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1.3.3 Contribution of the informal economy to GDP

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Alessio Lupi10 May 2018

1.3.3 Contribution of the informal economy to GDP

As explained in the previous section, the informal sector can clearly be identified as a sub-sector of the unincorporated enterprises of the household institutional sector in the SNA and its contribution to the GDP can be measured relatively easily. This does not hold true for informal employment outside the informal sector, which cuts across all institutional sectors of the SNA and is comprised of: 1) informal workers of the formal sector, 2) domestic workers, and 3) subsistence producers in the primary sector (and in the secondary sector). Whereas paid domestic services and subsistence production for own final use are also components of the household sector and can be identified in the SNA; informal employment in the formal sector is never identified in the SNA. Countries that prepare labour input matrices may estimate this component of total labour inputs, but rarely indicate its contribution to GDP (India is an exception: Kolli and Sinharay, 2011a and b).

Indeed, in the 4th revision of the System of National Accounts (SNA, 1993), and in the 5th revision (SNA, 2008 which dedicates an entire chapter to the informal aspects of the economy: chapter 25), the informal sector was defined as a sub-sector of the household institutional sector. As such, its contribution to GDP can be measured. Informal employment in the formal sector, on the contrary, is a hidden or non-observed part of the economic units constituting the other institutional sectors of the system of national accounts. Therefore it cannot be easily distinguished from the formal units and estimates are rarely available.

The estimation of the underground economy through econometric modelling (see for instance Schneider, 2000; Schneider and Enste, 2002, Schneider et al., 2010) is indeed interesting, however interpreting the comparison of its results with current GDP is particularly difficult as the national accounts already include a part of the underground and illegal economy. The fact that private incorporated and public enterprises employ informal workers does not mean that the contribution of these workers is not taken into account in the output of the firms (unless the goods or services produced are illegal by nature). However, it has an impact of the value added: supply and use tables by products are the instrument by which national accountants attempt to balance production and its uses (consumption, investment), as well as the reconciliation of the three GDP estimates on the production side, expenditure side and income side. A part of the hidden economy - supposedly the major part – which does not show up on one side, may show up in one or two of the other sides and justify adjustments in the volume or the value of output.

A tentative estimate of the informal sector contribution can be made for those countries which prepare the household sector accounts. The availability of the household accounts is not sufficient, however, and the distribution of gross value added by industry is also required, because production for own final use (not transiting through the market) must be excluded as it is not part of the international definition of the informal sector. This can be addressedby excluding the agricultural and related activities. Other exclusions are the imputed rents and paid domestic services (which never go beyond 1 or 2 percentage points oftotal GDP), without forgetting that – depending on national definitions – some unincorporated firms may belong to the formal sector within the household sector, but the necessary data are rarely available. Consequently, the results presented in table 5 remain proxies, but these proxies are acceptable. It is therefore necessary to isolate the informal sector by using the table of national accounts cross-classifying the gross value added by industry and institutional sectors. If all countries distinguish the various institutional sectors in their national accounts, not all of them present the accounts of the institutional sectors in details, especially by industries. The compilation of the UN statistics division (United Nations, 2004 and 2014) and its regular updating allows identifying the countries with detailed accounts of the household institutional sector. Table 8 hereafter is based on these compilations, as well as on national sources

and a special report by Afristat (1999) on the national accounts of the West Africa Economic and Monetary Union countries. As far as it has been possible, “imputed rents” and “private households employing persons” have been subtracted.

Inthe 2000s (Table 8) in sub-Saharan Africa, the informal sector, including the agricultural household sector, contributes to nearly 2/3 of the GDP (63.6% in arithmetical non-weighted mean), with a maximum in Niger (72.6%) and a minimum in Senegal (51.5%). Excluding agriculture, the share of informal sector in GDP represents approximately 1/3 of total GDP (31.3%) with a maximum in Cameroon (36.0%) and a minimum in Burkina Faso (21.7%). Moreover, the non-agricultural informal sector is as high as 50% of the non-agricultural Gross Value Added (50.2%) with a maximum in Benin (61.8%) and a minimum in Burkina Faso (36.2%).

During the 2010s (Table 9) the share of informal sector (including agriculture) dropped to 55%, its share excluding agriculture in total GDP to 25.1% and to 41.7% of non-agricultural GVA.

In the Middle East North Africa region (MENA) and for the same period, the contribution of the informal sector including agriculture is equivalent to slightly more than 1/3 of total GDP (36.2%) and a little bit more than ¼ (26.2%) if the agricultural household sector is excluded. Finally the non-agricultural informal sector represents 29.2% of total non-agricultural Gross Value Added. The minima are observed in Egypt for the three indicators (27.8, 14.7 and 16.9% respectively) and the maxima in Tunisia (respectively 41.8, 29.8 and 33.4%) and Palestine (with the non-agricultural informal sector at 34.1% of total GDP).

