More light on the black economy
Tanzi’s article, “The underground economy” (December 1983), is a good summary of the scarce knowledge about this new topic in economics. However, I would like to comment on some figures to which the author refers uncritically.
The sources for the estimate of the size of the underground economy in Austria are unknown to us in this country. How, then, can somebody abroad, with no information, so easily make such an estimate? Dr. Franz, of the Austrian Statistical Office, has estimated the share of the hidden economy in the GDP of Austria to be 3.5 to 4 percent. Many other estimates quoted in the chart seem to follow the rule “big is beautiful.” D. Blades (OECD Economic Outlook, June 1982) finds a shadow economy of 4 percent of the GDP in an industrial country to be at the upper limit of plausibility. At the Bielefeld Conference (October 1983) G.A.A.M. Broesterhuizen showed that a share of over 5 percent is unlikely. Many of the estimates reproduced by Tanzi are results of oversimplified monetary methods that lack any scientific foundation. For example, Dilnot and Morris (Fiscal Studies, No. 1, 1981) used these methods and estimated that the United Kingdom had a hidden economy of 34.3 percent in 1952 and of 7.2 percent in 1979. This inconvenient result is, of course, rarely mentioned. Mooslechner, applying these methods to Austria, concluded that changes in the financial system influence various cash/money ratios much more than changes in the size of the hidden economy. There is also no solid proof that the size of the hidden economy in the industrial countries has increased in recent years. The exaggerated statements about the explosion of the hidden economy seem to have one purpose: to prove that real growth is higher, and inflation and unemployment lower, than official statistics show. Economic policy decisions based on this inaccurate information are then wrong.
Dr. Jiri Skolka
Vito Tanzi replies:
When I wrote the survey article for Finance & Development, I had the following objectives: (1) to define the phenomenon; (2) to discuss the factors that give origin to it; (3) to discuss the consequences of a sizable, and possibly growing, underground economy; (4) to give a feel for the methods used by various authors to estimate the underground economy; and finally (5) to present the range of estimates made by these authors. As the article was supposed to be a review article, I could not pick and choose among the authors or their estimates. That would have been unscientific! I thought that I had put all the necessary warnings against taking these figures too seriously (see p. 13 of article); however, Dr. Skolka’s letter indicates that I may have failed in this respect.
Anyone who has read my work on the underground economy should know that I definitely do not subscribe to the view that “big is beautiful.” Quite the contrary, I consider many of the estimates of the underground economy (for instance, those in the upper range for India and the United States in my article) as wild exaggerations. For example, my own estimate for the United States is 4.5 percent to 6 percent of GNP. (See IMF Staff Papers, June 1983.) I would have no difficulty in believing a figure of 3.5 percent to 4 percent for Austria. (Incidentally, the estimate for Austria used in my article was presented in articles coauthored by Professor Bruno Frey of the University of Zurich and Editor of Kyklos) As my article contained no “exaggerated statements about an explosion of the hidden economy,” I am at a loss to make any sense out of the concluding sentences of Dr. Skolka’s letter.
Aid and NGOs
I have read with interest Mr. Owen’s guest article on “Changing public attitudes toward aid” (December 1983).
I wish Mr. Owen had something to say about another shift which is evident in public attitudes toward aid. I am referring to the growing disenchantment with the government-to-government pattern of assistance, including that channeled through multilateral organizations. There is increasing emphasis on building aid relationships through people-to-people organizations. This is caused not only by the inflexible and bureaucratic attitudes which pervade intergovernmental organizations but also by the evident failure of the top-down approach, which is inevitable in government-to-government assistance. According to the OECD Directory of Non-Governmental Organizations, aid from the nongovernmental organizations in OECD countries rose from $855 million in 1970 to $2 billion in 1980; if the poor, including women, are to be assisted, aid must be provided directly to organizations in the field.
S. K. Saxena
Henry Owen replies:
S.K. Saxena’s letter is a useful contribution in highlighting the importance of nongovernmental aid. This type of aid is not, however, sufficient to finance the large-scale infrastructural improvements, hydroelectric power projects and the like, that are needed to create an environment in which nongovernmental aid can have the desired effect. These large projects can only be financed by the multilateral financial institutions; only they have the needed resources. Thus, both nongovernmental aid and multilateral aid are needed.
