Shadow Economies: An Interview with Dominik H. Enste

1. 1. Shadow economies are difficult to define, especially because of the challenges in measuring them. How would you describe a shadow economy?

   Since the term 'shadow economy' comprises numerous economic activities, it is difficult to provide a universal definition. For example, one has to consider the role of goods and services produced and consumed within the household, 'soft' forms of illicit work ('moonlighting'), illegal employment and social fraud, as well as criminal economic activities.¹ In general, the shadow economy can be seen as the result of decisions of individuals to act outside of official norms and formal institutions for economic activity.

   Shadow economies are part of underground economies. An underground economy consists of all private economic activities that are not included in the calculation of the gross national product (GNP), but nevertheless contribute to added economic value.² The underground economy can be separated into a legal and an illegal sector. The legal sector can then be specified as the self-sufficient economy (household sector and informal sector) and the illegal one as the shadow economy or hidden economy (irregular sector and criminal sector).

   These activities are not registered for three reasons:

   1. 1. According to international custom, the activities are not included in calculations of GNP,

   2. 2. Insufficient collection methods result in some transactions not being recorded fully or at all in the national account statistics

   3. 3. The added value in a transaction is not readily apparent, hence it cannot be recorded.³

2. 2. What are the major challenges regarding the measurement of shadow economies? How can some of these challenges be overcome?

   There have been several studies providing information about illicit work ^{4, 5} in addition to annual estimations that measure the size of the

   Table 1.

   Categorization of the underground economy

   shadow economy in more than 150 countries based on macroeconomic methods.⁶ However, the results of these studies differ greatly due to the application of different estimation techniques and variations among the definitions and assumptions used by researchers. Consequently, international comparability cannot be assured. It is also difficult to compare national shadow economies since variables (such as tax burden and unemployment rates) are estimated differently from state to state. Moreover, illicit work is by nature carried out in secret. Therefore, it can only be detected indirectly (for example, in interviews). Macroeconomic estimation methods have also been criticized on various grounds. Regardless of these limitations, some international studies have been conducted, and comparable trends can indeed be observed, even though different estimation methods have been applied. Differences in empirically determined estimates of the size of the global shadow economy can be explained to a certain extent by theoretical differences in approach.⁷

   The different methods used to estimate the shadow economy are summarized in Table 2. Even though the techniques may not be able to give an exact result, they can render visible a few clues. Some approaches allow for an estimation of the development of the shadow economy over time. As the bases of the different approaches vary, there are clear differences regarding the estimation of the size of the shadow economy. Yet, comparing methodologies gives the reader an idea as to whether or not the estimations are plausible. When entirely different approaches lead to similar outcomes or when disparities can be explained by comparing methodologies, then more reliable results can be obtained by combining study approaches.⁸

3. 3. The term 'shadow economy' often carries a negative connotation. However, some experts like author Robert Neuwirth argue that shadow economies are an inherent part of the global economic system and not necessarily bad. Do you agree?

   Indeed, activities in the shadow can have positive and negative impacts for an economy. Illegal and semi-legal activities are in general undesirable for official institutions. Because the growth of the shadow economy is caused by a rise in the overall tax and social security burden—together with institutional sclerosis—an increase in underground activity erodes the tax and social security bases. The result is a further increase in the budget deficit or tax rates, additional...