Estimating informal economy share in Russian regions

TInformal economy in Russian regions is measured using two approaches: 1) cross-section regression model for electricity consumption in Russian regions; 2) augmented electricity dynamics approach. 1) Regression model is applied for electricity consumption in production of goods and services (total electricity consumption less losses, less households’ consumption). Model was estimated on the basis of regional data in 2011. It allowed estimating informal economy share in 67 Russian regions in 2011. The average informal economy share is estimated at 40% with standard deviation 18 percentage points. These results show high positive correlation with usual proxies for informal economy such as corruption, unemployment, and especially dependency of regional budget from Federal transfers. 2) Augmented electricity dynamics approach is developed to estimate dynamics of informal economy share in regions over 2004-2011. Comparing to traditional method in the literature, it takes into account changes in regional industrial structure and electricity intensity of GRP. It leads to more accurate estimates. It has been shown that the share of informal economy in Russia diminished from 55% in 2004 to 40% in 2011 due to the growth of formal sector. Only 16 from 65 regions witnessed an increase in informal economy share over the period.