Gradual Global Negotiations
I fully endorse Professor Bhagwati’s view that it is futile to persist with the Global Negotiations at the juncture, as there has been a sea change in the international situation since the euphoric days that followed OPEC’s successes. The South is correctly advised to practice the art of the possible and adopt a pragmatic approach to break the stalemate.
An alternative to Professor Bhagwati’s line, suggested out of sheer desperation by the Brandt Commission, is that Global Agreement may be reached by ignoring some of the noncooperative developed countries. This, too, overlooks economic and political realities. The poor cannot hope, even with the help of some not-so-powerful developed countries, to effect major changes in the world set-up in one go. The North will cooperate only where its interests overlap with those of the South. Thanks to the World Bank and the Fund, both the North and the South are aware of their increasing interdependence.
I agree, too, with Bhagwati’s recommendations that further positive attempts need to be made to enhance the role of the United Nations in global economic management and to bring about appropriate changes in the existing United Nations economic agencies, particularly by exploring the possibility of setting up new agencies. Instead of a GATT on migration, however, I would suggest a GATT on the Transfer of Resources—Physical, Human, and Technological.
Professor Bhagwati’s gradual approach makes sense in view of the futility of radical rhetoric.
Professor Autar S. Dhesi
New Publications in the IMF’s Occasional Paper Series
Three studies by the staff of the IMF Research Department examine various aspects of the exchange rate system:
Occasional Paper No. 28
Exchange Rate Volatility and World Trade
The coexistence in recent years of weakness in international trade and exchange rate instability has raised questions about the possibility of a causal link between the two. This paper, which was prepared at the request of the General Agreement on Tariffs and Trade, reviews, analyzes, and where possible presents evidence concerning the implications of exchange rate variability for world trade. It considers not only the direct effects of exchange rate fluctuations on the level and pattern of international trade but also their effects on domestic production and investment decisions, as well as their implications for inflation, and the constraints they place on governments’ domestic policies.
Occasional Paper No. 29
Issues in the Assessment of the Exchange Rates of Industrial Countries in the Context of Their Economic Policies
As part of its surveillance activities, the Fund must often tackle the problem of identifying cases in which the movements of exchange rates should be viewed with concern because they are unrelated to underlying economic and financial conditions. This paper considers the various issues connected with this problem as it affects industrial countries. It reviews the considerations that are important in determining whether an exchange rate deviates substantially from its sustainable level and assesses the degree of confidence that can be attached to judgments of the sustainable exchange rate.
Occasional Paper No. 30
The Exchange Rate System: Lessons of the Past and Options for the Future
In recent years there have been an increased number of appeals for a re-examination, even a reform, of the international monetary system. This paper contributes to the debate on this topic in three ways. First, it suggests a set of criteria for evaluating alternative exchange rate systems; second, it provides a comprehensive appraisal of the present exchange rate system, drawing on ten years of experience with managed floating and also on the accumulated experience with earlier exchange rate systems; and third, after summarizing the strengths and weaknesses of the present system it discusses how the evolution of the exchange rate system might best be managed over the medium term.
Also now available:
Occasional Paper No. 26
The Fund, Commercial Banks, and Member Countries by Paul Mentré
The rapid increase in the external debt of nonindustrial countries since 1973–74 and the consequent rapid growth in the external claims of commercial banks have led to a highly vulnerable structure of international debt. These risks have been intensified since 1982, as a result of high interest rates and a deepening recession in industrial countries, and political tensions in many areas. The crucial and increasingly important relationship between the Fund and commercial banks in tackling the problems affecting the Fund’s member countries is discussed in this paper.
Fund Occasional Papers may be obtained at a price of US$7.50 each (US$5.00 each for university libraries, faculty members, and students). To order copies or for further information, please contact:
Publications Unit, Box A-842
International Monetary Fund
Washington, D.C. 20431, U.S.A.