#6 - JRL 6586
Izvestia
December 4, 2002
SHADOWS GROW SHORTER AT NOON
The "gray" sector helps the "white" economy grow
Author: Alexander Levinsky
[from WPS Monitoring Agency, www.wps.ru/e_index.html]

A SUBSTANTIAL PART OF THE RUSSIAN ECONOMY STILL EXISTS "OUTSIDE" OFFICIAL STATISTICS, THOUGH THE SITUATION HAS IMPROVED. REDUCTION OF THE SHADOW SECTOR IS IMPROVING THE ECONOMIC SITUATION. HOWEVER, THE QUESTION IS WHETHER THE EXISTENCE OF THE "GRAY" ECONOMY HINDERS THE RECOVERY OF THE "WHITE" ONE.

The volume of Russia's shadow economy is decreasing. Judging from a survey released by the Aton investment group on December 3, the shadow sector of the market has been shrinking since the 1998 crisis, and has now reached 37% of GDP (45% in 1998). Analysts say that the unofficial economy exists because of excessive regulation of business activities and the "punitive" character of the tax system. However, there has been some slight improvement in the latter.

Aton's analysts say that the shadow sector of the economy boomed during the disintegration of the Soviet Union. State regulation of business activity and the complicated taxation system reached a peak by the 1990s. Naturally, a substantial proportion of business owners decided to "go underground".

Officials reports showed that on the eve of August 1998 industrial output was decreasing very rapidly. However, analysts say the slump was not as serious as it appeared. It was a case of part of the market moving into the shadows.

Analysts say that a substantial part of the Russian economy still exists "outside" official statistics, though the situation has improved. Reduction of the shadow sector is improving the economic situation. However, the question is whether the existence of the "gray" economy hinders the recovery of the "white" one.

The existence of a shadow sector creates a growth resource for the official economy: bureaucrats who drive the economy into the shadows cannot exert influence on it. As a result, the shadow economy become a reserve for the "white" economy, and "nourishes" its growth.

Cuts to the tax burden has undermined one of the "pillars" of the shadow market; however, the second pillar - state regulation - has remained. Some analysts say that "rules of the game" on the market have become stricter over four years. This particularly concerns small and medium business, which produces around 10% of GDP (in European this indication is around 50%). It should be noted that precisely these enterprises could relax Russia's dependence on raw materials.

Aton thinks that the tax reform, which was launched in 1998, makes the main contribution to the processes of leading the market out from the shadow. The company's experts say that simplification of the fiscal system and cuts to the tax burden have contributed to the increase of tax proceeds, though the rise of oil prices is the main factor.

A more comprehensible connection between the volume of GDP and tax collection appeared after 1998. Before a rise of oil prices did not affect tax proceeds because major oil companies and Gazprom paid taxes according to individual agreements with the government; not according to the law. After that the situation changed. First two quarters of 2002 marked with a fall of tax proceeds, testify to the recovery of the economy. Reduction of the income tax from January 1, 2002 affected this indication. Meanwhile, the cancellation of investment benefits might force enterprises to evade taxes.

The report presents methods used for evaluating the shadow market and conclusions, to which analysts have come. For instance, analysts say that in 1995 the production volume amounted to 50% of the 1990 levels. Meanwhile, power consumption reached 70% compared to the same period. In other words, statistics did not take in consideration part of the industry, which consumed electricity. At the same time, non- manufacturing business accounts for 60% of GDP. Aton's experts conclude that the shadow part of the economy was concentrated precisely in this sector. This is why this method makes it possible to find only part of the "shadow" economy.

Another method used for evaluating the hidden sector of the economy is to register changes on the labor market. This is method is not very reliable because officials statistics based on Soviet methods are not reliable either. Meanwhile, this method shows that a setback in production was not accompanied by a substantial rise of unemployment. Analysts note that the discrepancy between the growth of GDP in 1999-2000 and a lag in the job growth rate testifies to a reduction of the shadow sector.

The correlation of the number of employed and unemployed workers shows a more interesting picture. A drop in industrial output on the eve of 1998 was not accompanied by a corresponding rise in unemployment. This shows that part of the workforce "moved" to the shadow sector. However, economic growth in 1999-2001 increased the number of jobs by 4.3 million while the number of unemployed fell by only 3.5 million. This means that "unofficial" workers "moved" to official lists.

Foreign trade is another sector where hidden economic activities show up. Both the Central Bank and the State Statistics Committee had official data about trade which was not registered by customs offices (this concerns so-called "shuttle traders" who import consumer goods). However, there are some discrepancies between their reports and reports by the State Customs Committee. Unregistered exports accounted for only 10% of all exports until 1998. Meanwhile, imports exceeded 30%. The number of export and import transactions registered by the customs office went up in 1998. The Central Bank says that in the first half of 2002 all movements of goods were registered by customs offices. It turned out that the official volume of imports increased from 66% in 1998 to 78% in the first half of 2002.

(Translated by Alexander Dubovoi)