Underground economy causes BRL 1 trillion loss to Brazil
Economics
28 November 2017

Underground economy causes BRL 1 trillion loss to Brazil

After growing for two consecutive years, the underground economy stabilized in 2017, once again accounting for 16.6% of the Gross Domestic Product (GDP). This data comes from the Underground Economy Index (IES), a study held through a partnership between the Brazilian Institute of Competition Ethics (ETCO) and FGV’s Brazilian Institute of Economics (IBRE).

After growing for two consecutive years, the underground economy stabilized in 2017, once again accounting for 16.6% of the Gross Domestic Product (GDP). This data comes from the Underground Economy Index (IES), a study held through a partnership between the Brazilian Institute of Competition Ethics (ETCO) and FGV’s Brazilian Institute of Economics (IBRE).

In the 12-month period ending in July, informality in the country accounted for BRL 1.077 trillion.  This is the same as the GDP of countries such as Colombia and South Africa. Underground economy is the production of goods and services deliberately not reported to the government, in order to evade taxes, avoid social security contributions, avoid compliance with labor laws and regulations, and bypass expenses to ensure compliance with respective regulations.

The IES has been calculated since 2003, showing a constant improvement in the level of formalization of business in Brazil until 2014. During this period, underground economy dropped from 21% to 16.1% of the GDP. In 2015, the index suffered its first setback since the beginning of the historical series – and ultimately spiraled down last year.

“The expectation of the ETCO is that the new rules of the Brazilian Labor Code (CLT) will provide a safer environment for both employers and workers. As a result, the judicialization of contracts tends to decrease and there will be more incentives to increase the number of formal employees,” said the President of ETCO, Edson Vismona.

Despite the prospect of future improvement, Vismona points out that the country cannot settle for only recovering what was lost in the last two years, without any major advances. “A country that wants and needs to attract investments in order to grow cannot accept such high levels of informality,” he said.

According to IBRE researcher Fernando de Holanda Barbosa Filho, the informal market stopped growing as the recession ended, but that was not enough to keep the index from falling. “With the prospect of GDP growth at more than 2.5% for 2018, the economy should improve as a whole and positively impact business formalization in Brazil.”

About the Underground Economy Index 

Much is said but little is known about informality, piracy, and tax evasion, since it is extremely difficult to keep track of these illegal activities. In partnership with IBRE, ETCO has published the Underground Economy Index since 2007, estimating the values of activities deliberately not declared to public authorities, in order to evade taxes, and of those who are in the informal sector due to excessive taxation and bureaucracy.

Go to the website for more information.

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