The Underground Economy and Tax Evasion in Pakistan: Annual Estimates (1960-1998) and the Impact of Dollarisation of the Economy

The underground economy (UE) and tax evasion have been a focus of research in Pakistan for many years now. The growing interest in these areas is because of persistent budget deficits resulting from inadequate tax revenues. It is not the presence but the size of the underground economy and the extent of tax evasion that is a major cause of concern. The growth rate of the underground economy is crucial to policy making. Lack of information in this regard is often held responsible for distortions in major macroeconomic indicators. In effect, the socio-economic policies based on these indicators are made ineffectual. Thus up-to-date estimates of the size and growth of the underground economy are very important. Social and economic policies directly affect the size and growth of the underground economy. Major policy changes like structural reforms in the financial and banking sectors make a significant impact on both .economies. In this respect, it is crucial to gauge the impact of structural changes like dollarisation of the economy on underground activities. The term underground economy encompasses a vast variety of activities that are not deemed legal by law and one cannot be sure of the exact meaning of the phrase. There are several synonyms of the term underground; for example Secondary, Hidden, Irregular, Parallel, Unofficial, Black etc. However, there are four different categories under which the underground economy can be classified.