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Should the Black Market Economy Count Towards GDP?

06/06/2014 04:58 EDT | Updated 06/16/2017 01:04 EDT
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The European System of Accounts would require member countries to add their respective black market when calculating GDP for next year. Countries like Italy, Spain and the UK would be counting their black markets when calculating GDP. Some of the things that the black market or underground economy includes are drugs, weapons trafficking and prostitution. According to Eurostat, the inclusion of all illegal activities would yield a growth rate of 2.4 per cent for the European economies.

Adding the black economy would increase Italy's GDP by at least 1.3 per cent in the first year. This would allow Italy to comply with EU's rule of indebtedness that requires member countries to limit their expenditure to three per cent of GDP. An increase in the size of GDP by adding the black economy would allow the government a better GDP-deficit ratio and a higher limit of expenditure. In 2012, the Bank of Italy estimated criminal economy to be 10.9 percent of GDP. On the other hand, the grey economy or shadow economy that is already added to GDP was estimated to be between 16.9 percent and 17.5 percent of the Italian economy in 2008.

In the UK, the addition of illegal drugs and prostitution would add $16.7 billion to its economic activity, which is 0.7 percent of its GDP. Combined with other changes, this would increase UK's GDP by around 4 per cent. Other European countries like Finland, Sweden, Austria and the Netherlands are expected to see increases in GDP between 3 to 5 per cent. Some elements of black market like prostitution are legal in some countries; prostitution is legal in the Netherlands and is already counted in GDP calculation. In the UK, prostitution is legal; however, brothels, etc. are not. This would make the addition of prostitution to calculate GDP more difficult.

Even though the addition of the black market would boost Europe's GDP, there are ethical issues in doing this. If drugs and weapons trafficking are counted to calculate GDP, there is not much difference between the manufacture of bread (that is legal) and manufacture or sell of drugs (that is illegal) as both are contributing to GDP. An obvious question that arises is if these black market items are counted in calculating GDP, why should they be considered illegal at all? If these items are counted and promote economic growth, what is the point of legal establishments like courts and police to consider them illegal? After all, something that promotes economic growth should be allowed to flourish. It could be argued that the addition of black market items would blur the difference between the legal and illegal sections of the economy.

No country in the world can claim to have a zero black market. However, counting it in the calculation of GDP may be interpreted as a tacit approval of the black market. This could lead to an expansion of the black market. It is quite possible that counting the black market to calculate GDP would attract more resources and people to participate in the black market as the black market may then be viewed as a 'legit' part of the economy. An expansion of the black market is not desirable for any country or economy. Again, as the black market is an outcome of corruption, an increase in size and importance of the black market may lead to an increase in corruption in the society.

An important distinction has to be drawn between the black market and the shadow economy. The shadow economy consists of business activities, which though legal, are performed outside the scope of government activities. The shadow economy has two components; undeclared work that workers do not report to the government to avoid taxation, and under-reporting of revenue by businesses. A report by A.T. Kearney and Dr. Friedrich Schneider titled, 'The Shadow Economy in Europe, 2013', estimates the shadow economy in Europe at €2.15 trillion, which is 18.5 per cent of the total economy. Most countries, including those in the EU, count the shadow economy when calculating GDP.

When drugs and prostitution are counted in calculating GDP, one could ask why the items in the basket are not increased. Forced labor, human trafficking and illegal organ trade are also elements of the black market. If drugs and prostitution are counted in calculating GDP, should a country also count forced labor and human trafficking in calculating GDP? However, there are strict laws enforced against these illegal activities worldwide. The addition of black market to the GDP basket leads the calculation to murky waters as it leaves the definition of black market to various interpretations. Also, it may open the Pandora's Box of the components of black market that should be counted in calculating GDP. A very careful analysis and contemplation need to be undertaken before counting the black market in calculating GDP.