In India the informal sector (including agriculture) contributes to 54.2% of total GDP (2008) and still to 38.4% if agriculture is excluded. With 46.3% of total non-agricultural Gross Value Added, the informal sector strictosensu is the highest contributor to non-agricultural GVA among all countries reviewed in all regions.

 

Table 8: Contribution of informal sector to GDP in various developing countries: Years 2000s
Countries (years)
Informal sector (including agriculture) in % of total GDP
Informal sector (excluding agriculture) in % of non agricultural GVA
Informal sector (excluding agriculture) in % of total GDP
Northern Africa
35.8%
27.1%
23.9%
Algeria (2003)
37.9%
30.4%
27.1%
Egypt (2008)
27.8%
16.9%
14.7%
Tunisia (2004)
41.8%
34.1%
29.8%
Sub-Saharan Africa
63.6%
50.2%
31.3%
Benin (2000)
71.6%
61.8%
33.6%
Burkina Faso (2000)
55.8%
36.2%
21.7%
Cameroon (2003)
57.6%
46.3%
36.0%
Niger (2009)
72.6%
51.5%
29.0%
Senegal (2000)
51.5%
48.8%
35.1%
Togo (2000)
72.5%
56.4%
32.2%
India (2008)
54.2%
46.3%
38.4%
Latin America
29.2%
25.2%
24.0%
Brazil (2006)
21.6%
 
 
Colombia (2006)
37.5%
32.3%
29.4%
Guatemala (2006)
36.9%
34.0%
30.2%
Honduras (2006)
31.5%
18.1%
20.8%
Mexico (2009)
30.9%
 
 
Venezuela (2006)
17.0%
16.3%
15.7%
Transition countries
19.5%
13.9%
10.7%
Armenia (2008)
27.5%
19.5%
15.5%
Azerbaijan (2008)
17.8%
13.1%
12.4%
Belarus (2008)
6.7%
3.7%
3.4%
Bulgaria (2006)
21.6%
16.5%
15.1%
Estonia (2008)
10.7%
10.1%
9.8%
Kazakhstan (2009)
23.0%
20.0%
18.7%
Kyrgyzstan (2008)
45.2%
27.5%
20.3%
Latvia (2007)
11.3%
10.2%
9.9%
Lithuania (2008)
14.1%
11.8%
11.8%
Macedonia (2008)
22.5%
14.0%
12.4%
Moldova (2008)
20.0%
12.3%
11.0%
Russia (2009)
10.6%
8.6%
8.2%
Serbia (2008)
25.0%
 
 
Slovenia (2005)
19.5%
 
 
Ukraine (2008)
16.4%
12.9%
11.9%
Source: Charmes Jacques (2012) ‘The informal economy worldwide: trends and characteristics’, Margin—The Journal of Applied Economic Research, 6:2 (2012): 103–132.
Note: Non-weighted averages by region.

 

Table 9: Contribution of informal sector to GDP in various developing countries: Years 2010s
Countries (years)
Informal sector (including agriculture) in % of total GDP
Informal sector (excluding agriculture) in % of non agricultural GVA
Informal sector (excluding agriculture) in % of total GDP
Northern Africa
32,3%
24,1%
20,6%
Algeria (2013)
43,5%
39,4%
33,8%
Egypt (2012)
21,1%
9,2%
7,5%
Tunisia (2012)
 
23,8%
20,5%
Sub-Saharan Africa
55,0%
41,7%
25,1%
Benin (2012)
57,8%
53,5%
35,5%
Burkina Faso (2012)
49,1%
29,5%
17,6%
Cameroon (2009)
52,4%
44,2%
31,4%
Mali (2013)
64,4%
44,9%
28,4%
Niger (2013)
58,0%
55,1%
22,2%
Togo (2011)
48,1%
23,0%
15,5%
India (2013)
41,6%
34,1%
25,9%
Latin America
29,6%
26,0%
21,8%
Guatemala (2012)
35,4%
32,6%
29,1%
Honduras (2011)
26,3%
22,0%
17,4%
Nicaragua (2011)
40,0%
32,2%
25,3%
Venezuela (2007)
16,5%
17,1%
15,2%
Transition countries
18,0%
15,6%
12,7%
Armenia (2012)
29,3%
15,6%
11,3%
Azerbaijan (2012)
22,3%
19,7%
17,5%
Belarus (2013)
8,3%
7,5%
6,2%
Bulgaria (2011)
15,8%
16,3%
13,4%
Estonia (2014)
7,9%
8,8%
7,4%
Kazakhstan (2013)
23,6%
23,6%
20,9%
Kyrgyzstan (2013)
33,5%
26,3%
19,4%
Latvia (2012)
12,0%
13,3%
11,2%
Lithuania (2013)
10,8%
10,1%
8,8%
Macedonia (2011)
19,2%
13,9%
10,7%
Moldova (2013)
15,6%
11,5%
8,3%
Romania (2013)
24,8%
25,0%
20,7%
Russia (2013)
8,4%
7,9%
6,5%
Ukraine (2013)
19,8%
19,3%
15,2%
Source: Our compilations of UN (2015) and national sources for Africa.
Note: Non-weighted averages by region.

