BLACK ECONOMYPakistan Economic Policy

Presentation

presented to Zia Abbas Rizvi & Section D

SUMMARY

INTRODUCTIONby Maham Zahid (8033)

BLACK ECONOMY

DEFINITION:

BlackShadow

‘unmeasured and untaxed economic

activity’

CLASSIFICATION of BLACK ECONOMY

BLACK ECONOMY

ILLEGAL ECONOMY

UNREPORTED ECONOMY

UNRECORDED ECONOMY

INFORMAL ECONOMY

(1) THE ILLEGAL ECONOMY

• Income produced by anti social activities

• Activities:– drug trafficking– Smuggling• Goods• Currency• prostitution

(2) THE UNREPORTED ECONOMY

• Governments forfeit enormous amount of revenues through uncollected taxes.

• Affects:– economic and tax reform policies– the budget deficit– debt burden

(3) THE UNRECORDED ECONOMY

• Income which should be recorded in the national accounts but is not included.

• The unrecorded income is the difference between the actual amount or output and the amount measured by the statistical system.

• biases the estimates of the variables like unemployment rates, savings rates, etc.

(4) THE INFORMAL ECONOMY

• It comprises those activities that entail a cost and rights but are excluded from the benefits of the formal activities

• informal housing• informal transport• informal industrial sector etc.

BLACK ECONOMY INFLUENCE

• Economic indicators of growth, income generation, consumption, investment, unemployment, rate of inflation etc.

• Hurdles:– Formulate economic policies– to launch social welfare programs and development

projects– to inappropriate policy responses– inefficient use of resources.

IS BLACK ECONOMY MEASURABLE?

• Inability to entrap concealed transactions

• Lack of a precise definition

Hence,Estimation of informal economy is

difficult

ESTIMATION METHODS

1. Direct methods

2. Indirect methods

DIRECT METHODS

(microeconomic in nature)

– voluntary survey data• ASK: incomes, expenditure and labor status• CRITICISM: sensitivity, how the questions are

posed, how the questions are posed

– the results from tax audits• define the magnitude of the informal economy as

the difference between the income declared in tax returns and the income actually found after an audit

INDIRECT METHODS

Macroeconomic in nature

(a) monetary approach(b) physical input approach(c) Multiple Indicator–Multiple Cause (MIMIC) model

Criticism:– results are sensitive to transformations of the data,

to the units of measurement, and to the sample used.

– lack of theoretical foundations from which such models can be derived.

REFLECTING PASTby Fatema Moiz

• The black economy in Pakistan turns out to be at its peak during the early 1960s, when the corporate and personal income tax rates were high.

• The corporate income tax rate was 30 percent including 30percent super tax during that time

• Ayub regime claims to have identified Rs. 100 crore black money and 4.5 crore illicit foreign exchange

• The maximum personal income tax rate was 75 percent during the 1960-64 period, which was the reason for the black economy to remain well above 30 percent of the GDP during the same period

• The black economy kept declining during the 1965-75 period, when this rate was brought down within the 60-70 percentage

• This rate was 56 percent during 1980-1986, later brought down to 39 percent in 1988 and subsequently, to 28 percent in 1993. The effect of which is consequently reflected by the shrinking black economy in those periods.

• The black economy as a percentage of GDP declined by nine percentage points in case of both currency ratio and currency bearer bond during 1996 - 1997.

• Roughly, it can be seen that the inclusion of bearer bonds increases, on an average, the black economy as a percentage of the GDP by 5 percentage points each year

• Bearer bonds were introduced during the mid 1980s to promote savings in Pakistan

• The size of the black economy has slightly increased from 2000 onwards.

• Inclusion of bearer bonds as a medium of exchange significantly increases the size of the black economy

• Despite the fact that the black economy as a percentage of the GDP has decreased, the annual compound growth rate of the black economy during the sample period remained more than 11 percent.

