Tuesday, 26 June 2012

Shadow economies all around the world

Ceyhun Elgin and Oguz Oztunali are two economists who have been looking at the size of black-market economies around the world. Using a dataset with 7,395 observations for 161 countries from 1950 to 2009, they're looking into how the size of black markets differs in rich and poor countries.

Their estimate of the (mean) size of the shadow economies is 22.67 percent of world GDP.  Elgin and Oztunali  note a downward trend in the size of the black markets around the world.
For almost all country groups (except for the post-Socialist one), we observe a declining trend over time. However, the pace of the reduction seems to lose some momntum in the last decade. Somewhat more interestingly, we observe a spike staring in 2007. Considering the emergence of the global economic crisis, this could give further support for the hypothesis that the size of the shadow economy is countercyclical [ ... ].
Another, not too surprising, result Elgin and Oztunali find is that Latin American and sub-Saharan economies have significantly larger shadow economies than the other groups of countries, while the OECD-EU group has a significantly smaller shadow economy.
In Figure 2, we group countries with respect to GDP per-capita and then report the average GDP-weighted shadow economy size in each group. Here, we divide the countries into five categories – poorest, second, third, fourth and the richest 20%. Not surprisingly, richer countries tend to have a smaller shadow economy; [ ... ]
How much of the Lain American black market is drugs and how much of the sub-Saharan shadow economies is related to political corruption? Related to these questions is the question of whether rich countries have smaller shadow economies or if having a smaller black market results in you being measured as being rich. Does the smaller shadow economy just mean that more economic activity is in the measured sectors of the economy, and thus you are considered as being rich, while the overall size of an economy, black plus white markets, could be similar between rich and poor countries. One wonders what the true size of some Latin American countries GDP would be if both black and white markets were measured correctly and countered.


Mark Hubbard said...

Surely richer nations have ironically had much more taxpayer money, over time, to build up the powers and reach of the IR's - to, let's face it, full police state powers - so have been able to forcibly crack down on the black market much more effectively?

And technology is aiding the IR's on this also, as technology has many drivers away from use of cash, and technology, unsurprisingly, is prevalent in rich countries rather than poorer ones. In fact, once the economy is completely electronic, there can be no black market.

Joel Kreager said...

From my understanding, there are two distinct types of shadow economies. One type is inarguably criminal, the other is simply lacking proper registration and taxation. I have heard the second called "System D" lately. This would consist of people driving around in pickup trucks clearing yards and doing remodeling, as well as people selling things by the side of the road or from their home. This type of shadow economy would seem counter-cyclical by definition. However, when it becomes established as the way business is done, it might force more and more business into the gray area as it does not bear the costs of licensing, etc. I wonder if 7000 or so observations spread over several decades could track the growth of something so apparently pervasive.