Importance of the Asian Shadow Economy to the GDP of Asia

Importance of the Asian Shadow Economy to the GDP of Asia

Student’s name

Institutional affiliation

Importance of the Asian Shadow Economy to the GDP of Asia

Imagine the following scenarios; an organization imports goods worth trillions but hides the records of the transactions from the taxman, and a factory worker drives an Uber after their regular shift hours as an extra job. What about an IT expert who brokers a sale of software to their boss’s prospective client as a side deal and is paid in cash but does not report the same to the tax collector? Fishy business, right? These are instances of shadow or underground economy activities, whether legal or illegal, that sum up to billions of dollars annually but are kept off the gaze and out of the books of government records and tax collectors.  Authors and researchers have attempted to get a coherent and reasonable definition of what shadow economy is, but it has proven difficult due to the lack of observability. Smith (1994) opined that the shadow economy is the market production of goods and services, whether legal or illegal, that evades detection in the GDP’s official approximations (Schneider, 2008). Asian countries are known to be prone to these activities. This paper will discuss the importance of the Asian shadow economy to its GDP.

The terms, underground, informal, parallel, unregistered, unofficial, and shadow economy are customarily used interchangeably because of the lack of a consistent description of what shadow economy entails. Büehn and Schneider (2012) described the underground economy as unregistered economic activities and earnings which contribute to the official Gross National Product. Shadow economy also entails unreported or undeclared income from monetary or barter transactions that happen “below the radar” alongside a country’s formal economy and for which taxes should be paid but are not. The European Union statistics office has a uniform definition used by OECD countries. The EU defined the shadow economy as a combination of three sectors. They include underground economy (licensed products and services that run outside the government books), informal economy (legal business transactions by people or firms not recorded by official statistics offices), and illegal economy (criminal deals prohibited by the law) (Schneider, 2012).  According to National Accounting System (SNA, 2008) issued by the UN and EU, a parallel economy refers to those productive undertakings usually uncaptured by the primary data source used for compiling a country’s accounts. It falls into four groups, namely, not registered, not surveyed, misreporting, and others (Dell’Anno, 2016).

Lippert and Walker (1997) Table 1. Types of Underground Economic Activities

Currently, Asia has the fastest growing economy among the continents and leads in terms of GDP and Purchasing Power Party (PPP) (Kharas et al., 2010). China, Japan, India, Indonesia, and South Korea have the best economies among Asian countries. Asia is famous for its most prolonged economic blooms such as the 1950-1990 Japanese economic miracle, 1991–present Indian bloom, South Korean Miracle on the Han River, and the Chinese economic boom.  Asian countries participate in shadow economy activities to circumvent strict government regulations such as labor market regulations, i.e., minimum wages, and to evade meeting specific administrative procedures. Additionally, these countries conduct unreported transactions to avoid paying social security monies and taxes imposed on their goods.

Figure 1 Shadow economy statistics for Asian countries (Schneider and Williams (2013)

The World Bank reported that informal workers in East Asia and the Pacific make up approximately 47% of jobs while the figure rises to almost 80% in countries such as Myanmar and Laos. This is one of the importance of the shadow economy. It creates employment opportunities in Asian countries. This gives the formal sector and white-collar jobs a run for their money because of the competition introduced by businesses running in the shadows. Consequently, the effect of the competition between the informal and formal sector boosts the Gross Domestic Product of Asian economies, and it is no wonder they have economy blooms and the largest economies among the continents.

Figure 2 A Black Market in Asia

Figure 3 A woman working in an informal economy sector in Asia

Businesses in the shadows in Asian countries are also significant to the GDP because they provide additional revenue. The informal sector is the other source of goods and services for a country. Underground economy activities run parallel to the official economy hence are complementary. This means that part of the income generated by the informal sector is spent on acquiring goods for the official economy. For instance, in India, the informal sector provides products and services to the formal areas and is the backbone of the nation’s economy. Credit Suisse states that the shadow economy accounts for half of India’s GNP and 400million families and laborers depend on the informal jobs created by that economy (Wong, 2015). Corporations even prefer to higher informal employers who lack skills because they will pay them fewer wages. Besides, the unskilled workers do not ask for much hence helping the organizations evade strict government regulations and evade taxes and labor regulations. The additional revenue from the informal workers adds to the country’s revenue, thus boosting the GDP.

The parallel economic activities have led to the creation of new, better, and less stringent policies and regulations by Asian governments, which has boosted their GDP. Most of the people who work in informal factories struggle a lot in terms of low income, zero benefits, and exploitative rules. In January 2019, the Nikkei Asian Review reported that Asian governments had decided to bring the trillion of informal workers into regulated employment (asian.nikkei.com). The paper said that Bangladesh, Indonesia, and China took steps in the same month to formalize jobs for those doing underground economy jobs. The Dhaka government signed a $250 million deal with the World Bank to create large-scale, better paying inclusive jobs.  Eventually, most informal workers have moved to the regulated sector, and this has seen a GDP boom in China, Indonesia, and Bangladesh, among others.

