nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2016‒03‒06
eight papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Reflections on the meaning and measurement of Unobserved Economies: What do we really know about the "Shadow Economy" By Feige, Edgar L.
  2. Tax Reforms and the Underground Economy: A Simulation-Based Analysis By Barbara Annicchiarico; Claudio Cesaroni
  3. Income underreporting among the self-employed: a permanent income approach By Engström, Per; Hagen, Johannes
  4. Tracking and Tracing Tobacco Products in Kenya By Hana Ross
  5. The Urban Informal Sector in Francophone Africa: Large Versus Small Enterprises in Benin, Burkina Faso and Senegal. By Ahmadou Aly Mbaye; Nancy Benjamin; Stephen Golub; Jean-Jacques Ekomie
  6. Where Does Education Pay Off in Sub-Saharan Africa? Evidence from Two Cities of the Republic of Congo By Mathias Kuepié; Christophe Nordman
  7. Two Sides to the Evasion: The Pirate Bay and the Interdependencies of Evasive Entrepreneurship By Elert, Niklas; Henrekson, Magnus; Lundblad, Joakim
  8. A built, even illegitimate public debt? By Robert Joumard

  1. By: Feige, Edgar L.
    Abstract: This paper reviews the meaning and measurement of unobserved economies germane to tax evasion and macroeconomic information systems. These include the unreported, non-observed, underground, illegal, informal and unrecorded economies. It reviews the progress and shortcomings of national and international agency efforts to measure these unobserved economies, noting what they have in common, what distinguishes one from another and their interconnections. It then examines the meaning of Professor Schneider’s Shadow Economy (SSE), and the veracity of his claim to have accurately estimated its size and trend worldwide by employing a MIMIC model methodology. It concludes that SSE estimates suffer from conceptual flaws, apparent manipulation of results and insufficient documentation for replication, questioning their place in the academic, policy and popular literature.
    Keywords: Tax evasion, shadow economy, non-observed, underground, illegal, informal, unrecorded, MIMIC, cash, National Income and Product Accounts, Friedrich Schneider
    JEL: C51 C82 E26 E41 H26 K42 O17
    Date: 2016–02–01
  2. By: Barbara Annicchiarico (University of Rome "Tor Vergata"); Claudio Cesaroni (DEF, Università di Roma "Tor Vergata")
    Abstract: This paper studies the effects of several tax reforms in an economy in which taxes are partially evaded by means of undeclared work. To this purpose, we consider a two-sector dynamic general equilibrium model calibrated to Italy which explicitly accounts for underground production. We construct various tax reform scenarios, such as deductibility of labor costs from business tax, ex-ante budget-neutral tax shifts from direct to indirect taxes, and various tax cuts financed by decreases of government spending. We find the following results. First, neglecting the existence of the underground sector may lead to severely miscalculate the macroeconomic impact effects of tax reforms, especially in the short run, where policy interventions produce direct and indirect effects on the markup. Second, partial deductibility of labor costs from the business tax base proves to be highly expansionary and highly detrimental to the size of the underground sector. Third, the dimension of the underground sector is permanently and considerably reduced by changes in the tax mix that diminish the labor tax wedge. Finally, all the considered tax reforms take the public-debt-to-output ratio toward a prolonged downward path.
    Keywords: Dynamic General Equilibrium Model, Underground Economy, Tax Reforms, Italy
    JEL: E62 O41 O52
    Date: 2016–02–10
  3. By: Engström, Per (Uppsala Center for Fiscal Studies); Hagen, Johannes (Uppsala Center for Fiscal Studies)
    Abstract: The consumption based method to estimate underreporting among self-employed, introduced by Pissarides andWeber (1989), is one of the workhorses in the empirical literature on tax evasion/avoidance. We show that failure to account for transitory income fluctuations in current income may overestimate the degree of underreporting by around 40 percent. Previous studies typically use instrumental variable methods to address the issue. In contrast, our access to registry based longitudinal income measures allows a direct approach based on more permanent income measures. This also allows us to evaluate the performance of a list of instruments widely used in the previous literature. Our analysis shows that capital income is the most suitable instrument in our application, while education and housing related measures do not seem to satisfy the exclusion restrictions.
