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Deutsche Bank: Big shadow economies shore up countries in recession

28 December 2009 13:07 (UTC +04:00)

BakÄ± â€“ APA-Economics. Unofficial, or "shadow", economies can help shield European countries during a recession - but illicit activity has to be on a sizeable scale, according to a report by Germany’s Deutsche Bank, the Financial Times reported.
Countries with a high prevalence of moonlighting builders, unrecorded cash transactions, missing invoices, tax evasion or illegal activities such as drug dealing, have seen smaller contractions during Europe’s worst downturn since the 1930s than more honest neighbours, researchers at the Frankfurt-based bank have concluded.
The relationship works, however, only if the "shadow economy" is large - such as in Greece, where George Papandreou, prime minister, acknowledged earlier this month, the public services are riddled with corruption.
In spite of its growing fiscal problems, Greece’s economy has shrunk by only about 1 per cent this year - compared with about 4 per cent for the European Union as a whole.
At the other extreme, Deutsche Bank found that countries with a "particularly honest" population - such as Austria, France or the Netherlands had also fared relatively well during the crisis.
Indicating its research was not to be taken entirely seriously, Deutsche Bank said the countries faring worst included Germany where inhabitants "are neither impeccably honest in their work ethic, like the Austrians, nor do they expend so much effort in circumventing the state as, for instance, the Greeks".
The "most unfavourable level of shadow market activity", according to Deutsche Bank’s calculations, was exactly 14.3318 per cent of official gross domestic product. At 14.6 per cent, Germany "is on the brink of the worst-case scenario", it concluded.
As a result Germany faced two options: either to follow the example of "successful countries" such as Greece and "not just employ a moonlighting painter to do the living room, but to build the entire house"; or to choose the path of virtue.
Sebastian Kubsch, the report’s author, admitted he "couldn’t find a straight answer" to explain why a large - or tiny - shadow economy had helped shore up economies in the past year.
One explanation could be that a well-functioning unofficial sector provides a viable alternative, for instance, for the officially unemployed, but pervasive honesty also creates better outcomes.