#6570 #6571
#5 - JRL 6569
Kommersant
11 November 2002
[Interview with Christof Ruehl, chief economist for the
World Bank in Moscow]
[Kseniya Nechayeva] How do you define the shadow economy?
[Christof Ruehl] This concept covers two forms of economic activity which are not accounted for in official statistics, including the calculation data of tax revenue. The shadow or invisible economy covers both unaccounted economic activity (the so-called black market) and partially-accounted economic activity (the grey economy). If an employee in a registered company receives part of his wages in a plain envelope, we say that that worker is involved in grey economic activity. Here I would draw a distinction between the "black market" and the "grey economy" on the one hand and illegal forms of activity, which are in essence criminal (such as contraband drugs), on the other. Although such illegal forms of activity are also part of the shadow economy, they are connected with problems that lie outside the economic sphere as such.
[Nechayeva] According to data from the State Committee for Statistics, the shadow economy makes up twenty to twenty five percent of Russia's GDP. Does the World Bank have any figures for the scale of the shadow sector of the Russian economy?
[Ruehl] Not as yet. Assessing the scale of a shadow economy is a very complex task in so far as those involved in the shadow economy, of course, do not have any desire to show the scale of their activities. At present the State Committee for Statistics is adjusting the size of GDP 23 percent on the side of growth in order to take account of the shadow sector, but other experts think that the shadow economy's share in GDP stands at 40 to 50 percent. But if we compare the situation in Russia with that in other countries, for example Italy, where the official figure for the shadow economy is estimated at 17 percent, I would rather settle on an indicator of 40 to 50 percent than accept the published figures. I hope we will soon be able to present more accurate assessments. A project has been started jointly by us and the Economic Analysis Bureau (which also carries out research on this issue on the instructions of the government of the Russian Federation) and the Higher School of Economics to study the shadow economy and this will allow us to understand the role of this phenomenon and its scale and structure better.
[Nechayeva] In the World Bank's last economic report it is said that the shadow economy is absorbing the labor force that has disappeared from statistical surveys. Where are all these people going to?
[Ruehl] For the most part they are leaving traditional sectors of the economy, large- and medium-sized enterprises which are recorded in detail statistically, and transferring to small business and the area of retail trade and services. Of course, the shadow economy leads to a decrease in the collection of tax revenue, and a decline in economic indicators and so forth. These factors alone are sufficient to make us begin to do something about the shadow economy and try to assess its size. However, I would say that the significance of the shadow economy is defined by two much more weighty reasons. First of all, many of those involved in the shadow economy are busy in new sectors that are increasing more and more in significance for the development of the market economy. They have moved out of sectors whose role will decline over time. At regional level the shadow economy is playing a large role in areas where there is an influx of labor and not in places which the labor force is leaving. In other words, the shadow economy reflects the action of market forces and these forces, in their turn, reflect the general dynamics of structural changes that are needed for deeper diversification in the Russian economy. In a certain sense the shadow economy virtually reflects changes towards a more steady economic structure and this is a positive step. However, diversifying the economy is easier under open conditions rather than in a semi-legal position when you try to remain unnoticed and are easily open to blackmail or extortion. In other words, diversification will go ahead any way, but it will proceed more slowly than it would, given clean, competitive conditions. Secondly, although the shadow economy does reflect reserves for future Russian economic growth, it also limits the use of these reserves.
[Nechayeva] It appears then that the shadow economy facilitates growth in the official economy even if this is not confirmed by the statistics. So why should it restrict potential growth in the Russian economy in the future?
[Ruehl] I have just mentioned the reasons for this. The outflow of the labor force from the official sector of the economic to the shadow sector tells negatively on the setting up of effectively working enterprises in so far as certain resources must be allocated to their not being detected. Often this leads to restrictions in the size of an enterprise, holds its growth back, hinders people's access to work and is an obstacle to implementing technical modernization. Often such a situation suits firms that have adapted to semi-legal conditions, that is, firms which invest more resources in maintaining good relations with civil servants. These firms would not necessarily survive under conditions of open competition. As a result, it is difficult for potentially more efficient "clean" firms to compete. In other words, competition, one of the basic factors of economic growth, becomes deformed. On the other hand, the shadow economy does not guarantee a rise in tax revenue flowing into the state budget, which uses many resources from tax revenue for building roads and other kinds of infrastructure and therefore this leads to increased costs for the official sector of the economy. That is, the shadow economy leads to a general rise in the tax burden. And finally, the system of informal relations set up in the shadow sector has become the main stumbling block on the path to implementing government reforms aimed at improving the business climate in the country. The interests of privileged groups and corrupt state civil servants have become a strong obstacle on the route to reform.
[Nechayeva] If the shadow economy accounts for 40 to 50 percent of GDP, can you estimate how far data on economic growth have been lowered because a part of the economy remains in the shadows?
[Ruehl] Again I must say that I cannot as yet. We know that a significant portion of the shadow economy is concentrated in the service sphere which has great potential for sharp rise in productivity and achievement of high growth rates. But we do not know how productive the shadow sector of the economy is. Is the shadow economy able to compete successfully because the cleverest entrepreneurs are involve in it, or because taxes, social security contributions and the like are not paid there? We do not have an answer to this. As far as the issue of increasing or reducing the size of the shadow sector is concerned, data relevant to this are very superficial and fragmentary. According to suppositions from the State Committee for Statistics, the share contributed to GDP by the shadow economy is reduced partially as a result of such measures as carrying out tax reform and deregulating the economy and in part thanks to a growth of the official sector of the economy. However, in order to find a fuller answer to this question we must carry out more detailed research.
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