Pakistan’s black economy is believed to have grown to be more than half the formal economy which yields a GDP of $166 billion.

One report says that it has reached such proportions that it was upsetting public welfare plans. The report puts its size at $83 billion and that it could yield the national exchequer revenue of $8 billion if taxed even at 10 per cent.

But there is a belief that the country’s parallel economy has already touched $100 billion. To determine the size of the informal economy is problematic simply because there is nothing on paper. According to an assessment, the underground economy expanded at the rate of nine per cent in last 23 years—1977 to 2000.

The informal economy helps its sections make easy profits since the cost of labour becomes much lower than fixed by law. Black economy grows along with corruption, speed money, consultancies, smuggling, narcotics, government contracts and tax evasion.

Only recently, hoarders and speculators of staple food commodities like rice and wheat were able to make a killing by their covert activities with the active connivance of government officials.

No government has shown nerves to tackle this problem. The present government had also initially taken a serious view of the situation but then decided to offer incentives to whiten the black money/assets. In 2000-01, Shaukat Aziz regime had launched a campaign for documentation of the economy but abandoned it in the face of resistance of unregistered traders and factory owners.

A study conducted by the Lahore University of Management Sciences in 2003 showed that out of Rs100, the government receives only Rs38 and Rs62 is pocketed by the tax payer, tax collector and tax practitioner. It means that Rs720 billion tax collection in 2005-06 was only 38 per cent of about Rs2 trillion which should have been collected by the Federal Board of Revenue.

According to an SPDC study, the black economy in Pakistan had reached its peak in the early 1960s, when the corporate income tax rate was 30 per cent and super tax 30 per cent, the aggregate being 60 per cent. This rate dropped to 40 per cent during the late 1980s.

Likewise, the maximum personal income tax rate was 75 per cent during the 1960-64 period, which was the reason for the black economy to remain well above 30 per cent of the GDP in that period. The black economy kept declining during the 1965-75 period, until this rate came down within the 60-70 per cent range. It was 56 per cent in 1980-1986 period, and 39 per cent in 1988 and subsequently 28 per cent in 1993.

The black economy declined by nine per cent during 1996 and 1997 after having remained relatively high, 26 per cent of the GDP, in the early 1990s. During that period, tax-to-GDP ratio was almost stagnant at 13 per cent and the rate of return on deposits was falling – a disincentive to withdraw from activities related to the black economy.

The size of the informal economy slightly increased from 2000 onwards. This is, perhaps, due to the reduction of rate of return on deposits, which declined by more than 30 per cent in 2000-2003 fiscal year. Despite the fact that the black economy as a percentage of the GDP decreased, its annual compound growth rate remained more than 11 per cent.

At disaggregated level, this growth remained at two per cent during the 1960s, 17 per cent during the 1970s, 15 per cent during the 1980s and 13 per cent during the 1990s and onwards. Similarly, tax evasion grew at the rate of 12 per cent. This growth remained at five per cent during the 1960s, 19 per cent during the 1970s, 16 per cent during the 1980s and 11 per cent during the 1990s and onwards.

The black economy is, of course, a global phenomenon. The Economist, London, for instance, estimated that in 1998 the world’s black economy accounted for a missing $9 trillion worth of output – a volume of output almost equivalent to that of the US. Later, a study by Friedrich Schneider, an Austrian economist, attempted to measure the size of the black economy in 76 developed and emerging economies, revealing that underground activity is equivalent to 15 per cent of officially reported GDP, on average, in rich economies, and about one-third of GDP in emerging ones.

In India, the black economy which was rampant in the 1970s, is back and booming, pushing up stock and property prices, causing inflation and even making the rupee unusually strong against the dollar. According to Arun Kumar, a university professor and author of “Black Money in India”, the informal economy has assumed huge proportions and it keeps growing. His estimates suggest it is worth a whopping $500 billion – almost half the size of the official economy – but some say it is even larger and could be as high as 70 per cent of the official economy, if parallel activities undertaken outside the country are considered.

While most of the underground economy elsewhere in the world revolves around criminal or illegal activities, the major contributors to the black economy in India are legal businesses and the government. According to Indian Council for Research on International Economic Relations, legal businesses controlled by the government, government expenditures and taxes have also been the “major source of black-money creation.” For instance, no real-estate deal in the country is done without the involvement of at least 40 per cent unaccounted-for money, and a large portion of the billions of dollars in foreign-exchange inflows that India sees every year is actually the returning black money that went out of the country in the high-tax regime before liberalisation began.

America’s fast-growing black economy is believed to be worth $970 billion, or nearly nine per cent of the real economy. It could soon pass $1 trillion. What is fuelling this economy is the country’s growing ranks of low-wage, illegal immigrants. The government puts this population at 8.5 million but another study puts it at 20 million.

In the OECD countries in 1999–2001, Greece and Italy had the largest black economies, at 30 per cent and 27 per cent of the GDP, respectively. In the middle group were the Scandinavian countries, and at the lower end were the United States and Austria, at 10 per cent of GDP, and Switzerland, at nine per cent.