Is the Black economy all that black?

[ThePublicMenace]

KARACHI:

What exactly is the black economy, or the informal or illegal economy, or even parallel economy as it is called? Not all of these terms actually define this phenomenon accurately. The black economy is not necessarily illegal. For example a cobbler who sits on the roadside peddling his trade probably pays no taxes, and keeps no records about his turnover, so he is a part of the informal economy, but he is by no means doing something illegal.
So, the parallel economy is not always a bad thing. A significant sector of the informal economy comprises entrepreneurs like the cobbler who operate out of the system but don’t necessarily do it just to avoid taxes or rip off the government. This is especially true of the Third World. However, this is not to say that a very large part of the undocumented sector actually is illegal activity like drug trafficking, human smuggling and arms trade and even smuggling of non-contraband that absolutely needs to stop.

Needless to say, the informal sector needs to be roped into the system and documented if the economy is to grow exponentially. Again, this is even more important for Third World countries where the informal economy as a percentage of the documented sector is usually much larger.
There is not a lot of research on this because it is a difficult subject to investigate. But two recent researches have indicated that while on the one hand documentation of the economy has picked up pace, it is has not been able to keep up with the growth in the undocumented trade that either originates in Pakistan or transits through Pakistan.

The research conducted by the Sustainable Development Policy Institute (SDPI) and United Nations Office on Drug and Crime (UNODC) coordinated by Dr Abid Suleri of the SDPI has estimated the size of Pakistan’s illegal economy at anywhere between 20-30 per cent of the formal economy. This report deals mainly with the darker side of the informal economy, like human smuggling, drug trade, arms trade and other hardcore crimes.
Another report on the subject was generated by the Pakistan Institute of Development Economics (PIDE), based on calculations by M Ali Kemal and Ahmed Waqar Qasim. This report, was released in 2012 and suggested that the size of the informal economy in Pakistan in 2008 ranged between 74 per cent to 91 per cent of the formal economy.
Considering that the total size of Pakistan’s GDP is about $180 billion, this indicates that the informal economy is easily $160 billion. This also implies that the total size of Pakistan’s economy is almost $350 billion.

These are staggering numbers and the quantum of the informal economy is seen as growing, while, the regularly released figures by our financial managers already show us that the formal economy is in many ways, receding.
While Pakistan gets a lot of flak for its regulatory structure and failing to document the economy, numbers indicate that the informal economy is a global phenomenon.
In a shared world, the task of countering the illegal or informal economy is also a shared responsibility. And while there are constraints to any exercise or research that attempts to ascertain the size of the illegal economy, and there will always be a degree of doubt as to the veracity of the numbers, such studies are nevertheless useful and are a valuable tool in trying to determine the scope of this sector of the economy and its impact on the country at large.


Published in The Express Tribune, May 20th, 2013.

tribune.com.pk/story/551567/is-the-black-economy-all-that-black/

 

[farhan_9909]

if we black economy into our formal economy..no doubt our GDP will rise to atleast 450billons dollars

 

[Argus Panoptes]

if we black economy into our formal economy..no doubt our GDP will rise to atleast 450billons dollars

That is a mighty impossible "if" you ask for Sir.

Getting the black economy into the formalized sector would mean the end of those who benefit from the present situation. The big ones also control the policies, hence it cannot happen. The little people get away with whatever they can underhand.

 

[niaz]

What is actually a black or underground economy? This basically refers to the sector of economic activity that operates outside the gov’t network.

On the face of it appears as cheating of tax and excise & import dues. Because no taxes or duties are paid, no official accounting hence there is no recourse if the goods & services are substandard. Workers employed in the black economy are normally paid in cash but wages are lower; there is no regard for health & safety standards and the quality of product is normally substandard. This creates an unfair disadvantage to the tax paying entrepreneur who pays the minimum wage & all the gov't imposed duties & taxes making his goods & services more expensive but better in quality.

The above is true in western countries where one dollar lost in taxes means one dollar less available for providing services to the people who are really in need.

However, I would not think that black/underground economy is all that bad in Pakistani context. Here people don’t pay taxes anyway. So much theft of the government income goes on that one could call most of the economic activity within the gov’t network partly black. If substantial part of the revenue is going to end up lining pockets of the employees of the gov’t and her corporations, why shouldn’t it remain with the person earning it?

Besides, a rich gov't employee receiving graft is likely to use it to increase his bank balance whereas a small shopkeeper cheating on income tax/GST is likely to spend it on better food and health care of his family. It is fair to assume that a large proportion of the money that is not being taxed is likely to go back into the economy where it is being more efficiently used than it would be if the same was in the hands of an inefficient and corrupt government official or/ and politician.

Additionally, one must admit that underground economy does put food on a lot of people's table when the economy is in a bad shape and helps the economy moving even if paying money under the table is illegal.

I wouldn’t call “Black economy” all that black in Pakistan’s case.