Further, the pressure created by the shadow economy and forcing governments to implement inclusive policies has seen increased urbanization and industrialization in Asia. The rationale behind this is the fact that governments created more job opportunities for those in unofficial economies. Consequently, rural laborers moved to urban areas. Increased urbanization and industrialization, therefore, means the GDP of these states goes up. For instance, China has since experienced growth in urban areas and industries since 1976. It is within the same year that China attracted substantial foreign direct investments to boost capital for economic growth, and many labor-intensive businesses opened in the Eastern provinces, which needed laborers. (Chen and Schneider, 2018) However, rural workers could not move to the formal sectors due to strict rules, and thus China reformed their household registration system that caused this challenge. Therefore farmers were now able to move freely to urban areas to look for jobs in the manufacturing and service sectors. China’s urbanization rate was 57.35% in 2016 from 17% in 1976, and employment ration in primary industries such as farming and fishing decreased to 27/%.

Shadow economies have seen a decrease in gender inequality in terms of employment. This means that women now work and make a living for their families. A 2011 study showed that religious beliefs, culture, greater commitment to family, and illiteracy pushed women to informal sectors rather than corporate jobs (Jahirrudin et al., 2011). In India, women work as rag pickers, beauticians, house helps, coolies, vendors, and construction workers.  In as much as this might sound like a problem, in the real sense, it has seen women become emancipated and get economic freedom. The consequence of this is that their income has contributed slightly to increase the GDP in Asian nations because of reduced poverty and increased employment.

In 2018, a First Post article revealed that over 1 billion people of the 68% employed persons in Asia-Pacific come from the informal sector propagated by underground economy activities. Moreover, Eco-Business’s June paper reported that the informal economy is a crucial component of the economic culture of Asian countries. These articles agree that shadow economy activities are significant to Asian countries and their GDP.  The undergroundThe underground economy in Asian states has seen a growth in their GDP through the creation of improved and less stringent laws, increased formal sector jobs, increased urbanization, constructive competition, , and being a source of revenue and goods and services. It goes without saying that the contribution of informal economy workers must be given recognition.  In fact, instead of Asian governments trying to shun shadow economy activities, they could try to include to complement the official economy.  They could do this by introducing contractual jobs to informal workers, reducing tax rates on personal income, legalizing of certain underground economy businesses, and creation of higher-paying formal duties.  Besides, the International Labor Organization in 2002 removed the common misconception of the shadow economy by saying it did not include illegal transactions. The ILO even embraced informal workers by supporting them through training. The Asian governments should, therefore, embrace the shadow economy as it is of great importance to their GDP.

References

Buehn, A., & Schneider, F. (2012). Shadow economies around the world: novel insights, accepted knowledge, and new estimates. International tax and public finance, 19(1), 139-171.

Chen, H., & Schneider, F. (2018). Size and Causes of Shadow Economy in China over 1978–2016: Based on the Currency Demand Method.

Dell’Anno, R. (2016). Analyzing the determinants of the shadow economy with a “separate approach.” An application of the relationship between inequality and the shadow economy. World Development, 84, 342-356.

Eco-Business. (2018) “Informal workers make cities work for all: 3 stories from Thailand, India, and Colombia”. Eco-Business. Retrieved from http://www.eco-business.com/opinion/informal-workers-make-cities-work-for-all-3-stories-from-thailand-india-and-colombia/

International Labour Organization. (2002). Women and Men in the Informal Economy.

Jahiruddin, ATM; Short, Patricia; Dressler, Wolfram; Khan, Adil (2011). “Can Microcredit Worsen Poverty? Cases of Exacerbated Poverty in Bangladesh”. Development in Practice.

Kharas, H., & Gertz, G. (2010). The new global middle class: A cross-over from West to East. China’s emerging middle class: Beyond economic transformation, 32-54.

Lippert, O., & Walker, M. (Eds.). (1997). The underground economy: global evidence of its size and impact. The Fraser Institute.

First Post. (2018). “Over 68% of Asia-Pacific’s workforce makes a living in informal economy, says International Labour Organization“. Retrieved from  www.firstpost.com.

Roughneen, S. (2019, January 20). Asian countries seek to pull millions out of informal economy. Nikkei Asian Review. Retrieved from https://asia.nikkei.com/Economy/Asian-countries-seek-to-pull-millions-out-of-informal-economy

Schneider, F. (2008). Shadow economy. In Readings in Public Choice and Constitutional Political Economy (pp. 511-532). Springer, Boston, MA.

Schneider, F. (2012). The shadow economy and work in the shadow: what do we (not) know?

SNA (2008) System of National Accounts, New York: Commission of the European Communities, IMF, OECD, UN, WB. 662p.

Williams, C. C., & Schneider, F. (2016). Measuring the Global Shadow Economy: the prevalence of informal work and labour. Edward Elgar Publishing.

Wong, J. (2015). Poverty, Invisibility, and the Welfare State in the Developing World. Inclusive Growth, Development, and Welfare Policy: A Critical Assessment, 211.