Can hidden economies be good?

One of them we are about to tell you is about an ex-prisoner. Let’s call him Vincent.

After serving almost a decade and a half for a violent crime, he now has to figure out how he is going to take care of himself and his family. He is uneducated and his record renders him almost unemployable. Vincent, however, has a plan.

It is high risk and involves meeting the needs of desperate Venezuelans coming to Trinidad and Tobago (TT) under cover of night to get foodstuff and medical supplies. In exchange, they are willing to pay US dollars for these items they are unable to get at home. He is also considering making trips to the mainland once he can secure a boat. If he does, he plans to meet a contact, a former cellmate, at a tiny village on the mainland to trade goods.

US dollars are not always available, so on occasion, he is paid in kind.

Gold can sometimes form the basis of a barter. Other times, the trades are more exotic. Letting the Venezuelans come to him is safer, but going directly to them is more lucrative.

Whichever path he chooses, the money makes its way to Trinidad.

It is relatively easy to get the US changed. Forex is in short supply and there are several who will convert the currency for him with little or no questions. Through consumption, buying groceries, household items, paying for his son’s school supplies, that cash, eventually makes its way into the mainstream economy.

Vincent and his enterprise, though, live in the hidden one.

“It is an economy that operates parallel to the official economy,” Indera Sagewan-Alli, economist, explained. “The official economy is the one that we have data and information on. It is the one that operates within the rule of law.

People pay their taxes. Information is captured by the different institutions that exist to do so.” With no record of the transactions within the sectors that make up this economy and no formal systems existing to track or tax its revenues, the hidden economy is characterised by illegal activity. This is separate and apart, however, from what is termed the “informal” economy.

“We don’t want to conflate the two,” said Dr Daren Conrad, who is an Economics lecturer at the University of the West Indies (UWI), St Augustine campus. “One centers on illegal activity. The other is legal activity but not part of the main economy in that they are not captured in taxable income.” To illustrate the difference, Conrad told Business Day a person engaged at high levels within the hidden economy may be able to afford a housekeeper or a gardener. These people are most likely compensated in cash.

Their employment and activity are not illegal, but there are no formal systems for picking either up.

“Economists are very creative and can find ways to make proxy estimates of what the size of these economies are because we don’t have any means of verifying,” said Sagewan-Alli, “It is associated therefore with a lot of hearsay, word of mouth type notions of associating particular types of businesses with that kind of activity.” To complicate matters, just as in the story of our enterprising ex-prisoner, Vincent, the money can make its way almost seamlessly into the mainstream economy. Sagewan-Alli referenced businesses that function in the formal economy, but with the sole purpose of laundering illegal proceeds before they enter the system. Again, without hard evidence, it is difficult to say what these businesses might be and who are the people behind them.

So, if there are no records, what proof is there that the hidden economy exists, beyond hearsay, rumour and word of mouth? According to both economists, news headlines would be a good indicator.

While Conrad singled out stories about the sex and drug trade as corroboration that a hidden economy is alive and well in TT, Sagewan-Alli focused on the trade of illegal arms and the resultant crime fueled by the access.

“It [the crime] impacts people’s ability to fraternise within the official economy in a way they would if we didn’t have crime,” said Sagewan-Alli.

The economist noted, for example, that people were staying away from restaurants and nightspots and on the whole, were less willing to be out late at nights.

She also suggested that it may be contributory to TT’s continual shortage of forex.

“What it [the hidden economy] does is it places a premium on the official rate. It supports the unofficial devaluation of the currency, because those who operate in these sectors are willing to pay a higher price since their demand for foreign exchange is so high,” said Sagewan-Alli.

The potential, therefore, for negative social fallout from the hidden economy is great. The size of the hidden economy itself is also considerable.

Dr Patrick Watson, SALISES director, economist and UWI lecturer, has studied hidden and informal economies throughout the Caribbean and estimated that TT’s may be between 20 to 40 per cent of measured Gross Domestic Product.

Watson defined the phenomenon as all unrecorded income and therefore includes activities in both the hidden and informal groupings. He and his colleagues used the rate of circulation of money through the economy to gauge how much of it might be coming from hidden sources.

He gave some additional signals for recognising the operation of a hidden economy based on his experience observing it in Martinique. The unemployment rate is upward of 40 per cent, but the Martiniquais have relatively high standards of living.

Dr Watson explained the people often chose to apply for unemployment benefits that they have access to, because they are a department of France, while earning income through plying a private car for hire or selling coconuts. Through the dual sources of income, the Martiniquais are able to achieve a decent standard of living.

This critical positive benefit of hidden economies is important said Dr Watson, an opinion Dr Conrad shared.

“It creates the fiscal space to absorb negative shocks. For example, if the government were to roll back social programmes, those individuals who are part of the underground economy, wouldn’t be significantly adversely affected because they would still be generating some type of income,” said Conrad, ultimately stabilising society in times of financial difficulty.

“There is no doubt that they also generate a lot of employment and entrepreneurial activity,” Watson said.

As they exist in every economy in the world and through their very nature do not seem to be going away anytime soon, what should be done about the hidden economy? Not wanting to take a moral position, Conrad suggested that the sex trade, for example could be decriminalised and a fine imposed on offenders. This, he said, clears up the courts and leaves resources free to pursue other matters.

“I think that it is not impossible to manage and control and reduce the size of the economy, said Sagewan- Alli on the point, “but government needs to be very deliberate about it and have the mechanisms and institutions to deal with it.”