Pandemic affects informal activity in Brazil and brings down indicator

Underground economy in Brazil, moved something close to R $ 1,2 trillion reais, higher than the GDP of countries like Switzerland and Sweden

The underground economy suffered a small drop in participation in the Brazilian economy and reached 17,1% of GDP, which represents about R $ 1,2 trillion reais. The result is part of the Underground Economy Index (IES), a partnership between the Brazilian Institute of Ethics in Competition (ETCO) and IBRE / FGV that has been monitoring, since 2003, the evolution of activities that operate outside the laws and regulations that affect formal activities in the country.

The indicator, slightly lower than that observed in 2019 (17,3%), points to an interruption in the successive increases observed since 2015, caused by the events associated with the covid-19 pandemic that raised the level of uncertainty in an extraordinary way in relation to the performance of the economy.

The negative impacts on economic activity and the labor market affected informal workers more intensely, compared to formal workers, contributing to the fall of the Underground Economy Index (HEI) in 2020.

According to Edson Vismona, president of ETCO, the drop observed in the index, unlike what happened in the past, is not associated with the increase in formal activity.

“It is a reduction that we cannot celebrate. Circulation restrictions during the most critical months of the pandemic have taken people off the streets, significantly disrupting street vendors, application drivers and informal traders. This population had its activity stopped abruptly and this brought a strong economic and social impact ”, completes the executive.


The Graph shows the evolution of the Underground Economy Index since 2003 - Source: Prepared by ETCO and FGV / IBRE

Making a historic rescue, the highs observed in the indicator up to 2019 were a consequence of the crisis that started in mid-2014, which reduced the formal sector of the economy, and the slow recovery of economic activity, concentrated in its most flexible part the informal economy , which was pulling jobs in the country. At the same time, the reduction in interest rates and the slow increase in income alleviated the growth situation in the shadow economy, which would be stronger in the absence of these factors.

IBRE / FGV economist Paulo Peruchetti believes that the current crisis, with unique characteristics, the formal worker was more protected, mainly due to the Emergency Job Preservation Benefit (BEm). Regarding informal ones, the emergency benefit guaranteed income, but not employment.

“As it is more flexible, the recovery of employment over the next year is likely to occur due to stronger increases in the informal labor market, which may reverse the decline in the underground economy indicator in the coming years”, concludes Peruchetti .

Vismona and Peruchetti agree that structural factors that led to the reduction of the underground economy between 2014 and 2019 remain present in the Brazilian economy, but that caution is needed when assessing the evolution of the indicator, as its dynamics will depend on the speed of economic recovery, which advancing the reforms necessary to stimulate the economy.

 Evolution of the Index

ETCO and IBRE / FGV developed an index to monitor the underground economy, providing an indicator of the evolution of informal activities. The underground economy is defined as the production of goods and services not reported to the government, deliberately, to: evade taxes; evade social security contributions; circumvent compliance with labor laws and regulations; avoid costs arising from the rules applicable to each activity.

The index starts in 2003, with the highest value in the historical series, about 21% of the Brazilian GDP and since then, it has presented a strong downward trend, reaching in 2014 its lowest value (16,1%). However, as of 2015, however, there was a worsening in the indicator, with an increase of more than 1 percentage point between 2015 and 2019.

The reduction in the index in the country in the 2000s is related to several structural factors that stimulated the formalization of the labor market and made it difficult for companies to operate outside the law. Among the factors that helped to increase the formalization of the economy, we can mention the increase in the credit market and the expansion of the average schooling of Brazilians.

In addition, measures to simplify legal standards help to reduce the cost of formalization, stimulating a reduction in the shadow economy. In this sense, measures with the implementation of electronic invoices (NFes), SIMPLES and MEI tend to formalize the economy more.

Between the second quarter of 2014 and the fourth quarter of 2016, Brazil faced a long period of recession (11 quarters) according to the Economic Cycle Dating Committee (CODACE). One of the consequences of this loss of dynamism in the economy was the increase in the number of people engaged in informal activities.

We can see (Graph) a worsening in the Shadow Economy Index between the years 2015 and 2019. In this period, there was an increase of more than 1 percentage point in the Shadow Economy Index, so that it went from 16,2% in 2015 to 17,3% in 2019.

