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Measuring Underground (Unobserved, Non-Observed, Unrecorded) Economies in Transition Countries: Can We Trust GDP?

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  • Feige, Edgar L.
  • Urban, Ivica

Abstract

Abstract This paper compiles alternative estimates of underground economies in twenty five transition countries during the transition decade and finds a disturbing lack of convergence between them, calling into question the reliability of GDP figures (which in varying degrees now include non-transparent imputations for the “non-observed economy”) as well as the macro model estimates of the unrecorded economy. A corollary of this finding is that substantive results from many studies examining the consequences of the radical transition from planned to market economies must be viewed with considerable skepticism. Underground (unobserved, non-observed, unrecorded) economic activities play a major role in transition economies. Evaluations of the success and failure of the transition experience should be based on estimates of total economic activity (TEA) namely, recorded plus unrecorded economic activity. We examine the conceptual and empirical relationships between new National Income and Product Accounts (NIPA) methods for obtaining “exhaustive” measures of total economic activity and the two most popular macro-model approaches (electric consumption and currency ratio models) for estimating the size and growth of the unrecorded sector. Our updated empirical results detailing the size and trajectory of unrecorded activities obtained from different estimation methods reveal a disturbing lack of convergence. Until these important differences are resolved, investigations of the relationship between economic reforms and economic outcomes during the transition decade must be viewed with considerable caution. Given the shortcomings of conventional macro model estimates of the underground economy and the lack of transparency and consistency of NOE estimates, it is high time that the profession acknowledges how little we really know about underground economies and their causes and consequences.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 7345.

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Date of creation: Nov 2007
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Handle: RePEc:pra:mprapa:7345

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Keywords: Key words: Underground; unrecorded; unobserved; non-observed; NOE; hidden; informal; shadow; GDP; national accounts; transition economies;

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References

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  1. Edgar L. Feige, 2005. "The Underground Economy And The Currency Enigma," Macroeconomics 0502004, EconWPA.
  2. Feige,E.L., 2003. "The dynamics of currency substitution, asset substitution and de facto dollarization and euroization in transition countries," Working papers 3, Wisconsin Madison - Social Systems.
  3. Edgar L. Feige, 2003. "Defining And Estimating Underground And Informal Economies: The New Institional Economics Approach," Development and Comp Systems 0312003, EconWPA.
  4. Richard D. Porter & Ruth A. Judson, 1996. "The location of U.S. currency: how much is abroad?," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Oct, pages 883-903.
  5. Simon Johnson & Daniel Kaufman & Andrei Shleifer, 1997. "The Unofficial Economy in Transition," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(2), pages 159-240.
  6. Manik L. Shrestha & Adriaan M. Bloem, 2000. "Comprehensive Measures of GDP and the Unrecorded Economy," IMF Working Papers 00/204, International Monetary Fund.
  7. Helmut Stix, 2001. "Survey Results about Foreign Currency Holdings in Five Central and Eastern European Countries," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 2(3), pages 41-48, 02.
  8. World Bank, 2002. "Transition, The First Ten Years : Analysis and Lessons for Eastern Europe and the Former Soviet Union," World Bank Publications, The World Bank, number 14042, October.
  9. Michael Alexeev & William Pyle, 2002. "A Note on Measuring the Unofficial Economy in the Former Soviet Republics," Middlebury College Working Paper Series 0230, Middlebury College, Department of Economics.
  10. Trevor Breusch, 2006. "Size, Causes and Consequences of the Underground Economy: An International Perspective Edited by Christopher Bajada and Friedrich Schneider," The Economic Record, The Economic Society of Australia, vol. 82(259), pages 492-494, December.
  11. Campos, Nauro F & Coricelli, Fabrizio, 2002. "Growth in Transition: What we Know, What we Don't and What we Should," CEPR Discussion Papers 3246, C.E.P.R. Discussion Papers.
  12. Brian M. Doyle, 2000. ""Here, dollars, dollars ..."estimating currency demand and worldwide currency substitution," International Finance Discussion Papers 657, Board of Governors of the Federal Reserve System (U.S.).
  13. Edgar L. Feige & Ivica Urban, 2003. "Estimating the Size and Growth of Unrecorded Economic Activity in Transition Countries: A Re-evaluation of Electric Consumption Method Estimates and their Implications," Macroeconomics 0311010, EconWPA.
  14. Mária Lackó, 2000. "Hidden Economy - an Unknown Quantity? Comparative Analysis of Hidden Economies in Transition Countries, 1989-95," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 8(1), pages 117-149, March.
  15. Edgar L. Feige, 2005. "A Re-Examination of the 'Underground Economy' in the United States; A Comment on Tanzi," Macroeconomics 0501021, EconWPA.
  16. Oleh Havrylyshyn, 2001. "Recovery and Growth in Transition: A Decade of Evidence," IMF Staff Papers, Palgrave Macmillan, vol. 48(4), pages 4.
  17. Johnson, Simon & Kaufmann, Daniel & Zoido-Lobaton, Pablo, 1998. "Regulatory Discretion and the Unofficial Economy," American Economic Review, American Economic Association, vol. 88(2), pages 387-92, May.
  18. Feige,Edgar L. (ed.), 1989. "The Underground Economies," Cambridge Books, Cambridge University Press, number 9780521262309, October.
  19. Gerxhani, Klarita, 2004. "Tax evasion in transition: Outcome of an institutional clash? Testing Feige's conjecture in Albania," European Economic Review, Elsevier, vol. 48(4), pages 729-745, August.
  20. Michael Alexeev & William Pyle, 2003. "A note on measuring the unofficial economy in the former Soviet Republics -super-1," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 11(1), pages 153-175, March.
  21. Ratna Sahay & Jeromin Zettelmeyer & Eduardo Borensztein & Andrew Berg, 1999. "The Evolution of Output in Transition Economies," IMF Working Papers 99/73, International Monetary Fund.
  22. Friedman, Eric & Johnson, Simon & Kaufmann, Daniel & Zoido-Lobaton, Pablo, 2000. "Dodging the grabbing hand: the determinants of unofficial activity in 69 countries," Journal of Public Economics, Elsevier, vol. 76(3), pages 459-493, June.
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Citations

