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Estimating the Size and Growth of Unrecorded Economic Activity in Transition Countries: A Re-evaluation of Electric Consumption Method Estimates and their Implications

Author

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  • Edgar L. Feige

    (University of Wisconsin-Madison)

  • Ivica Urban

    (Institute of Public Finance)

Abstract

It is widely acknowledged that underground (unrecorded) economic activities play a major role in transition economies. Evaluations of the success and failure of the transition experience should therefore be based on total economic activity [TEA], namely, the sum of recorded and unrecorded economic activity. Substantive conclusions concerning the effects of unrecorded activities on the transition process as well as investigations of the causes and consequences of unrecorded activities have to date, relied extensively on estimates of unrecorded income based on variants of the electric consumption method [ECM] during the first half of the transition process. We first attempt to replicate these estimates employing improved data series. We then go on to extend and update alternative versions of the ECM estimates of unrecorded income for twenty five transition countries for the period 1989-2001. These new estimates enable us to examine the sensitivity of the results to alternative specifying assumptions, particularly, initial conditions. We find that our updated ECM estimates of the size of the unrecorded sector are not only highly sensitive to initial conditions, but they produce negative estimates of unrecorded income for many transition countries. Our findings are also compared to the new national accounting procedures that attempt to estimate exhaustive measures of the “non-observed economy”. Our disturbing results call into question many of the substantive conclusions reached by other scholars who relied on earlier ECM estimates to draw inferences about the transition process as well as the causes and consequences of underground economies in transition. In short, while we conclude that ECM estimates of the size of the unrecorded economy are unreliable, it is still possible to use the growth rate of the unrecorded sector to make important inferences about the transition process by examining the dynamic relationship between recorded and unrecorded sectors. The extension of our data base to cover the entire transition period will hopefully result in new investigations employing panel data rather than the more traditional method of applying simple cross country test procedures.

Suggested Citation

  • 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, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpma:0311010
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    References listed on IDEAS

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    1. Edgar L. Feige, 1986. "A Re-Examination of the "Underground Economy" in the United States: A Comment on Tanzi," IMF Staff Papers, Palgrave Macmillan, vol. 33(4), pages 768-781, December.
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    4. Feige,Edgar L. (ed.), 1989. "The Underground Economies," Cambridge Books, Cambridge University Press, number 9780521262309.
    5. Mr. Adriaan M. Bloem & Mr. Manik L. Shrestha, 2000. "Comprehensive Measures of GDP and the Unrecorded Economy," IMF Working Papers 2000/204, International Monetary Fund.
    6. Michael Alexeev & William Pyle, 2003. "A note on measuring the unofficial economy in the former Soviet Republics1," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 11(1), pages 153-175, March.
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    Cited by:

    1. 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.
    2. Psychoyios, Dimitrios & Missiou, Olympia & Dergiades, Theologos, 2021. "Energy based estimation of the shadow economy: The role of governance quality," The Quarterly Review of Economics and Finance, Elsevier, vol. 80(C), pages 797-808.
    3. Ercolani, Marco G., 2007. "Hidden Economies and the Socially Optimal Fiscal-Tax to Liquidity-Tax Ratio," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 1, pages 1-32.
    4. Feige, Edgar L., 2015. "Reflections on the meaning and measurement of Unobserved Economies: What do we really know about the “Shadow Economy”?," MPRA Paper 68466, University Library of Munich, Germany.
    5. Peter, Klara Sabirianova, 2009. "Income Tax Flattening: Does It Help to Reduce the Shadow Economy?," IZA Discussion Papers 4223, Institute of Labor Economics (IZA).
    6. Enste, Dominik, 2004. "Schattenwirtschaft und Korruption in Mittel- und Osteuropa," IW-Trends – Vierteljahresschrift zur empirischen Wirtschaftsforschung, Institut der deutschen Wirtschaft (IW) / German Economic Institute, vol. 31(1), pages 68-73.
    7. Oksana Nezhyvenko, 2018. "Informal Employment in Ukraine and European Union Transition Countries," Erudite Ph.D Dissertations, Erudite, number ph18-03 edited by Philippe Adair.
    8. Feige, Edgar L. & Urban, Ivica, 2008. "Measuring underground (unobserved, non-observed, unrecorded) economies in transition countries: Can we trust GDP?," Journal of Comparative Economics, Elsevier, vol. 36(2), pages 287-306, June.
    9. International Monetary Fund, 2004. "Republic of Croatia: Selected Issues and Statistical Appendix," IMF Staff Country Reports 2004/251, International Monetary Fund.
    10. Anna Ivanova & Michael Keen & Alexander Klemm, 2005. "The Russian ‘flat tax’ reform [‘Income tax evasion: A theoretical analysis’]," Economic Policy, CEPR;CES;MSH, vol. 20(43), pages 398-444.
    11. Byung-Yeon Kim, 2011. "The Unofficial Economy in Russia," KIER Working Papers 797, Kyoto University, Institute of Economic Research.
    12. Maxim Bouev, 2005. "State Regulations, Job Search and Wage Bargaining: A Study in the Economics of the Informal Sector," William Davidson Institute Working Papers Series wp764, William Davidson Institute at the University of Michigan.
    13. Manamba EPAPHRA & Moga Tano JILENGA, 2017. "Currency Demand, the Subterranean Economy and Tax Evasion: The Case of Tanzania," Journal of Economic and Social Thought, KSP Journals, vol. 4(2), pages 187-211, June.
    14. Stanisław Cichocki, 2006. "Metody pomiaru szarej strefy," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 1-2, pages 37-61.
    15. Maxim Bouev, 2004. "Diverging Paths: Transition in the Presence of the Informal Sector," William Davidson Institute Working Papers Series 2004-689, William Davidson Institute at the University of Michigan.
    16. Bojan Nastav & Stefan Bojnec, 2007. "Shadow Economy in Slovenia: The Labour Approach," Managing Global Transitions, University of Primorska, Faculty of Management Koper, vol. 5(2), pages 193-208.
    17. Feige, Edgar L., 2016. "Professor Schneider's Shadow Economy:What do we really know? A Rejoinder," MPRA Paper 71903, University Library of Munich, Germany.
    18. Bejaković Predrag, 2017. "How to measure the unmeasurable: Project Grey developing capacities and capabilities for tackling undeclared work," Croatian Review of Economic, Business and Social Statistics, Sciendo, vol. 3(2), pages 20-38, December.

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    More about this item

    Keywords

    underground; unreported; unrecorded; unobserved; hidden; informal; shadow economy; transition economies; electric consumption method;
    All these keywords.

    JEL classification:

    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • O5 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies
    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • P20 - Economic Systems - - Socialist Systems and Transition Economies - - - General

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