 

In Latin America, there are six estimates available, but only four countries have detailed their household sector accounts by industries. Only global estimates (including agriculture) can be generated for Brazil and Mexico. The estimates here prepared approximate and assimilate the informal sector to the household sector (minus subsistence agriculture, households with employed 

persons and imputed rents), but national methodologies and official definitions may be more complex and in the case of Mexico and emerging economies, the informal sector is only a segment of unincorporated enterprises of the household sector. The informal sector (including agriculture) represents in average 29.2% of total GDP with a maximum in Colombia (37.5%) and a minimum in Venezuela (17.0%). Excluding agriculture, the informal sector contributes on average to 24.0% of total GDP (maximum in Guatemala with 30.2% and minimum in Venezuela with 15.7%) and it contributes to 25.2% of non-agricultural Gross Value Added (34% in Guatemala and 16.3% in Venezuela).

Finally it is for the transition economies that the number of estimates is the greatest with 15 countries. This is not surprising, given that the system of national accounts has been implemented recently in these former socialist countries, which were used to apply a specific system of material balances. Applying a new system, national accountants have tended to strictly follow the rules of the central framework of the SNA 1993. The private sector recently emerged in the transition countries where paid employment in public enterprises was the rule, and it is expected to grow more and more, especially the micro-enterprises of the informal sector, hence the importance of the efforts towards their measurement. With a contribution of 19.5% to total GDP on average, the informal sector (including agriculture) is at a maximum in Kyrgyzstan (45.2%) and a minimum in Belarus (6.7%). When excluding agriculture, the contribution of informal sector drops down to 10.7% in average (20.3% in Kyrgyzstan and 3.4% in Belarus) and to 13.9% of non-agricultural GVA (27.5% in Kyrgyzstan and 3.7% in Belarus).

Sub-Saharan Africa is the region with the largest estimates for the contribution of informal sector to GDP: nearly 2/3 including agriculture, 1/3 excluding agriculture and ½ of non-agricultural Gross Value Added. It is followed by India with around 50% of total GDP (including agriculture) and 38% excluding it, and 46% of non-agricultural GVA. Then MENA countries with 36%, 26% and 29%, respectively,Latin America (with 29%, 24% and 25%) and lastly transition countries (with 19%, 11% and 14%).

The informal sector (in its broad sense: including agriculture, as well as in its strict sense: excluding agriculture) is the largest contributor to GDP in the regions where agriculture is predominant (Sub-Saharan Africa and Asia).

Assessing trends on the contribution of the informal sector to GDP is more difficult. This is so because changes in values are primarilydue to the assumptions of national accountants and the only noticeable changes are structural when a new base year allows radical changes based on updated sources and new surveys. This is the case for data available for the 2010s that have been compiled for new base years. Generally speaking these new data seem to show a slight decrease of the share of informal sector in GDP. This result is consistent with the observed drop in employment in the informal economy in most regions, except sub-Saharan Africa but the differences in the sets of countries cannot allow deeper analyses.

Chart 5shows the relation between the share of employment in the informal economy and the contribution of the informal sector to GDP. As expected, Niger and Benin are located in the upper right corner, whereas transition countries stand at the lower left corner.

 

Chart 5: Contribution of the informal sector to GDP and share of employment in the informal economy (Years 2010s).
 

To a certain extent, those figures are underestimated because the informal economy in general and the informal sector in particular are usually characterised by weak statistics, despite the recent progress of which the present compilation is an illustration. Furthermore, the contribution of informal sector to GDP does not take into account informal employment outside the informal sector, which is scattered all over the various institutional sectors. The volume of this sub-component of the informal economy can be now estimated in terms of jobs: the question is then to know what value added can be imputed to these jobs. India attempted such an exercise with its labour input matrix (Kolli and Sinharay, 2011a and b) and it estimated at 43.9% informal employment in the public and private corporate sector in 2004-05 and at 21.6% its contribution to the Gross Value Added of these sectors (12.1% in 1990-2000) and 34.7% of non-agricultural activities (including the informal sector). At the same time, these same figures of the contribution of informal sector to GDP may indeed be overestimated asthey are based on the assumption that the household sector can be assimilated to the informal sector. If this can be considered as approximately true in regions with large traditional subsistence agriculture and small formal sector, it is not so justified for emerging economies.

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