Brazilian Institute of Competition Ethics (ETCO), through the Underground Economy Index (IES).

The IES historical series dates back to 2003, when it represented 21% of Brazil's GDP, totaling R $ 357,8 billion, or R $ 626 billion in 2011 values. In almost ten years, there was a significant reduction in the size of this underground economy, especially in the past five years.

Economic growth contributed to this fall, which causes an increase in financial intermediation, requiring complete documentation and, consequently, the formalization of companies. Also growing imports and exports have been a driving force in the formalization of economic activity.

With the exception of 2009 - an atypical year for the economy, due to the global crisis -, since 2007, the HEI had fallen by 0,7 percentage point, going from 20,2% in 2006 to 17% in 2011. The most recent estimate of IES shows, however, that it has stopped falling. As the researchers already predicted, the index registered now, of 16,9%, reached its minimum level.

The determining factor to stop this reduction in the underground economy is education.

According to data from the National Household Sample Survey (Pnad), between 2002 and 2011, informality in the labor market dropped 10 percentage points, from 43% to 32%. The increase in the 22 million people who were educated between 2001 and 2011 accounts for 64% of this drop.

This is a surprising number, in the opinion of Ibre / FGV researcher Fernando de Holanda Barbosa Filho, responsible for preparing the IES.
Improving the educational system is a huge challenge. There has been great progress in recent decades, especially in access to school. But the number of children who do not finish elementary school is still significant.

In addition to education, labor laws weigh in on IES stagnation. Despite the rigidity of these laws and the costs of hiring and firing employees, Brazil has reduced outsourcing in recent years, even to retain talent.

The government has signaled improvements in relation to the tax burden, by relieving the payroll of sectors of the economy. But experts believe that CLT reforms could be made in times of economic difficulties. It is more difficult to promote changes at a time like this, when unemployment is low.

If, on the one hand, softening labor laws is an increasingly essential mission, investing in education is much more than a goal. It is an obligation for a nation that claims to be strong and positioned among the main economies in the world.

ROBERTO ABDENUR, 70, is a diplomat and executive president of the Brazilian Institute of Ethics in Competition