By Al Edwards, Business Co-ordinatorJAMAICA'S INFORMAL economy is estimated to account for 43.5 per cent of GDP with a dollar valuation placed at J$155,904 million according to a report conducted by the internationally renown research body, Group of Analysis for Development (GRADE).
The Report is the result of a consultancy requested by the Inter American Bank (IDB). The consultancy was carried out by a team of researchers of GRADE including Miguel Robles, Manuel Hernandez, Jorge De La Roca, with local imput coming from Development Option's President, Maureen Webber. The study was co-ordinated by Maximo Torero.
The Office of the Prime Minister (OPM),The Planning Institute of Jamaica (PIOJ),the Statistical Institute of Jamaica (STATIN) and the IDB's Local Office. Speaking at the Hilton Hotel, New Kingston yesterday, Project Co-ordinator, Maximo Torero said that the main purpose of the study was to analyse and estimate the size of the informal sector in Jamaica in order to understand the role that this sector has in the economy and to measure its participation in the past years in the declining incidence of poverty.
"For this study we adopt the definition of the informal sector as "market-based production of goods and services, whether legal or illegal, that escapes detection in the official estimates of GDP. We also extend the definition to include explicitly activities that evade taxes," said Mr.Torero. This study divided activities in the underground economy into three categories namely, pure tax evasion, the irregular economy and illegal activities.
Pure tax evasion occurs when individuals fail to fully report earnings from perfectly legal activities carried out in businesses that are properly registered and recorded in the national statistics.
The irregular economy generally covers the production of legal goods and services in unregistered and hence, untaxed and unrecorded small businesses. Activities in the irregular economy are an important form of underground activity.
Illegal activities in the main run out of the regulatory and tax laws, as well as the criminal law, and which are not included in this study.
For this particular study the consultants developed a complementary module of the 2001 Survey of Living Conditions (SLC) which concentrates on informal activities carried out by individuals and households.
"We chose to focus upon three activities, namely the labour market, independent non-agricultural activities and independent agricultural activities. The information given is then used together with the latest census, the labour survey and the SLC surveys to characterise and estimate the size of the informal economy using different techniques.
FINDINGS
The majority of the household independent activities developed in Jamaica are micro enterprises connected to distributive trade and personal services, as well as to agricultural activities. The property status of the establishments or units in which these businesses are carried out revealed the informal condition under which these firms operate.
"Most of them do not fulfil all the formal requirements. The results also evidenced their low productivity in terms of value added generation and their labour intensive condition., particularly in agricultural activities.
"On the other hand, an analysis of the labour market classified by formal and informal workers, indicates that the latter contains a greater proportion of males, are older, less educated, posses more specific experience and perceive lower incomes. In relative numbers, around 53 per cent of the employed labour force in Jamaica is informal," pointed out Mr.Torero. So what methods were used to estimate the size of Jamaica's shadow economy ?
"In this study we estimate the size of the informal sector in Jamaica using four indirect approaches, two macroeconomic (Monetary Approach and Electricity Consumption Method) and two microeconomic (Consumption Function Expenditure Approach and Method of Additions).
One of the main contributions of the study is the calculus of underreporting income made by the formal workers; hence, the final estimation is not only the aggregation of activities in the irregular economy but also the amount of "pure" tax evasion made by formal agents."
The Monetary Approach and the Method of Additions present similar estimates of the size of the informal sector. Both approaches indicate that the ratio of the informal sector to registered GDP (STATIN determines registered GDP) fluctuates around 43 per cent for the year 2001.
The electricity Consumption Method apparently overestimates the contribution of the informal sector to the economy (more than 40 per cent of the total GDP in 2000)The results provided by this approach evidence an upward trend in the share of the informal sector over GDP, similar to the pattern shown by the Monetary Method. As far the Electricity Consumption Method is concerned two facts must be borne in mind. The first is that there has been a 60 per cent increase in electricity consumption over the last 10 years and secondly account was not taken of the rural electricity programme.
CONCLUSION
"The results clearly show the importance of the informal sector in Jamaica. It is clear that the informal economy will grow in those areas where existing laws and regulations are inefficient or most at odds with current mores. The informal economy provides an escape valve but at the same time trying to understand its structure and rationality could provide valuable information regarding rules and regulations that need to be reassessed." Although the Report is instructive the fact remains that it does not deal specifically with the illegal economy which is believed to be the main component of the informal economy. Many commentators are of the view that an assessment drawing on empirical studies of the criminal economy would prove more insightful.
Speaking at the launch of the Report's findings yesterday, the Minister of Finance and Planning, Dr. Omar Davies drew attention to the criminal component. "Criminal activity is clearly a job mainly for my colleague Peter Phillips but also we have an interest through the Financial Crimes Unit and RPD not just in terms of arresting criminals but possibly in terms of increasing revenues from the forfeiture of assets. But I don't want to focus too much upon that because it cannot contribute on a sustained basis to economic growth and development, however it is one important element of the informal sector.
"For obvious reasons it is clear that the research to date on that area is weak in terms of how you would effectively access the full value of the contribution made through criminality because I do not know whether national accounts methodology allows you to include in your national accounts the trade in cocaine or crack."
