Measuring the extent of the shadow economy in any country is a notoriously tricky and controversial task. The size of the shadow economy should take into account all economic activity, including the official and unofficial production of goods and services. This comprehensive exercise is essential in the formulation of economic policies.
The different names used for the shadow economy are confusing as there may be subtle interpretation nuances linked to the terms used. Hidden economy, illegal economy, grey economy, black economy, submerged economy, cash economy and informal economy are just some of the terms used that do not necessarily include the same economic activities.
The National Statistics Office told this newspaper “the non-observed economy” is estimated to amount to three per cent of GDP. A spokeswoman wisely pointed out that “the non-observed economy is not a direct estimate of the shadow economy”. The NSO estimate follows new EU statistics guidelines but certainly does not cover “total economic activity”, which includes much more unrecorded activities besides dealing in drugs and prostitution.
According to a paper published this January by the International Monetary Fund, the shadow economy “includes all economic activities which are hidden from official authorities for monetary, regulatory and institutional reasons”. These could include avoiding paying taxes, avoiding government bureaucracy and corruption.
Malta’s shadow economy was estimated to range between 15.3 per cent and 23.6 per cent of GDP depending on the calculation method used. The two academics who authored the report after studying the size of the shadow economy in 31 European countries last year based their estimates on “mostly legal economic and productive activities” that, presumably, excluded dealing in drugs and prostitution. This could explain, to some extent, the variances between the figures quoted by the NSO and the IMF paper.
The debate on the effects of the shadow economy on the long-term socio-economic prospects of the country seems to be a taboo issue for political parties. The bigger the estimated size of the shadow economy, the more political parties fear antagonising both law-abiding citizens and those employed in the submerged economy. But the size of the shadow economy is a core input to estimate the extent of tax evasion. What is not measured cannot be controlled.
Besides the negative economic consequences linked to an uncontrolled shadow economy, there are social repercussions. Workers engaged in the shadow economy can easily be exploited by employers who feel they have no obligation to follow labour legislation. These workers will also discover in a few decades time that by not contributing to social security throughout their working lives they will miss out on a full pension.
The debate on the extent of the shadow economy should be open and comprehensive. It is misleading and futile to try to measure only illegal activities like prostitution and drug dealing.
Political parties owe it to the public to define their plans to control the shadow economy and ensure that all economic activities are, as much as possible, captured in official statistics. Yet, the front page report on this newspaper titled ‘“Illegal” economy now tops €320 million’ provoked no reactions whatsoever.
Such commitment will ensure that public finances are not distorted by tax evasion and that all workers benefit from contributing to the national insurance scheme.
This is a Times of Malta print editorial