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News Analysis
Magic figure of shadow economy
Magic figure of shadow economy
Shamsul Huq Zahid
The finance division of the government has come out with magic figures for the size of country's shadow or black or underground or grey or clandestine or parallel -- one has every liberty to give it a name which one deems fit -- economy.
According to the 'analysis' made by the division, the country's shadow economy in the year 2010 was equivalent to a size lying somewhere in between 45 per cent and 81 per cent of its gross domestic product (GDP) for that year.
The division prefers to call the estimates (or guesstimates) as projections. If the projections were true, the country's a shadow economy was, roughly, worth more than $ 50 billion or $100 billion in 2010.
The reasons for the projections, made through the econometric analysis which, reportedly, used Currency-Demand Approach, varying very widely remains unexplained. The analyses of shadow economies of many other developed and developing countries made earlier had never varied so wildly. Those usually varied between 4.0 per cent and 20 per cent in most cases.
In fact there is no uniform or one-size-fits-all formula for measuring the size of the shadow economy of a country, nor is there a precise definition of shadow economy. A number of economists are of the opinion that in the absence of concept of shadow economy in economic theory, any attempt to dig out a magic figure is just meaningless.
Yet there have been efforts to measure the size of the shadow or black economy in many countries, both developed and developing. And the most widely-used methods for the purpose have been (a) measurement of self-reported participation in shadow economic activities and (b) measurement of discrepancies between expected level of demand or receipts ( such as electricity, currency or tax revenue) and actual use of goods or services (Source: The Shadow Economy authored by Matthew H. Fleming, John Roman and Graham Farrel).
The finance division is claimed to have followed the second approach.
There is no denying that with their economies growing, most developing countries facing the problem of expanding shadow economies and Bangladesh has not been any exception.
Based on its findings, the finance division has made observations that excessive wealth is being accumulated in the hands of a few, giving rise to social inequalities and it also traced a link between the shadow economy and the abnormal rise in land and stock prices in recent times. In fact, one does not have to take the trouble of doing research on the developments mentioned above. Even common men do have the same feeling.
The finance division has, however, rightly underscored the need for bringing the shadow economy within the fold of the mainstream economy. Since the shadow economy remains outside the national income statistics it is very difficult to get a true picture of the national economy. Moreover, policy responses of the government tend to be inappropriate because of insufficient national income statistics.
But how can, at least, a major part of the shadow economy be brought into the mainstream economy? It is easy to mention a magic figure for the size of the shadow economy but it is really hard to facilitate the diversion of funds from shadow economy to formal economy.
Both definitional and behavioural approaches divide the shadow economy into four broadly comparable components--- criminal, irregular, household and informal sectors. The criminal part of the underground economy is always difficult to dislodge but right kind of policies might help to woo some portions of other three components to the formal economy.
But the policymakers here do need to ponder why the size of the shadow economy is growing bigger and bigger. In fact the expansion of the shadow economy does suggest that the current economic policies, such as tax and regulatory measures are flawed or inappropriate or burdensome. Its size is also very much linked to regulatory efficiency or inefficiency.
Another important element--- political patronization--- plays a very important role in the growth of the shadow economy. If individuals or business entities can manage undue support and protection from the power-that-be in their bid to amass wealth irregularly, there should be no reason for the shadow economy not to grow in an unbridled pace.
A large shadow economy also poses a danger to the macro-economic stability and efficiency of the formal regulatory institutions of a country. The propensity to transfer funds outside the country by big operators gets momentum when the shadow economy grows beyond control.
Finance division in its study report has put great emphasis on bringing the shadow economy within the fold of formal economic activities and cited a few unsuccessful steps, including tax-holiday facility and the opportunity to whiten black money, initiated in the past to make it happen. But it could hardly suggest alternatives.
Most developed economies do also have shadow economies but they are relatively small in size. What seems to be most importantelement to tackle the problem of shadow economy in a country like Bangladesh is good governance which broadly encompasses the performance of organs of the state, oversight bodies and regulatory institutions. Ensuring that within a short span time appears to be too distant a dream.
