The Shadow Economy King

With much attention in global financial markets focused on the Greek economy and its weak public finances, including spotty tax collection, the country seems to be a likely candidate for the title of having the developed world's largest shadow economy. We wonder: Which major country has the highest share of legal economic activity that is deliberately concealed from public authorities?

A. Greece
B. Italy
C. Russia
D. Spain

A. Greece is not correct.

In Greece, economic activities equivalent to 25.1% of GDP are kept off the books. While that is a significant level, in neighboring Turkey the corresponding number is considerably higher, at 33.9% of GDP.

That puts Turkey in close range to Mexico, where the shadow economy is estimated to reach 31.5% of GDP, according to researchers at the Johannes Kepler University in Linz, Austria.

B. Italy is not correct.

With the Mafia's strong presence in the country's southern half, and a perceived general inclination to keep things off the books, Italy has the reputation of being another country with a large shadow economy.

And indeed, at 22.3% of GDP, its shadow economy is at the highest level among the G7 countries. By comparison, the corresponding numbers are 7.2% for the United States, 9.0% for Japan, 10.6% for the UK, 11.8% for France, 12.6% for Canada and 14.6% for Germany.

C. Russia is correct.

Russia's shadow economy, estimated at 46.6% of GDP, is at a significantly higher level than in fellow BRIC countries. While Brazil also has a relatively large shadow economy at 39.9% of GDP, India's is at 23.6% — and China's, at only 13.4%, is at the level of most West European countries.

Russia itself is outperformed by neighboring Ukraine, where the shadow economy, at 54.3%, is slightly over half the official GDP. Only some countries in Latin America and Africa have an even larger shadow economy.

D. Spain is not correct.

In both Spain and Portugal, the shadow economy is just under one-fifth of GDP.

In theory, if all the unreported income in a given country were to become part of its official economy, tax receipts should improve — and so should the government's fiscal balance, which would be highly welcome news given the currently high budget deficits in many countries.

In practice, though, it is not quite so simple. First, people keep income off the books because they feel the need to generate more income in a difficult economic environment. And second, about 70% of those unreported funds are spent in the official economy, where they are subject to sales taxes and value-added taxes — which further limits additional tax income.

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