GDP to include illegal activity

August 2014  |  FEATURE  |  ECONOMIC TRENDS

Financier Worldwide Magazine

August 2014 Issue

August 2014 Issue


With growth hard to come by in the eurozone, a number of countries including the UK, Ireland and Italy have begun to change the way they calculate their respective GDPs, factoring in illegal activity. This is a move which could see billions of dollars added to the GDPs of a number of European economies in the near future.

The decision taken by the UK and others to include illegal activity has raised eyebrows, although more countries will soon follow suit. The EU is following a ‘best practices’ directive which was set out by the United Nations in 2008, although the figures across Europe will undoubtedly be difficult to calculate and standardise.

The new GDP calculations will see the UK factor in the proceeds from prostitution and illegal drug sales. According to the Office for National Statistics (ONS), the move could add £65bn, almost 5 percent of the overall UK economy, to the GDP. However, the means by which the ONS has confirmed that it will measure the activity goes some way to demonstrating how difficult the task will be throughout Europe. According to the ONS it will estimate the consumption of six drugs: crack cocaine, powder cocaine, heroin, cannabis, ecstasy and amphetamines; however, due to the illicit nature of the narcotics industry officials will have to calculate the number of drug users based on crime surveys, then multiply by an estimate of the average amount of drugs consumed per user. As such, a figure as vital as GDP growth will be reduced to relying on a series of rough estimates.

Statistics related to the sex industry are just as hypothetical. The ONS will begin with an estimate of the number of on-street prostitutes from the London Metropolitan Police and an estimate of off-street prostitutes from a non-government group that studies violence against women and girls. The number of prostitutes will be assumed to rise or fall along with the male population. The assumed cost of prostitution services will be presumed to fluctuate in line with the prices of lap dances, escort agencies and other workers in the sex industry. The ONS has deemed these activities to be “the closest…we have to prostitution” that are already measured.

Unsurprisingly the strategy has proven unpopular with many commentators, as it is likely to provide an unrealistic representation of economic development.

As a result of these revelations from the ONS, critics of the plan have begun to question not only the merits of the scheme, but also the methodology used to generate the data. In Italy, the decision has encountered strong criticism from parties who believe the move is little more than a political stunt. Italian detractors believe that the addition of the country’s shadow economy will artificially inflate the nation’s GDP and allow the country’s economically troubled government to present its spending and deficit as representing a smaller share of national output than it would otherwise. Black market activity in Italy is expected to add around 1.3 percentage points to GDP this year. However, by including elements of a nation’s shadow economy in GDP calculations, the means by which countries can measure and accurately determine the value of their economies is open to manipulation and interpretation. The Italian government in particular, which has suffered a negative public image for some time, will likely be exposed to further widespread criticism. Furthermore, investors will learn to dismiss, or at least, discount, Italy’s and other European states’ growth statistics, as they could easily be dismissed as inauthentic estimates.

However, despite the criticisms, the new GDP calculations are likely to become popular. In mid-June, Spain’s National Statistics Institute noted that it too would begin to include activities from its shadow economy later in 2014. According to Spain’s statistics office, there will be an “inherent difficulty” associated with estimating illegal revenues, however it said that the change would enable its figures to be compared “with those of all the advanced economies of the world”. Figures from Spain’s interior ministry suggest that drug dealing generates close to €5.7bn a year. As Spain’s GDP in the first quarter of 2014 was around €256bn, the drug trade alone could account for about 0.5 percent of GDP.

It would appear that creative accounting in the EU member states is set to become commonplace, as attempts are made in Brussels to harmonise measurements of economic growth. Unsurprisingly the strategy has proven unpopular with many commentators, as it is likely to provide an unrealistic representation of economic development. Equally, the classification of illegal activity across European states varies significantly, which will present its own challenges.

As a result of the EU’s directive, the economies of its member states are likely to receive a healthy boost; however, it will be a boost on paper and up for debate.

© Financier Worldwide


BY

Richard Summerfield


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