• At a disaggregated level, this growth remained at 2 percent during the 1960s, 17 percent during the 1970s, 15 percent during the 1980s and 13 percent during the 1990s and onwards

CURRENT SCENARIO

presented by Habibullah Dadabhoy (8243)

Pakistan Black Market Value$5.983 Billion

• Cigarette Smuggling: $89 Million• Counterfeit and Piracy Market: $0.246 Billion

($246 Million)• Gas and Oil Smuggling: $66 Million• Global Drug Trade: $4.8 Billion• Heroin Price: $4.2 per gram• Pirated Books: $55 Million• Pirated Music: $25 Million• Pirated Software: $166 Million

• Oil smuggling in PakistanThe Pakistani Governments estimates that it losses between 5 billion

to 6 billion Pakistani Rupees ($66 Million) to oil smuggling each year.

• Kidnapping for ransomIn the first 9 months of 2010, there were 550 reported cases of

kidnapping for ransom in the country.

• Opium trafficking in PakistanOpium trafficking in Pakistan is a $1 Billion industry.

• Tea smuggling in PakistanThe Chairman of the Pakistan Tea Association stated that the

government losses up to $4.5 Million a month in lost revenue to tea smuggling.

IMPACTREALITY CHECK

presented by Suhaib Munir ()

IMPACT ON THE FORMAL SECTORBlack Economy “A Vicious Cycle”

1. LOSS ON TAX: a) non reporting b) under reporting 2. GDP AFFECTED: a)the GDP to tax ratio reduces 3. INCOME DISPARITY: the gap between rich and poor

increases.a) Tax evasion impacts the poor, who bears the tax burden.b) Rich become richer through exploitation

4. ECONOMY SUFFERS:a)Budget Deficit: money in the economy becomes

unregistered giving rise to a budget deficit

5. WHITE MONEY TRANSFERRED TO BLACK ECONOMY:

a) Money spend on DRUGS, PROSTITUTION,ARMS,AMMUNITION.

6. INFLATION:

1. CRIME RATE INCREASES: the black economy consists of illegal activities generating crime.

2. COMMON MAN SUFFERS: a) the social b) economic impact on the poor is adverse.3. DRUG ABUSE: a) Consumption of drugs increased.b) Productivity of individuals affected.

IMPACT OF THE BLACK MONEY

4.SUICIDE INCREASES: a) gambling houses: people loose fortunes in

gambling.b) Drug consumption leads people to

suicide.

5.TERRORISM: a) funded by black money: arms, ammunition

etc b) Impact of terrorism on economic activity

CONCLUSIONRECOMMENDATIONS

presented by Iman Azmat (8626)

1. Number of legal documentation without creating red-tapism.

2. Strengthening the institutions that are central to the workings of the economy.

3. Transparent and proper governance.

4. A reduction of barriers prohibiting people to work in the formal sector's of the economy.

5. A massive improvement in the taxation department in terms of tax payer records.

6. A restriction of smuggling through tariff rationalization, free trade and more actions to control the authorities that give permission to the pertinence of smuggling.

SOLUTIONS: SHORT-RUN

1. Substantial increase in the awareness of informal economy, through education.

2. This can only be substantiated if people are also provided with the socio-economic benefits that they could avail if they moved to the formal sector.

3. The sheer size of Pakistan’s informal economy can be said to be of its own doing as when there is no payback for the common man he’s better off in the informal sector.

4. Reduction in the rampant income disparities that prevail in the economic society of Pakistan.

5. Investments into infrastructure and positive social factors that could create economic opportunity.

SOLUTIONS: LONG RUN

1. Defining the Informal economy is of a very intricate nature as no precise definition has been promulgated.

2. Another factor to note is that there is no precise method of calculating the size of the informal economy.

3. Various methods are applied but the most common being monetarist methods of the velocity of money in circulation in comparison to formal macro-economic indicators.

4. The size of the informal sector is alarming and is a fact that needs to be addressed empathically, as it would nurture the growth of the country.

5. Lack of Education, Tax Avoidance and Ignorance are the main culprits.

CONCLUSION

http://www.pide.org.pk/pdf/PDR/1995/Volume4/791-807.pdfEstimation of the Black Economy of Pakistan through the Monetary ApproachBy MEHNAZ AHMED and QAZI MASOOD AHMED

http://mpra.ub.uni-muenchen.de/2226/1/MPRA_paper_2226.pdf“ A Fresh Assessment of the Underground Economy and Tax Evasion in Pakistan:Causes, Consequences, and Linkages with the Formal Economy “By M. Ali Kemal

http://www.havocscope.com/HAVOSCOPE –Online database of Black Market

REFERENCES