    Keywords: Income underreporting; tax evasion; self-employment; Engel curves; permanent income
    JEL: D12 H24 H25 H26
    Date: 2015–06–15
  4. By: Hana Ross (School of Economics, University of Cape Town)
    Abstract: Although estimates of the size of the illicit cigarette market in Kenya vary, the government sees it as a problem and has been trying to address the issue since the early 2000's. Between 2003 and 2013 the Kenyan government experimented with numerous measures designed to reduce tobacco tax evasion with varying degrees of success. In the end, it decided to implement a tracking and tracing system for cigarettes (and alcohol products) and joined a small but growing number of countries addressing illicit tobacco trade via a technological solution. The introduction of the new system required a systematic approach, participation of all stakeholders, and an initial investment into infrastructure and enforcement. Preliminary results indicate that the new system, accompanied by an electronic cargo monitoring system, has reduced the size of the illicit cigarette market and substantially increased tax revenue for the Kenya Revenue Authority (KRA). The experience of Kenya highlights the importance of political will, consistency, and comprehensiveness of the system addressing tax evasion, because piecemeal measures have only short-term effects.
    Keywords: Tobacco industry, tobacco tracking, tobacco tracing
    Date: 2016
  5. By: Ahmadou Aly Mbaye; Nancy Benjamin; Stephen Golub; Jean-Jacques Ekomie (Université Cheikh anta Diop de Dakar; Professor of Economics)
    Abstract: The informal sector is often associated with micro- and family-based firms. In West Africa, however, some informal firms are very large. Based on detailed surveys and interviews carried out in Benin, Burkina Faso and Senegal, we compare the characteristics of formal, large informal and small informal firms. This paper discusses the survey methodology, the main industries in which large informal firms operate, and the characteristics and functioning of firms. It shows that large informal firms have some features of both their formal and small informal counterparts, but in terms of management structure and functioning they are more like informal firms than formal firms. Policy should adopt a differentiated approach towards large versus small informal firms, as they have different effects on poverty alleviation and economic development.
    Keywords: Informal sector, economic development, West Africa, Senegal, Burkina Faso, Benin
    JEL: F31 J21 J30
    Date: 2014–12
  6. By: Mathias Kuepié (CEPS INSTEAD Luxembourg et DIAL); Christophe Nordman (IRD, UMR 225 DIAL, PSL, Université Paris Dauphine, LEDa)
    Abstract: (english) Using first-hand data from the 2009 Employment and Informal Sector Survey (EESIC) in the two largest cities of the Republic of Congo, Brazzaville and Pointe-Noire, we analyse the impact of education on labour market outcomes, and identify the segments where education pays off the most. Multivariate analyses of the risk of unemployment and sectoral choice indicate that young people face serious difficulties in the labour market: for most of them, their only choice is to remain unemployed or to join the informal sector. To measure the specific impact of schooling on earnings, we address issues related to sample selection and endogeneity of education in the earnings function. The results shed light on heterogeneity in the returns to schooling across the two main cities and institutional sectors. An important finding is that the informal sector does not systematically lag behind the formal sectors in terms of returns to education. We emphasize convex returns to education, meaning that the last years in secondary and tertiary schooling yield the highest returns, while those of primary education are generally lower. This convexity is also apparent in the informal sector, where education (albeit on another scale) again appears as an important determinant of earnings. _________________________________ (français) En utilisant les données « Enquête sur l'Emploi et le Secteur Informel au Congo 2009 » (EESIC) portant sur les deux grandes villes de la République du Congo, Brazzaville et Pointe-Noire, nous analysons l’effet de l'éducation sur l’insertion sur le marché du travail, et identifions les segments où l'éducation procure les rendements privés les plus élevés. Nos analyses multivariées du risque de chômage et du choix sectoriel indiquent que les jeunes sont confrontés à de sérieuses difficultés : pour la plupart d'entre eux, l’alternative est entre une situation de chômage ou une insertion dans le secteur informel. Pour mesurer l'impact spécifique de la scolarité sur les gains individuels, nous abordons les questions liées à la sélection et à l’endogénéité de la variable d’éducation dans la fonction de gains. Les résultats mettent en évidence une hétérogénéité des rendements de l’éducation dans les deux villes et leurs secteurs institutionnels. Un résultat important est que le secteur informel ne se situe pas systématiquement derrière les secteurs formels (privé et public) en termes de rendements de l'éducation. Nous montrons l’existence de rendements convexes de l'éducation. Cette convexité est également apparente dans le secteur informel, là où l'éducation (quoique à une autre échelle) apparaît aussi comme un déterminant important des gains.
