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Mariam Lashkhi

Shadow Sector’s Ratio in Georgian Economy Exceeds 50%

Austria is the world’s second least shadow economy following Switzerland, according to the 2018 IMF report saying that Switzerland has the lowest shadow economy ratio in GDP  (7.2%), while the highest ratio is recorded in Bolivia (62.3%).

According to the IMF interpretation, shadow economy is known under various names: hidden economy, grey economy, black economy, cash-based economy or informal economy. According to this report, total volume of shadow sector in the global economy accounts for 31.9%, based on 1991-2015 data from 158 countries. According to IMF, shadow economy comprises all economic activities that are hidden on government level, due to monetary, regulatory and institutional reasons”. Namely, shadow sector evades taxes and social allowances due to monetary motivations, while regulatory component implies an evasion from state bureaucratic systems and restrictions. As to institutional reasons, it implies a law against corruption, quality of political institutions and fragile legislative governance in the country. At the same time, the mentioned report on shadow economy does not highlight illegal and criminal components, as well as activities based on the Do Yourself principles.

Changes over the past years have simplified business commencement and implementation process. These changes were to bolster honest business activities, even in terms of taxes. Regretfully, according to the IMF report, the ratio of shadow economy in Georgia exceeds 50%.The average ratio over the past 20 years was 64.87%.

I think nobody would argue  that this indicator reflects unfavorable results in not only European countries, but even in our region and this is proved by shadow economy indicators in the neighboring countries: Turkey – 31.38%, Russia – 38.42%, Armenia – 42.59%, Azerbaijan – 52.19%. Research by Association of Chartered Certified Accountants (ACCA) gives the almost same results for our neighboring countries. The mentioned organization has not explored the same components in Georgia, regretfully.

It should be also noted that in 1991-2009 shadow economy was growing, while starting 2010 the shadow economy ratio started declining. This signifies after the 2008 war the Authorities activated efforts for mobilizing money resources and maximizing economic transparency for overcoming overcome financial problems in post-war period. As a result, the Government could accumulate more taxes from  and the IMF report also proves that informal economic ratio started declining in 2010 from 68.46% and shrank to 53.07% as of 2015.

It is not surprising that in high-income countries the ratio of shadow economy is very low, while in low-income countries the ratio of shadow economy is high and the Georgian example proves this consideration.

We realize that similar results may make Georgia less attractive for foreign investors and beat stereotypes that Georgia is the most transparent and attractive business environment in the Region.

It should be also noted that the IMF report also comprises certain paradoxes. For example, South Korea and Taiwan demonstrates unusually high ratio of shadow economy (24%), which exceeds the averaged indicator of developed countries several times and, on the contrary, weak economy like Vietnam shows unusually low ratio of shadow economy (18%).

We hope that Georgia may become the same exception taking into account the declining shadow economy ratio since 2010.

Mariam Lashkhi – Analyst for TSU Center for Analysis and Forecast