Measuring Underground (Unobserved, Non-Observed, Unrecorded) Economies in Transition Countries: Can We Trust GDP?

36 Pages Posted: 20 Jun 2008

See all articles by Edgar L. Feige

Edgar L. Feige

University of Wisconsin - Madison - Department of Economics

Ivica Urban

Institute of Public Finance

Multiple version iconThere are 2 versions of this paper

Date Written: March 2008

Abstract

This paper compiles alternative estimates of underground economies in twenty five transition countries during the transition decade and finds a disturbing lack of convergence between them, calling into question the reliability of GDP figures (which in varying degrees now include non-transparent imputations for the "non-observed economy") as well as the macro model estimates of the unrecorded economy. A corollary of this finding is that substantive results from many studies examining the consequences of the radical transition from planned to market economies must be viewed with considerable skepticism. Underground (unobserved, non-observed, unrecorded) economic activities play a major role in transition economies. Evaluations of the success and failure of the transition experience should be based on estimates of total economic activity (TEA) namely, recorded plus unrecorded economic activity. We examine the conceptual and empirical relationships between new National Income and Product Accounts (NIPA) methods for obtaining "exhaustive" measures of total economic activity and the two most popular macro-model approaches (electric consumption and currency ratio models) for estimating the size and growth of the unrecorded sector. Our updated empirical results detailing the size and trajectory of unrecorded activities obtained from different estimation methods reveal a disturbing lack of convergence. Until these important differences are resolved, investigations of the relationship between economic reforms and economic outcomes during the transition decade must be viewed with considerable caution. Given the shortcomings of conventional macro model estimates of the underground economy and the lack of transparency and consistency of NOE estimates, it is high time that the profession acknowledges how little we really know about underground economies and their causes and consequences.

Keywords: Underground, unrecorded, unobserved, non-observed, NOE, hidden

JEL Classification: E26, E01, O17, P24, H26, O11

Suggested Citation

Feige, Edgar L. and Urban, Ivica, Measuring Underground (Unobserved, Non-Observed, Unrecorded) Economies in Transition Countries: Can We Trust GDP? (March 2008). William Davidson Institute Working Paper No. 913, Available at SSRN: https://ssrn.com/abstract=1147794 or http://dx.doi.org/10.2139/ssrn.1147794

Edgar L. Feige (Contact Author)

University of Wisconsin - Madison - Department of Economics ( email )

1180 Observatory Drive
Madison, WI 53706
United States

Ivica Urban

Institute of Public Finance ( email )

Katanciceva 5
10000 Zagreb
Croatia

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