The Size of Informal Economy in Pakistan

Transcription

1 The Size of Informal Economy in Pakisan by Muhammad Farooq Arby Muhammad Jahanzeb Malik Muhammad Nadim Hanif June 2010

2 Moivaion of he Sudy Various Approaches o Esimae Informal Economy Direc Mehods Indirec Mehods Moneary Approach Elecriciy Consumpion Approach MIMIC Model Resuls

3 I is imporan o have some sense of oal volume of economic ransacions aking place in a counry for: undersanding he working/ srucure of an economy economic analysis / research making an effecive macroeconomic policy undersanding policy implicaions, ec. However, he exisence (and he naure) of informal economic aciviies make i difficul o record various dimensions, including he size, of he economy The official naional accouns only parially record acual GDP An esimae of size of informal economy can fill he gap somehow

4 Approaches o Esimae Informal Economy Direc Mehods Microeconomic in naure volunary survey daa ax audis BUT.here are problems in exrapolaing/ exending resuls of direcs mehod(s) o whole economy

5 Approaches o Esimae Informal Economy Indirec Mehods Macroeconomic in naure Moneary approach Physical inpu (elecriciy) approach Muliple Indicaors - Muliple Causes (MIMIC) model

6 based upon currency demand Assumes ha (a) he informal economy is a direc cause of axes, (b) ransacion are carried ou by cash i.e., a high raio of currency in circulaion in oal moneary asses indicaes high volume of informal economy, and (c) income velociy of money is same across he economy In (CM) = a o + a 1 In (1+TW) +a 2 In (WS/NI) +a 3 In (R) + a 4 In (PY) + e Esimaed form of his equaion is used o gauge he effec of a change in he ax level on demand for currency The equaion is usually esimaed by OLS (wihou aking care of ime series properies (saionariy) of he variables

7 We use auoregressive disribued lag (ARDL) model as suggesed by Pesaran and Shin (1999) and Pesaran e all (2001); i akes care of ime series properies. Add educaion as explanaory variable for currency Also add financial secor developmen CM CM T F R E k k k k k CM T F R E 1i i 2i i 3i i 4i i 5i i A long run relaionship beween he currency raio and oher relaed variables is esablished hrough his model

8 Long Run Relaionship exraced from he ARDL model: ˆ CM 0 1T 2F 4R 5 Cˆ M T F R E Wald Coefficiens Resricion Tes: The compued F-saisic is 8.13 which is above he upper level of he bound es (he bound is for lag 1 a 5 percen criical level). E he informal economy as a raio o he overall GDP is Y T E Y i 2 5 m

9 Kauffman and Kaliberda (1996) argue ha elecric-power consumpion is regarded as he single bes physical indicaor of oal economic aciviies in a counry elecriciy consumpion / GDP elasiciy... usually close o 1 If we have daa on elecriciy consumpion, we can esimae oal size of he economy. Assumpion: Growh of elecric consumpion is an indicaor of he growh of recorded and un-recorded GDP. We assume ha official GDP of refleced all he economic aciviies of he year.

10 MIMICis a paricular form of LISREL models Informal economy is aken as a laen variable Informal economy is caused by a se of variables and effecs oher variables (indicaors of informal economy)

11 Causes Indicaors T CM F Infomral Economy (L) P EL L X + Y L e Y X e

12 Variable Coefficien Sd. Error -Saisic Prob. Inercep CM(-1) T(-1) F(-1) R(-1) E(-1) T F R E CM(-1) T(-1) F(-1) R(-1) E(-1) R-squared Breusch-Godfrey Serial Correlaion LM Tes: F-saisic 0.26 (0.77)

13 Long-run relaionship Cˆ M T F R E

14 Cause Variables Tax/GDP (%) M2/GDP (%) Durable (regime durabiliy) Esimaed Coefficiens saisics Indicaor variables Currency o M2 raio (C/M2) (%) Growh in elecriciy consumpion (%) Diagnosic Tess Chi-square (p-value) = 1.40 (0.50) RMSEA= 0 90% confidence inerval for RMSEA = (0:0.29) p-value for es of close fi (RMSEA<0.05) = 0.57 N=36 Goodness of Fi Index (GFI) = 0.98 Adjused Goodness of Fi Index (AGFI) = 0.88

15 40 Figure 2a: Informal Economy (%) by ARDL Approach

16 Figure 2c: Unmeasured Economy (%) by Elecriciy Consumpion Approach

17 Figure 2b: Informal Economy (%) by MIMIC Approach

18 Informal Economy as % of Toal GDP ARDL model MIMIC Elecriciy Consumpion Approach 1960s s s s s

19 The ARDL approach shows ha he underground economy increased from less han 33 percen of he oal GDP in 1960s o 33 percen in 1990s and hen declined o 23 percen in 2000s. The elecriciy consumpion approach shows ha unrecorded economy increased from 5 percen of economy in 1970s o 29 percen in 1990s and hen declined o 27 percen in 2000s. The MIMIC model shows ha he informal economy has been around 30 percen

20 Underground Economy (% ) Esimaed by Differen Sudies* Shabsigh Ahmad and Qazi (1995) Aslam Ahmed and Haider (1995) 1 (1998) (2008) 1 Kemal (2007) 2 Arby (2009) Based on equaion which uses currency and bearer bonds Based on equaion 2 of he paper which produces highes esimaes of underground economy Resuls from ARDL model *:Ohers' resuls are esimae of informal economy as % of recorded GDP whereas our resuls are esimae informal economy as % of overall economy