Informal Economy

Updated: November 2023

An informal economy (or shadow economy) is the part of any economy that is neither taxed nor monitored by any form of government.

The Informal sector makes up a larger share of poorer, more agricultural and less developed economies.


Why Measure the Informal Economy?

In many poorer countries as found in the Frontier Markets, a very large swathe of activity can remain uncounted and hence outside national accounts. Due to the nature of much informal work, ranging from housework, small scale farming through to gambling, prostitution, drug dealing, and smuggling, calculations of the value of such activities are difficult. Housework, although nearly universal, is usually omitted from estimates due to the difficulty of valuation.



There have been many attempts to estimate the size of parts of the informal economy using both direct and indirect approaches, Leandro Medina and Friedrich Schneider describe these in their 2018 IMF Working Paper as:

Direct approaches:

  1. Measurement by the System of National Accounts Statistics – Discrepancy method;
  2. Survey technique approach
  3. The use of surveys of company managers; and
  4. The estimation of the consumption-income-gap of households

In-direct approaches:

  1. Discrepancy between national expenditure and income statistics
  2. Discrepancy between official and actual labour force
  3. Electricity approach
  4. Transaction approach
  5. Currency demand approach (CDA)
  6. Multiple Indicators, Multiple Causes (MIMIC) approach


The World Economics Quarterly Informal Economy Survey

Each of these methods produce imperfect data but collectively can provide estimates that give a reasonable idea as to the size of the informal economy in different countries. Would Economics reviews available research to find updated estimates but the main bias of the informal economy  estimates remains the classic Schneider & Media 2018 IMF Working Paper.

The World Economics Informal Economy database covers 150 of the worlds largest economies and can be accessed online in full.


Related and futher reading:

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