The study of the shadow economy in modern conditions: Theory, methodology, practice

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Highlights

  • The shadow sector in the modern economy systematically interacts with the legal sector.

  • Depending on the situation, the shadow sector of the economy induces both an overstatement and an understatement of GDP.

  • The methods used to study the shadow sector have an excessive error.

  • The autonomous sector of the shadow economy is detected only on the basis of analysis of real consumption.

  • The mixed sector of the shadow economy is revealed by comparing GDP with tax accounting data.

Abstract

Despite the fact that economic science offers many methodological approaches to the study of the shadow economy, the development of information infrastructure in conjunction with the globalization of economic relations have created a fundamentally new situation in which traditional research methods do not allow to obtain the result with the necessary accuracy and efficiency. The article proposes the author’s method of calculating the GDP adjustment taking into account the shadow economy, at which the indicators of shadow GDP of China and Russia for 2011–2017 were calculated and an attempted was made to interpret the results.

Introduction

The shadow economy is present in any economic system of both market and non-market types. Traditionally, the shadow economy is considered as part of an unobservable economy, which represents all economic activity that is not fixed by the current system of statistical observations or other information resources of the state and society. At the same time, unlike other segments of the unobservable economy, the shadow economy, on the one hand, is outside the legal framework, and on the other hand, it produces goods and services whose supply is legal, in contrast to the criminal economy, whose activity is aimed at benefiting by illegal redistribution income and values. In this article, the object of research is the shadow economy in precisely this interpretation.

Despite the efforts to reduce the shadow sector of the economy, consisting of both repressive measures (increasing criminal and administrative liability, financial sanctions, tightening controls, including the latest methods of monitoring the movement of goods and money circulation), and creating favorable conditions for legal economic activity studies, show that the share of the shadow economy in the total volume of the national product continues to increase, although the specific values vary significantly across countries, periods, and also depending on the measurement methods used (Medina & Schneider, 2018; Schneider & Enste, 2000). The most difficult problem associated with the study of the shadow economy is its measurement, which is explained by the very essence of shadow economic transactions, the participants of which try to achieve concealment of their real parameters from all types of control. An analysis of the currently used methods for measuring the shadow economy will be given below, however, modern attempts to calculate the share of the shadow economy in GDP (Feld & Schneider, 2010; Kelmanson, Kirabaeva, Medina, Mircheva, & Weiss, 2019; Medina & Schneider, 2018) in some cases give obviously incorrect results. As a vivid example, consider the CIS countries. In the Republic of Belarus, where strict measures are used to control the circulation of goods and money (including special control marks, RFID tags, mandatory use of cash registers for cash payments, etc.), the share of the shadow economy in GDP turned out to be at the level of Ukraine (44–45 percent), where, with the same economic structure, state control measures are less stringent and higher than in Russia (38 percent), whose shadow economy, in comparison with Belarus and Ukraine, includes an additional large-scale illegal production and export of raw materials. So, if according to the data of the customs statistics of Russia in 2015 oil and oil prodact were exported in the amount of 216.1 billion US dollars, then according to the summarized data of the customs statistics of other states they imported from Russia these goods worth 338.2 billion US dollars. Some of this discrepancy is explained by the different methodology of customs statistics in different countries, however, it cannot explain a complete discrepancy of almost 60 % (Sovdagarov, 2017). In addition, countries with the largest share of the shadow economy in GDP among the CIS countries – Tajikistan and Moldova, whose governments do not control a significant part of their territory, are not distinguished by the results of calculations among other countries in this region. The clearly underestimated level of the shadow economy in China is also noteworthy. Despite the presence of large-scale shadow production (counterfeit copies of well-known brands of Chinese origin are faced by residents of all countries), export zones where large wholesale trade with foreign importers is carried out in cash foreign currency, as well as huge agricultural clusters whose products are sold on the markets without any government control and the world's largest shadow banking, the calculation results showed that the shadow economy in China is at the level of countries such as Canada, Denmark, the Czech Republic, France, Iceland, Norway and less than in countries such as Belgium, Estonia, Israel, Italy, South Korea, Poland, Portugal, Slovenia, Spain (Medina & Schneider, 2018). The list of such results can be continued. Therefore, the purpose of this article is to develop a new methodology for calculating the volume of the shadow economy, which allows to obtain more reliable results compared to the methods currently used.

The first part of the article analyzes the currently used methods for assessing the volume of the shadow economy. The second part of the article reveals the modern structure of the shadow economy, which is necessary for its effective research. In the third part, a new methodology for calculating the volume of the shadow economy is proposed, which allows to determine the real GDP of the country taking into account shadow economic operations. In the fourth part of the article, in order to test the proposed methodology, the results of calculating shadow GDP for two countries with the most complex structure of the shadow economy – Russia and China – are presented. The fifth part contains conclusions and suggestions on the interpretation of the results.

Section snippets

Modern methods of studying the shadow economy

Scientists began to study the causes, nature and consequences of the functioning of the shadow economy in the 30 s (of the twentieth century). However, a critical analysis of the research methodology and suggestions for improving it began after the publication of Hart (Hart, 1973), where an attempt was made to determine the differences between the formal and informal sectors of the economy. K. Hart's ideas formed the basis of the concept of informal economic activity developed by the

The structure of the modern shadow economy and its interaction with the legal sector

The shadow economy has a diverse impact on the economic system. In some cases, the shadow economy plays a positive role. In particular, the positive effects of the shadow economy include:

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    shadow economy provides additional employment, bringing the economic system closer to full employment;

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    the shadow economy, by minimizing costs in a competitive environment, provides consumer gain through a cheaper offer of goods, work and services;

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    having developed sufficiently, the shadow economy creates a

Research methodology and data

The feature of the modern shadow economy is its symbiosis with the legal economy, which involves interaction in many areas. At the same time, the shadow economy can be conditionally divided into two segments:

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    a symbiotic segment, which doesn’t cover not the entire cycle of production of goods and services, but only a part of it (the cost of the final product is created both in the shadow economy and in the legal economy);

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    an autonomous segment that covers the entire process of creating value

Calculation of shadow GDP of Russia and China according to the author’s method

We made an attempt to estimate the shadow GDP created in the economies of Russia and China. The choice of these economies is due to the following considerations:

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    in these economies, in addition to the standard motives for the existence of the shadow economy (tax concealment and legalization of shadow income), there are specific motives for economies with a high degree of statism: excessive administration, unequal competition, barriers to market access, high level of arbitrage margin between

Summary and policy conclusions

Regarding measures to reduce the shadow economy, it should be noted, that the reason for the emergence of shadow economic relations, like any other, is the desire to maximize profits. Therefore, the criterion for the expediency of participation of firms in the shadow economy is excess of proceeds from such participation over cost increases. Therefore, the general methodological approach to reducing the shadow economy is to reduce the benefits of participation in it – or by reducing additional

Declaration of Competing Interest

The authors report no declarations of interest.

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