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Informal Economy

Updated: March 30, 2022

An informal economy (or shadow economy) is the part of any economy that is neither taxed nor monitored by any form of government.

The Informal sector makes up a larger share of poorer, more agricultural and less developed economies.



Why Measure the Informal Economy?

In many poorer countries as found in the Frontier Markets, a very large swathe of activity can remain uncounted and hence outside national accounts. Due to the nature of much informal work, ranging from housework, farming through to gambling, prostitution, drug dealing, and smuggling, calculations of the value of such activities are difficult.



Methodologies

There have been many attempts to estimate the size of parts of the informal economy using both direct and indirect approaches, Leandro Medina and Friedrich Schneider describe these in their 2018 IMF Working Paper as:

Direct approaches:
  1. Measurement by the System of National Accounts Statistics – Discrepancy method;
  2. Survey technique approach
  3. The use of surveys of company managers; and
  4. The estimation of the consumption-income-gap of households
In-direct approaches:
  1. Discrepancy between national expenditure and income statistics
  2. Discrepancy between official and actual labour force
  3. Electricity approach
  4. Transaction approach
  5. Currency demand approach (CDA)
  6. Multiple Indicators, Multiple Causes (MIMIC) approach


The World Economics Quarterly Informal Economy Survey

Each of these methods produce imperfect data but collectively can provide estimates that give some idea as to the size of the informal economy in different countries. World Economics conducts a Quarterly Informal Economy Survey (QIES), which combines the latest estimates from economists around the world. Estimates for each country are combined into a simple average with data outliers removed. World Economics provides links to many related sources for background study below.

The World Economics Informal Economy database covers 150 of the worlds largest economies and can be accessed online in full.

The best and worst performing countries for the size of their informal economy are shown below:



Countries with the smallest Informal Economy by size

Top 20 countries with the smallest Informal Economy by size




Countries with the largest Informal Economy by size

Top 20 countries with the largest Informal Economy by size




Related and futher reading: