Black economy and black money

Express (July 27, 2011)

Soon after presenting the national budget for fiscal 2011-12 in the parliament where black money whitening was on the card, the Minister of Finance revealed a startling finding from a little-known study that between 48 to 82 per cent of the gross domestic product (GDP) of Bangladesh is derived from black economy. Despite the very large range of uncertainty of the estimate, it was widely reported in the news media. The Minister had the difficult task of justifying (or at the least making it appear benign) the legalisation of black money through investment in the stock market at modest cost, a course of fiscal action that he had publicly repudiated on several occasions in the past.

If more than four-fifths of the economy is actually black economy, then presumably the black money holders are not really as bad a group of people as they are made out to be; they are more like the average person of the society and it would not be fair to single them out! The cue was picked up by the holders of black money and their allies to argue even more vigorously for the opportunity of whitening black money. They were not disappointed.

The statement of the Minister gave the impression that black money and black economy are the two sides of the same coin, even though that might not have been his intention. However, he did not clarify, nor did anybody else, that black money and black economy are not quite the same thing in Bangladesh. The confusion could be in part due to the unwitting application of western concepts to the Bangladesh economy, a practice that is regrettably widespread.

This writer could not find the study, nor could he find anyone who has seen it. It has not been put up in the Ministry's website. Assuming that the author(s) of the study did not invent a new definition, one could follow the standard definition of black economy to examine what might be implied by the finding. Black economy, variously called the underground economy, shadow economy, parallel economy etc., refers to economic activities that are not reported to the taxman or the statistical office.

Some authors make a difference among these terms. For example, shadow or parallel economy may include only unreported legal transactions, while black or underground economy includes all unreported transactions. Since these transactions are not reported or recorded, they do not show up in the national income accounts.

It may be mentioned that 'the income approach' of estimating national income, i.e. national income estimates derived by adding up the incomes of individual economic agents, is a reliable method of estimation in developed countries such as the USA. Hence, the extent of the black economy is a rough measure of the amount by which the national income is underestimated in official national accounts.

The sway of the black economy is believed to range under 15 per cent of GDP in the most developed countries, but increases dramatically for the poorer countries. Black economy contributing more than three-quarters of the GDP in such countries is not unknown. Hence, it would seem that the extent of the black economy in Bangladesh suggested by the study is not outlandish if the standard definition of the term is accepted.

As indicated earlier, black economy activities could be either legal or illegal. All incomes, even when below the tax threshold level, have to be reported (and hence recorded) in developed countries such as the USA. Since black economy transactions are not reported, these give rise to illegal incomes or black money. Legal actions could be taken if the existence of such money is detected. In this case, these two terms are indeed two sides of the same coin.

In contrast to the practice in developed countries, the people of Bangladesh are not required to submit tax returns if their incomes are below the threshold level (except under certain circumstances). The threshold level of income this year is Tk 180,000. For farmers this is raised by an additional Tk 50,000.

Since only a fraction of the population have incomes in excess of these amounts (only seven to eight hundred thousand people pay income tax), a large part of the national income is exempted from reporting. Consequently, unreported incomes could amount to a large fraction of the GDP, but importantly these are not necessarily illegal. Unlike in some developed countries, all unreported incomes are not black money in Bangladesh.