Between 2016 and 2019, there was a recovery of employment, albeit informal, whose work relations are much more flexible, generating increases in the number of people without a formal contract and in the share of this group's income in the total income.

Therefore, the increase in informality observed in this period made the impact via the labor market greater, thus leading to successive increases in the Underground Economy Index between the years 2015 and 2019.

In the year of 2020, it was possible to notice a decrease of 0,2 percentage points in the indicator, explained by the change in the composition of the labor market, with a greater weight of formalization, combined with the expectation of a strong reduction in the level of economic activity. This value observed in 2020, shows that the underground economy in Brazil, moved something close to R $ 1,2 trillion reais, greater for example than the GDP of countries like Switzerland and Sweden, which correspond to something close to 16% of the Brazilian GDP , according to IMF data.

The drop in the indicator in 2020 is associated with a change in the composition of the labor market. With the advance of the Covid-19 pandemic, there was a greater relative reduction in informal workers compared to the drop observed in formal workers, which generated an increase in formalization.

The positive side is that the structural factors that led to the reduction of the underground economy remain present in the Brazilian economy. The process of simplifying rules and regulations remains active (with prospects for expansion by the current government), the average schooling of Brazilians continues to increase and the credit market should return to its growth trajectory. In addition, the labor reform carried out in the previous government tends to stimulate the formalization of the labor market, reducing the relative cost of formalization, stimulating the return of formal employment.

Historical index

Informality brings direct damage to society, creates an environment of transgression, stimulates opportunistic economic behavior, with a drop in the quality of investment and a reduction in the growth potential of the Brazilian economy.

In 2020, the underground economy moved R $ 1,2 trillion, slightly less than in 2019. The drop is related to the economic paralysis, due to the Covid-19 pandemic.

How it is calculated

The size of the underground economy is estimated from two indicators:
The Shadow Economy Index is calculated by averaging two important indicators of the economy. Monetary method Raising the currency due to the tax burden and informal work. Informal work Percentage of workers without a formal contract and income from informal work.

Informal activity tries to remain unobserved by the authorities and, consequently, has a higher demand for money than formal activities, which use more banking instruments for their transactions. Thus, the increase in informal activity will raise the demand for money through two channels:

    • Increase in the proportion of workers without a license.
    • Higher taxation.

The hypothesis is that the increase in taxation induces an increase in the underground economy, which also generates an increase in the demand for currency

Based on the PNAD, the average is calculated between the percentage of informal workers and the percentage of income from work that is informal.

The level of the underground economy is the average between the two methods: monetary method and informality in the labor market.

The Illegal Market and the Underground Economy in Brazil were themes of the CONIMAQ meeting

“There is no developed country that does not have an ethical vision and the defense of the law as its foundation,” said Edson Luiz Vismona, president of the Institute of Ethics in Competition (ETCO), during a meeting with members of the National Council of the Machinery Industry (CONIMAQ) in last February 21st, at ABIMAQ headquarters, in São Paulo.
Vismona presented a survey conducted by the FNCP that shows a total loss of more than R $ 146 billion involving only 15 productive sectors with the illegal market (R $ 100 billion) and tax evasion (R $ 46 billion) in 2017. “The survey, carried out since from 2014, it was done in order to sensitize the media, society and the government to the theme, as we cannot accept deviations from this amount for a country that wants and needs to resume growth ”.
ABIMAQ's executive president, José Velloso, based on the data presented, stressed that the high tax burden and all other accessory obligations charged to companies, are the “iron ball” tied to the feet of Brazilian businessmen, to paraphrase the minister of Economy Paulo Guedes.
According to him, after the pension reform, the approval of a Tax reform must be worked hard by the Federal Government so that we can simplify and relieve companies, allowing them to invest in their businesses. Another point commented on was the importance of compliance for companies and associations, citing as an example the Code of Conduct and Ethics, prepared by ABIMAQ.
Finishing its participation, Vismona stressed that companies are concerned and committed to strengthening the ethical culture, so that these rules are observed by customers, suppliers and business partners to remain competitive in the national and international market, while facing the challenges internal and external taxes imposed on those who undertake in Brazil. In his view “For all the adversities to be overcome daily, the Brazilian entrepreneur has a heroic posture of demonstrating competence”.

