Informal and illegal activities in Brazil generate US$232 billion, equal to Peru’s GDP – IES survey

RIO DE JANEIRO, BRAZIL – A survey carried out by FGV includes activities such as street vendors and the self-employed, as well as mechanisms such as tax evasion, piracy, and smuggling.

The informal economy has already moved R$ 1.3 trillion (US$232 billion) this year, equivalent to 16.8% of the Brazilian GDP. The amount is also similar to the entire GDP of countries like Peru or New Zealand.

This is what the Underground Economy Index (IES), prepared by the Brazilian Institute of Ethics in Competition (ETCO) and by the Brazilian Institute of Economics of the Getulio Vargas Foundation (Ibre/FGV), points out.

The survey shows that the underground economy – which comprises unregistered legal activities carried out by peddlers and freelancers as well as illegal mechanisms such as tax evasion, piracy, and smuggling – already shows an upward trend. The index has returned to the level of 2017.

In the passage from 2019 to 2020, the indicator fell from 17.3% to 16.7% of GNP due to the impacts of the health crisis on informal workers and services. Now, the slow start of normalization of economic activity stimulates the advance of informality.

Weak formal market

According to data from the IBGE’s Pnad for the quarter ending in September, Brazil has an informality rate of 40.6%.

“We see that the economic activity is returning to normal in 2021, but the economy is not recovering, with indexes pointing to technical recession. Informality started to operate faster than the formal market, and the rate grew again,” says Edson Vismona, president of ETCO.

The result of this movement was the return to a pattern of the informality of 2017, when the indicator began to rise more intensely because of the economic crisis that started in 2014. The labor market, which since 2016 maintained the mark of ten million unemployed, was further weakened by the pandemic.

Shortly after the beginning of the pandemic, in May last year, entrepreneur Alana Villela, 36, chose to leave the marketing agency where she worked and now provides production services for companies and influencers on a freelance basis. She works informally:

“Regularization ends up making you profitless. Everything has a bureaucracy. That’s why many times, we do everything by word of mouth. Whether it is R$50 or R$10, at this moment, this is missingm” she says.

Informality on the rise

With the economy skating, the tendency is for the percentage of informal workers to increase, even with mechanisms that help fight informality, such as the facility of registering activities through the “Simples” tax regime and the labor reform, explains Vismona:

“There are conditions for us to recover the market for formality, but informality tends to grow with our economy in a difficult situation. It’s like a seesaw. When the economy is doing well, informality falls. When the economy goes into recession, informality goes up. This is what we have seen in our historical curve,” he affirms.

Fernando de Holanda Barbosa Filho, economist from Ibre/FGV, evaluates Brazil’s intermediate shadow economy rate. It is worse than developed countries, whose rates are around 10% of GNP – for instance the U.S. with estimates between 11% and 12% in 2020, based on data for 2018 -, but better than countries that are in the 30% to 40% range – such as Turkey, whose rate is around 30%, according to IMF data for 2019.

BAD CONJUNCTURE

Barbosa Filho recalls that were it not for the overlapping of economic crises, the country would follow a trajectory of gradual improvement of the indicator. The expansion of the average education of Brazilians in recent years contributes to the formalization of the worker.

Other essential factors are also the expansion of the credit market, which encourages the formalization of companies, and the improvement in tax collection efficiency by the Federal Revenue Service, with the implementation of electronic invoices (NFes), the Simples, and the MEI (individual micro-business):

“Although the structural factors are going in a correct direction, the fact that we live in a bad conjunctural situation prevents this improvement from occurring in our daily lives. The effect of low growth and the constant crises make it difficult for the underground economy to decline.”

The IES was created in 2003 to measure the production and commercialization of goods and services that are not officially reported to the government.

FGV uses a model developed in the USA, called “Underground Economy”, calculated by the average of two factors: the monetary indicator, which measures the equation of demand for money; and the indicator of the informal labor market, which includes the percentage of workers without a signed labor contract and the income from everyday work.