How to measure the unmeasurable: Project Grey developing capacities and capabilities for tackling undeclared work

Abstract

Abstract The term “not directly observed” or “the underground economy” refers to those economic activities that should be included in the GDP estimation but which are not recorded in the statistics business surveys or tax and administrative data used in the calculation of the estimates of national accounts because they are not directly observable. The unofficial or informal economy contains that part of the economic activity that is difficult to measure. Thus, in addition to the complex issue of defining the underground production, there is an even more demanding task of measuring it. Hitherto in the literature, various estimation methods of unofficial economy have been proposed and their results differ significantly. The goal of this article is to provide an overview of the various methods of its measurement. The unobserved economy poses estimation problems of economic aggregates that can be differentiated as the total lack of information and the distortion of available information. There is no universal optimal approach applicable to all countries or even to the same country at different periods. In the attempt to limit the underground economy, it is much better to obviate the causes than penalise the consequences. It is necessary to simplify the procedures enabling citizens to formalize their undeclared activities, to provide a tax system that is as stable as possible and a tax and regulatory burden that is as low as possible. What is crucial is the improvement of institutions, professionalization of civil service and removal of the huge impact of politics in the societies.