Precise Estimates of the Unrecorded Economy

Informal activities are present in almost all the sectors of the Pakistan economy, whether it is agriculture, manufacturing, construction, finance, transport or services. National accounts covered some of the informal activities in the GDP estimates, however, considerable size is not recorded. Several approaches are available in the literature to estimate the size of the unrecorded/undocumented/underground economy. Most popular among these approaches is monetary approach. Other approaches are labour market approach, MIMIC approach,, Electricity approach, fiscal approach, etc. However, all these approaches have number of problems among which the first and foremost is that they do not give the actual estimates of the unrecorded economy instead those estimates are used as trend estimates of the unrecorded economy based on different assumptions. In this paper we are estimating size of the unrecorded economy using a new approach. We call it “KQ” (Kemal and Qasim) approach or discrepancy approach. Our idea in this paper is to calculate total private consumption from the household survey for the total population and adjust it for trade misinvoicing and calculate the estimates of the GDP which is then compared with the GDP estimates reported in the National Accounts (at current prices). The difference between the two is the size of the unrecorded economy. PSLM 2007-08 is used to calculate total private consumption and Mahmood (2012) is used for misinvoicing of exports and imports. Our estimates show that the unrecorded economy of Pakistan was 91 percent of the recorded economy in 2007-08.