The shadow economy almost by definition defies measurement. As unofficial economic activities that create value are so widespread and varied, most economist would shy away from estimating the size of a country’s shadow economy.
Equally evident is the lack of agreement among academics on the costs and benefits of the shadow economy on society in general. At a time when political correctness seems to be a priority for economic commentators, many have stopped using the derogatory term ‘black economy’ and prefer the more ambiguous ‘shadow economy’.
One economist that does not shy away from measuring the shadow economy of European and OECD countries is Friedrich Schneider of the Department of Economics of Johannes Kepler University of Linz in Austria.
His Handbook on the Shadow Economy, published in 2011, is an important addition to the tools used by other economists and politicians who are interested in understanding how the shadow economy impacts on the official economy of various countries.
The most recent Schneider calculations that I have seen of the size of the shadow economy of 36 countries show that Malta’s shadow economy was estimated to reach 24.3 per cent of GDP in 2015. This makes us the eighth country with the largest shadow economy of the 36 studied by Schneider. Astonishingly, according to this economist, Malta’s shadow economy is relatively bigger than that of Greece, Italy and Spain, as well the EU average of 18 per cent. Schneider also predicts that the shadow economy in Malta will continue to increase as it will in Austria, Belgium, France, Hungary and Luxembourg.
Our political leaders must look beyond the short-term electoral cycle and grapple the fundamental issues that are the foundations of a fair and just society
Beyond the number crunching and the validity of the model used by Schneider and other economists, one needs to understand the likely effects of a substantial shadow economy on our society.
I recall a business leader, who later unsuccessfully turned to politics, saying that in business there is no such thing as a black economy or white economy. As long as an economic activity was creating wealth, the government should not tamper with it
Others, with whom I agree, argue that the lack of control on irregular economic activities exploits low-paid workers who work in precarious conditions and are paid a wage that is tax free and without any social security deductions. The flip side of this practice is that such workers have little protection and even less long-term cover for retirement income, injury, sick leave payments and all the other social benefits that workers in the official economy enjoy.
I can understand the political argument that trying to curb the unofficial economy carries risk that may lead to higher unemployment, especially among the multitude of young people who have few if, any skills, that make them employable.
Admittedly, in the last few years, important initiatives have been introduced to encourage young people to improve their skills base, and mainly immigrant workers not to be exploited by unscrupulous employers who use them as commodities rather than human beings. But much more needs to be done.
With public accounts improving mainly as a result of a growing economy, now is the right time for public policymakers to come up with a long-term plan on how to reduce the shadow economy and integrate more workers in the official economy.
Shadow economies usually grow at a time of economic distress when political authorities try to ease the burden on employers by closing one or even two eyes to employment abuses as long as jobs are created. Spain, Italy and even France have gone through this experience.
But, luckily, Malta is faring better economically. Yet there are some long-term, slow-burning issues that are not being addressed sufficiently well.
Our free health and education system as well as our pension system’s growing stress will be starved of important investment if their financing model is not revised drastically to make them viable. In social terms, this will hurt most the lower strata of our society.
We already have a situation where some pensioners are struggling to make ends meet. They feel they are disenfranchised because the media and public opinion in general is not very aware or even interested in their plight.
Our political leaders must look beyond the short-term electoral cycle and grapple the fundamental issues that are the foundations of a fair and just society. We need to plan as from now for what we want our society to be like in two or three decades’ time.
johncassarwhit@yahoo.com