Is the Black economy all that black?

The informal economy needs to be redirected and documented to account it and boost the country’s GDP.

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 20^th, 2013.

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