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Cited by:
  1. Feige, Edgar L. & Cebula, Richard, 2011. "America’s unreported economy: measuring the size, growth and determinants of income tax evasion in the U.S," MPRA Paper 34781, University Library of Munich, Germany.
  2. Luisanna Onnis & Patrizio Tirelli, 2010. "Challenging the popular wisdom. New estimates of the unobserved economy," Working Papers 184, University of Milano-Bicocca, Department of Economics, revised Apr 2010.
  3. Pääkkönen, Jenni, 2010. "Economic freedom as driver of growth in transition," Economic Systems, Elsevier, vol. 34(4), pages 469-479, December.
  4. Nikolay Nenovsky, 2010. "Monetary Regimes In Post-Communist Countries Some Long-Term Reflections," Analele Stiintifice ale Universitatii "Alexandru Ioan Cuza" din Iasi - Stiinte Economice, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, vol. 57, pages 217-234, november.
  5. Robina Ather Ahmed & Mark Rider, 2008. "Pakistan’s Tax Gap: Estimates By Tax Calculation and Methodology," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0811, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  6. Byung-Yeon Kim, 2011. "The Unofficial Economy in Russia," KIER Working Papers 797, Kyoto University, Institute of Economic Research.
  7. Sadia Banchirigah & Gavin Hilson, 2010. "De-agrarianization, re-agrarianization and local economic development: Re-orientating livelihoods in African artisanal mining communities," Policy Sciences, Springer, vol. 43(2), pages 157-180, June.
  8. Jože Kocjancic & Stefan Bojnec, 2011. "Analisys of the Shadow Economy in the Wood Industry," MIC 2011: Managing Sustainability? Proceedings of the 12th International Conference, Portorož, 23–26 November 2011 [Selected Papers], University of Primorska, Faculty of Management Koper.
  9. Duarte, Pablo, 2014. "The relationship between GDP and the size of the informal economy: Empirical evidence for Spain," Working Papers 127, University of Leipzig, Faculty of Economics and Management Science.

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