Zahidmar10@gmail.com
Magic figure of shadow economy
Magic figure of shadow economy
Shamsul Huq Zahid
The finance division of the government has come out with magic figures for the size of country's shadow or black or underground or grey or clandestine or parallel -- one has every liberty to give it a name which one deems fit -- economy.
According to the 'analysis' made by the division, the country's shadow economy in the year 2010 was equivalent to a size lying somewhere in between 45 per cent and 81 per cent of its gross domestic product (GDP) for that year.
The division prefers to call the estimates (or guesstimates) as projections. If the projections were true, the country's a shadow economy was, roughly, worth more than $ 50 billion or $100 billion in 2010.
The reasons for the projections, made through the econometric analysis which, reportedly, used Currency-Demand Approach, varying very widely remains unexplained. The analyses of shadow economies of many other developed and developing countries made earlier had never varied so wildly. Those usually varied between 4.0 per cent and 20 per cent in most cases.
In fact there is no uniform or one-size-fits-all formula for measuring the size of the shadow economy of a country, nor is there a precise definition of shadow economy. A number of economists are of the opinion that in the absence of concept of shadow economy in economic theory, any attempt to dig out a magic figure is just meaningless.
Yet there have been efforts to measure the size of the shadow or black economy in many countries, both developed and developing. And the most widely-used methods for the purpose have been (a) measurement of self-reported participation in shadow economic activities and (b) measurement of discrepancies between expected level of demand or receipts ( such as electricity, currency or tax revenue) and actual use of goods or services (Source: The Shadow Economy authored by Matthew H. Fleming, John Roman and Graham Farrel).
The finance division is claimed to have followed the second approach.
There is no denying that with their economies growing, most developing countries facing the problem of expanding shadow economies and Bangladesh has not been any exception.
Based on its findings, the finance division has made observations that excessive wealth is being accumulated in the hands of a few, giving rise to social inequalities and it also traced a link between the shadow economy and the abnormal rise in land and stock prices in recent times. In fact, one does not have to take the trouble of doing research on the developments mentioned above. Even common men do have the same feeling.
The finance division has, however, rightly underscored the need for bringing the shadow economy within the fold of the mainstream economy. Since the shadow economy remains outside the national income statistics it is very difficult to get a true picture of the national economy. Moreover, policy responses of the government tend to be inappropriate because of insufficient national income statistics.
But how can, at least, a major part of the shadow economy be brought into the mainstream economy? It is easy to mention a magic figure for the size of the shadow economy but it is really hard to facilitate the diversion of funds from shadow economy to formal economy.
Both definitional and behavioural approaches divide the shadow economy into four broadly comparable components--- criminal, irregular, household and informal sectors. The criminal part of the underground economy is always difficult to dislodge but right kind of policies might help to woo some portions of other three components to the formal economy.
But the policymakers here do need to ponder why the size of the shadow economy is growing bigger and bigger. In fact the expansion of the shadow economy does suggest that the current economic policies, such as tax and regulatory measures are flawed or inappropriate or burdensome. Its size is also very much linked to regulatory efficiency or inefficiency.
Another important element--- political patronization--- plays a very important role in the growth of the shadow economy. If individuals or business entities can manage undue support and protection from the power-that-be in their bid to amass wealth irregularly, there should be no reason for the shadow economy not to grow in an unbridled pace.
A large shadow economy also poses a danger to the macro-economic stability and efficiency of the formal regulatory institutions of a country. The propensity to transfer funds outside the country by big operators gets momentum when the shadow economy grows beyond control.
Finance division in its study report has put great emphasis on bringing the shadow economy within the fold of formal economic activities and cited a few unsuccessful steps, including tax-holiday facility and the opportunity to whiten black money, initiated in the past to make it happen. But it could hardly suggest alternatives.
Most developed economies do also have shadow economies but they are relatively small in size. What seems to be most importantelement to tackle the problem of shadow economy in a country like Bangladesh is good governance which broadly encompasses the performance of organs of the state, oversight bodies and regulatory institutions. Ensuring that within a short span time appears to be too distant a dream.
Zahidmar10@gmail.com
That was just brilliant 
