THERE’S no right way of accurately measuring the undocumented part of an economy. Hence, the size of Pakistan’s shadow economy is estimated to be in the range of 30pc to 50pc of the nation’s total reported GDP by various studies using different methodologies. That is massive by any yardstick. The shadow or informal economy refers to economic activities taking place outside the tax and regulatory system, and may or may not have any backward or forward linkages with the organised sectors. Every country is grappling with the issue of parallel economy; Pakistan is not alone in this. The problem for Pakistan is that the size of the unreported economy has grown so big that it is now bearing down on formal sectors, penalising taxpayers, undermining tax collection, intensifying market distortions and creating an uneven field for organised businesses. The existence of unregulated economic activities across almost every segment of business underlines poor governance and law enforcement, weak tax administration, corruption, and the lack of political will to take action against participants of the shadow economy.
The size of the unregulated economy isn’t the only problem Pakistan must deal with. The state’s tolerance of the black economy means that smuggled and counterfeit products are now snatching a bigger market share from the organised sector, besides fostering further growth in illicit trade at the expense of consumers and industry. This is in addition to the government forfeiting large revenues through uncollected taxes that could have been used to build economic and social infrastructure to boost productivity, generate employment opportunities and create surplus for exports. It is, indeed, hard to document every unregulated sector. Nor is this required. Many informal micro and small businesses linked to organised sectors will always exist and continue to indirectly contribute to economic growth; therefore, they need not be regulated vigorously. It is the unchecked smuggling and illicit trade in counterfeit products that the authorities need to curb without further delay to protect the organised industry and consumers.
Published in Dawn, June 7th, 2022