According to a study by ETCO and FGV / Ibre, stability in informality this year reflects the economic recovery

After growing for two consecutive years, the underground economy stabilized in 2017 and returned to represent 16,6% of the Gross Domestic Product (GDP). The calculation is from the Underground Economy Index (IES), a study carried out in partnership by the Brazilian Institute of Ethics in Competition (ETCO) and the Brazilian Institute of Economics of the Getúlio Vargas Foundation (FGV / Ibre).

Informality in the country generated, in the 12 months ended in July, the equivalent to R $ 1,077 trillion. The number represents the GDP of countries like Colombia and South Africa. The underground economy is the production of goods and services not reported to the government deliberately, with the aim of evading taxes, evading social security contributions, circumventing compliance with laws and labor regulations and avoid costs arising from compliance with the rules applicable to each activity.

The IES has been held since 2003 and, until 2014, registered a constant improvement in the level of formalization of business in Brazil. During this period, the shadow economy fell from 21% to 16,1% of GDP. In 2015, the index suffered its first setback since the beginning of the historical series, a situation that worsened last year.

GRAPHIC IESSize of the underground economy

An important point for the resumption of the formal economy to take place, and to continue in the coming years, is labor reform. “ETCO's expectation is that the new CLT rules will bring about a safer environment for employers and workers. As a consequence, the judicialization of contracts tends to decrease and there will be more incentives to increase the number of employees with a formal contract ”, says ETCO's executive president, Edson Vismona.

Despite the prospect of future improvement, Vismona points out that the country cannot be content with just recovering what was lost in the past two years, without further progress. “A country that intends and needs to attract investments in order to develop cannot accept living with such high levels of informality”, he adds.

According to Fernando de Holanda Barbosa Filho, a researcher at FGV / Ibre, the informal market stopped growing with the end of the recession, but that was not enough to reverse the downward trend of the index. "With the prospect of GDP growth of more than 2,5% for 2018, the trend is for the economy to improve as a whole and positively impact the formalization of business in Brazil," he highlights.


About the Shadow Economy Index 

ETCO believes that knowing the size of the problem is critical to tackling it. Much is said, but little is known, about informality, piracy and evasion, as, as illegal activities, they are difficult to measure. The ETCO, in conjunction with the Brazilian Institute of Economics of the Getúlio Vargas Foundation (FGV / Ibre), has since 2007 published the Underground Economy Index, a study that estimates the values ​​of activities deliberately not declared to public authorities, with the objective of evading taxes, and those of those who find themselves in the informal sector due to excessive taxation and bureaucracy.

Slice of the informal economy in Brazilian GDP grows in 2016, says study

photo-informalityThe participation of the informal market in the Brazilian economy grew again in 2016, reflecting the economic crisis in the country, which has affected formal employment, according to a survey released on Monday.

The so-called underground economy - production of goods and services not reported to the government deliberately - reached 16,3 percent of GDP, against 16,2 percent in 2015, according to a study carried out by the Brazilian Institute of Ethics in Competition (ETCO) and the Brazilian Institute of Economics at Fundação Getulio Vargas (FGV / IBRE).

Comparatively, the participation of the informal economy in GDP exceeds that of the Northeast (12,3%), Midwest (9,5%) and North (5,8%) regions.

In nominal terms, the informal market moved 983,283 billion reais in 2016, compared to 956,96 billion reais in the previous year.

According to FGV / IBRE researcher, Fernando de Holanda Barbosa Filho, responsible for the study, the informal market is also affected by the crisis, but, as it manages to dampen a little more than the formal market, it has increased its relative weight in the economy .

"The crisis disturbs everyone," Barbosa Filho told Reuters, adding that this worsening should stop when the economic crisis in the country passes.

For now, however, the signs are not optimistic. The IBGE announced last week that Brazilian GDP shrank 0,8 percent in the third quarter compared to the previous three months, in the seventh quarter followed by contraction and with the biggest retraction in the year on this basis of comparison.

In the same vein, the Ministry of Labor's General Register of Employed and Unemployed (Caged) showed that 751.816 formal vacancies were closed in Brazil in the first ten months of the year, in the adjusted series.

(By Paula Arend Laier)

Reuters - 06/12/2016