Italy planning to boost economy by including shadow economy as part of GDP
Drugs, prostitution and arms smuggling may not be legal, but it's all real economic activity, at least in Italy, which will now include illegal enterprises as part of its gross domestic product (a measure of the goods and services a nation produces). Italy has decided to boost the size of its economy by including the value of black market activities.
This new accounting strategy is likely to be not only controversial, but may put the nation's credibility on the line because there is no adequate way to measure or value illegal activities, according to an article published by an economics editor in USA Today.
The expert points to the illegal marijuana industry in the United States, saying it's estimated to be worth between 10 billion and 100 billion dollars a year and it just depends which economist you ask.
If you're an economist in Italy who needs to make the country's economy look bigger, no doubt you'll want to go with the liberal calculation according to the article, although The truth is, no one really knows.
That could also backfire because the creative accounting may be viewed as an effort to manipulate the nation's GDP and investors could start to dismiss or question Italy's statistics.
While the move may seem unorthodox it's apparently just what the European Union has ordered.
New rules require member nations to report all income-producing activities, including the black market sales of alcohol and cigarettes. No country is supposed to let their annual deficits exceed 3% of GDP or accumulated debt exceed 60% of GDP.
Countries that don't comply with the debt limits are to be penalized — 0.2% of GDP, plus a variable component that can range up to 0.5% of GDP annually as long as the breach continues.
Boosting GDP helps lower the debt ratio, but that's not the only incentive Italy has. Theoretically, having a bigger economy should allow the nation to borrow more money.
Italy may be the first nation to include illegal activities in its GDP, but countries inside and outside the Euro zone may want to follow suit. For example Turkish researchers estimate the shadow economy averages just below 18% of GDP in Organization of Economic Co-operation and Development and EU countries and is as high as 42% in some Latin American countries.