Why are we doing research on the underground economy?
In this week’s column, I will conclude the discussion on the underground economy in Guyana by highlighting some of its crucial features. It is important that readers keep them in mind whenever they assess recent performance and / or the outlook for the Guyanese economy.
The first is that I have formulated a very strict interpretation of what the underground economy represents in today’s circumstances. In my recent columns, this term has covered three sets of related activities. One concerns economic transactions which are deliberately not declared by economic agents because they are illegal and of criminal origin. Of course, to be eligible, transactions must take place within Guyana’s legal jurisdiction. Another set refers to transactions for which economic agents deliberately evade payment of taxes, especially those due on income and wealth. However, both the income and the wealth referred to here may or may not have been acquired legally. The latest round of activity is rooted in the deliberate intention to bypass and defraud regulators. Here again, the activity may or may not be legal. For example, it could be downright illegal as in the case of drug trafficking or human trafficking. Or, it could be legal, as in the case of legitimate gold mining, but is part of the underground economy because the mined gold is not declared to the legal authority (Gold Board) but is rather smuggled out of the country.
From the above description, it is clear that I am not including in the underground economy what economists usually refer to as the traditional informal sector. Typically, this informal sector would represent, for example, transactions such as the sale by small farmers of part of their production in local markets and their failure to report the income earned to the tax authorities. Or, indeed, it would cover transactions carried out by non-farm households, such as the provision for payment of repair and maintenance services, which are also not reported as income to the tax authorities. Readers can arguably provide several other transactions of a similar informal nature that do not go through the marketplace and therefore pay the required taxes.
Drivers of change
The second crucial feature that readers should note is that since the metro was first studied in Guyana, four main drivers have been behind its expansion. In the 1960s and at the very beginning of the 1970s, almost the entire sector could be attributed to what can be described as an informal economy, which today no longer has major consequences. Indeed, I have dropped this feature from examining the current underground economy.
From the mid-1970s to the late 1980s, the underground economy grew rapidly, mainly in reaction to statist / sponsor policies pursued by the PNC administration at the time. These policies included import licenses and bans, export licenses, and very strict controls on the ownership, sale and purchase of foreign exchange. The resulting shortages led to huge black markets for rare items and especially foreign currencies. The size of the underground economy peaked and an estimate at the time, which was referenced last week, put it up to 99 percent of official GDP (Thomas, 1989)!
With the introduction of the Economic Recovery Program (ERP) in 1989 and the liberalization of the economy that accompanied it, regulatory-induced shortages disappeared. Thus, import restrictions were removed and a free currency market flourished. Shortages and shortages could no longer be the engines of the underground economy. What then emerged was that tax evasion and regulatory failure became the main drivers of the underground economy during this period. This was encouraged by the norms of illegality, which had become a deeply ingrained feature of the culture of the entrepreneurial class, spawned in the period of evasion and manipulation of its way through massive restrictions and extensive intervention. and state intrusiveness into the economy during the mid-1970s to the late 1980s. The period of rapid liberalization that followed thereafter lasted from the late 1980s to the late 1990s .
As the drivers of tax evasion and regulatory failure continued to be prominent in the 2000s, there was the powerful driver of organized crime. This aspect of the underground economy, I called the shadow economy in the previous columns. Its main activities are drug trafficking, trafficking in persons (TIP), arms smuggling and associated money laundering.
The question readers might want to answer at this point is what is to be gained by researching the underground economy in Guyana. Several advantages immediately spring to mind, but I only have space in this column to refer to two of them. First and foremost, in my opinion, it provides the best proxy indicator of the size and influence of organized crime in the Guyanese economy. The underground economy is clearly not entirely comprised of organized criminal activity, but an estimated range for this is 25 to 75 percent of the estimated range for the underground economy relative to official GDP. This seems quite plausible for Guyana and would indicate a minimum size of US $ 150 million to a maximum of US $ 900 million.
A second advantage is to determine how the undeclared underground economy behaves in relation to the declared official economy; this would be of immense value to policy makers.
The latest study by Pasha and Jourdain-Stephen finds a strong correlation between movements in the underground and official economy. As readers know, correlation is not causation. The question they then investigated is: What is the most likely direction of movement in the two figures? Statistically, what they found was a countercyclical relationship. By this they meant that the growth of the official economy is accompanied by a contraction of the undeclared underground economy and, by parity of reasoning, that the contractions of the official economy are associated with the growth of the economy. underground economy. Using what is called the Granger causality test, the direction of movement found is from the official economy to the underground economy and not the other way around (i.e. not from the underground economy to the official economy).
If the above is true, we can expect that as the formal economy grows, the size of the underground economy in Guyana will decrease.