    Keywords: Labour market participation, Unemployment, Returns to education, Earnings functions, Informal sector, Republic of Congo, Brazzaville, Pointe-Noire
    JEL: J24 J31 O12
    Date: 2015–10
  7. By: Elert, Niklas (Research Institute of Industrial Economics (IFN)); Henrekson, Magnus (Research Institute of Industrial Economics (IFN)); Lundblad, Joakim (Centre for Innovation, Research and Competence in the Learning Economy (CIRCLE))
    Abstract: Evasive entrepreneurs innovate by circumventing or disrupting existing formal institutional frameworks by evading them. Since such evasions rarely go unnoticed, they usually lead to responses from lawmakers and regulators. We introduce a conceptual model to illustrate and map the interdependence between evasive entrepreneurship and the regulatory response it provokes. We apply this framework to the case of the file sharing platform The Pirate Bay, a venture with a number of clearly innovative and evasive features. The platform was a radical, widely applied innovation that transformed the Internet landscape, yet its founders became convicted criminals because of it. Applying the evasive entrepreneurship framework to this case improves our understanding of the relationship between policymaking and entrepreneurship in the digital age, and is a first step towards exploring best responses for regulators facing evasive entrepreneurship.
    Keywords: Entrepreneurship; Innovation; Institutions; Regulation; Self-employment
    JEL: L50 M13 O31 P14
    Date: 2016–01–06
  8. By: Robert Joumard (IFSTTAR/AME/LTE - Laboratoire Transports et Environnement - IFSTTAR - Institut Français des Sciences et Technologies des Transports, de l'Aménagement et des Réseaux - PRES Université de Lyon)
    Abstract: After criticizing the usual tools and units for presenting the public debt, we analyse the French public debt through using a great number of public long-term statistical data, up to 2013. The huge increase of public debt ratio since 1978 is mainly due to the State and marginally to the social welfare system. Analysing revenues and expenditures of public administrations shows that the debt is not the consequence of too high and inappropriate expenditures, but mainly the consequence of falling fiscal revenues – by five percentage points of GDP in 35 years. Then we model the impact of four of the mechanisms of the public deficit: tax breaks, tax evasion of individuals allowed by banking secrecy, effect of the economic crisis, snowball effect due to excessive interest rates. These mechanisms are respectively accountable for 840, 450, 310 and 400 billion euro of public debt in 2013, i.e. brought together 2 000 billion euro, when the debt amounts to only 1 940 billion: They explain therefore the whole public debt. Other mechanisms contributing at the same level to public deficit, but not modelled, reinforce these findings: The public debt is a built debt, consequence of political decisions, whose characteristics suggest in addition its illegitimacy.
    Abstract: Après avoir porté un regard critique sur les outils habituellement utilisés pour parler de dette publique, nous présentons un panorama de la dette publique française à l'aide de nombreuses statistiques publiques établies sur le long terme jusqu'en 2013. L'augmentation très forte du taux d'endettement public depuis 1978 est due principalement à l'État et secondairement à la Sécurité sociale. L'analyse des recettes et des dépenses des administrations publiques montre que la dette n'est en rien due à des dépenses trop élevées, inconsidérées, mais essentiellement à la chute des recettes de l'État, de près de cinq points de PIB en 35 ans. Nous modélisons ensuite l'impact de quatre des mécanismes du déficit public : les cadeaux fiscaux, l'évasion fiscale des particuliers permise par le secret bancaire, l'effet de la crise économique, et l'effet boule de neige lié aux taux d'intérêt excessifs. Ces mécanismes sont responsables respectivement de 840, 450, 310 et 400 milliards d'euros de dette publique en 2013, soit 2 000 milliards en tout, alors que la dette n'est que de 1 940 milliards : ils expliquent donc la totalité de la dette publique. D'autres mécanismes qui contribuent autant au déficit public n'ont pu être modélisés, mais renforcent la conclusion : la dette publique est une dette construite, fruit de décisions politiques, dont les caractéristiques suggèrent qu'elle est en outre illégitime.
    Keywords: modelling,public debt,France,tax breaks,tax evasion,economic crisis,snowball effect,cadeaux fiscaux,dette publique,évasion fiscale,crise économique,effet boule de neige,modélisation
    Date: 2014–08–17

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