Monday, May 14, 2012

The Shadow Economy: Estimates For Malaysia

From an article on VoxEU last week:

Shadow economies all around the world: Model-based estimates
Ceyhun Elgin & Oguz Oztunali

Even though informality is a widespread phenomenon and poses serious social, economic, cultural, and political challenges across the world, many issues about its nature and consequences still remain largely under-explored or unresolved. For example, the evidence presented in the existing literature has failed to generate a consensus among researchers around the measurement of the informal sector…

…As the number of papers in the growing literature on informality indicates, there is an increasing focus on the economic analysis of the shadow economy. Yet one particular setback that, despite the development of various methods, still persists in the literature is the lack of significantly large datasets that would make informality subject to robust (applied) policy analysis. Even though there are various methodologies suggested for its measurement, this issue mostly arises due to the fact that the size of the shadow economy, by definition, is hard to measure and to subject to empirical analysis…In this study, however, the authors rely on the MIMIC (Multiple Indicators and Multiple Causes) approach to estimate the size of the shadow economy which, according the Breusch (2005), is largely unfit for purpose.

The “shadow” economy is whatever isn’t part of the “formal” economy and isn’t included in the official statistics -  your hawker stalls, the housewives baking cakes and kuih as a sideline, and yes, organised crime. What’s interesting about this article (and the accompanying working paper) is that it presents estimates for the shadow economy in 161 countries going back over 60 years. Data on Malaysia is of course included, and I’m pretty sure it will be useful to somebody.

I’ve taken the liberty of charting the raw estimates (ratio to official GDP; 1955-2008):


Half a century ago, about 40% of the economy was in the informal sector, compared to a little under a quarter 5 years ago. The interesting thing here is that, juxtaposing this against the official figures, the economy is in reality 25% bigger than we think it is.

Technical Notes:

  1. Ceyhun Elgin & Oguz Oztunali , "Shadow Economies All Around the World: Model-Based Estimates", VoxEU, 10 May 2012, accessed 14 May 2012
  2. Ceyhun Elgin & Oguz Oztunali , "Shadow Economies All Around the World: Model-Based Estimates", Bogazici University Working Paper EC2012-05, April 2012 (warning: pdf link)


  1. How did you come up with the 40% and a quarter GDP figures?

  2. @Justin

    Taking the 2008 figure, the shadow economy in Malaysia is about 30% of "official" GDP. So total official plus unofficial GDP would be 100%+30%=130%. The size of the shadow economy would therefore be 30%/130%=23% or about a quarter.

  3. Justin, in the 60s, our informal economy is about 70% (according to the above graph) of the economy. And such, our actual economy size was 170% of the gdp. 70% over 170% of the gdp yields about 40%....