Minister, State Minister for Euro-Atlantic
Integration of Georgia Under the United National Movement’s rule, the share of the shadow economy decreased from 70% to 5%
The shadow economy does not have a straightforward definition but it generally consists of any form of the unofficial economic activity from criminal (drug dealership) to the informal renting out of an apartment. These types of activities cannot be taken into account when measuring a country’s gross domestic product (GDP). Therefore, it is possible to say that the actual total income of a population in any country is always higher as compared to the GDP. The shadow economy is measured vis-à-vis a country’s GDP (the shadow economy to the official GDP ratio). However, it is difficult to measure informal assets and value them in monetary units and, consequently, reliable data in this case are not readily available.
The World Bank’s definition of the shadow economy has a number of shortcomings and it should not be accepted as an accurate instrument of measurement. Giorgi Baramidze also made a mistake when naming figures from the World Bank. In fact, the World Bank indicates that the size of Georgia’s shadow economy to the GDP ratio decreased from 66% to 60% in 2003-2012 instead of 5%. There is a substantial gap between the actual figure and the one named by Mr Baramidze and the only element of truth in the statement is pointing out the trend of the decreasing shadow economy. Therefore, Giorgi Baramidze’s statement is MOSTLY FALSE.
Verdict: FactCheck concludes that Giorgi Baramidze’s statement is MOSTLY FALSE.
On 27 January 2023, on air on TV Pirveli’s Politikuri Ambebi talk show, a member of the United National Movement, Giorgi Baramidze, talked about reforms implemented by Mikheil Saakashvili and discussed the aspect of the shadow economy within this context. In particular, Mr Baramidze stated: “Georgia… had shadow economy at 70%. This is the World Bank’s data and we cut the shadow economy to 5%.”
The shadow economy does not have a straightforward definition. It could be illegal/criminal activities such as smuggling, drug dealing, trade in arms and human organs, trafficking, prostitution or harmless activities such as apartment rent, artisanship or working as a taxi driver or a private tutor. All of these activities have one common feature as people working in the shadow economy do not pay taxes.
Another example of the shadow economy would be a registered enterprise which hides some its income, where the number of real employees exceeds the number of official employees and which pays less taxes to the budget than it is supposed to pay.
It is very difficult to pinpoint the share of the shadow economy, particularly in developing countries, because its measurement is based on many assumptions, including attempting to count the uncountable where the chance of error is high.
This task is further complicated when such a study is carried out across the world. In some countries, soft drugs are legal whilst they are banned elsewhere. Some countries ban selling alcoholic beverages. In addition, countries differ from each other when it comes to the tax burden, the number of regulations, the enforcement of the law and the level of corruption. In some countries, it is possible that a certain type of economic activity is not exempt from taxation but at the same time there is no law which makes it a subject of taxation. Therefore, one and the same approach can measure the size of the informal economy in one country more or less accurately which may not be the case in another country.
The World Bank uses 12 measurements to determine the informal economy which in turn are mostly based on employment and perceptions.
According to the World Bank’s survey, the shadow economy to the GDP ratio in Georgia was 65.8% and was at the top in the world ranking, followed by Panama and Bolivia in the second and third ranking positions with their shadow economies being over 60% of their GDP.
At the end of the United National Movement’s rule in 2012, the informal economy to the GDP ratio in Georgia decreased by 5.6 percentage points to 60.2% and the ranking improved by only one position. Zimbabwe was in the first place with a shadow economy to the GDP ratio at 64.7%. The latest figures date from 2018 where Georgia is still in the second position, again after Zimbabwe, although its informal economy to the GDP ratio is 56.6%. It is less likely that the World’ Bank’s data are accurate – despite the rather large size of the shadow economy, Georgia’s progress in 2003-2012 and its ranking position in general could have been much better if a proper measurement had been carried out.
Of note is that when it comes certain criteria, there is a discrepancy between the World Bank’s data and that of the National Statistics Service of Georgia. For instance, the share of self-employed people in the total number of employed individuals in 2003 was 65.9% according to the World Bank whilst the National Statistics Office of Georgia reported that it was 62.4%. This mismatch started to become wider from 2010 which in turn was precipitated by changes in the methodology because the National Statistics Office of Georgia applied a different methodology when measuring employment and unemployment statistics for 1998-2009 and for 2010-2021. As a result, when in 2012 the World Bank said that the share of self-employees in the total amount of employees was 52.6% (the old assessment of the National Statistics Office of Georgia), the National Statistics Office of Georgia reported that it was much lower at 36.7% (updated methodology). The difference between the two figures is 19 percentage points in 2018 which was the last year of observation. As reported by the National Statistics Office of Georgia, the share of self-employees was 30.3% whilst the World Bank put the number at 49.2%.
Apart from confusion over the share of self-employed people, the section about informal employment as one of the elements in the World Bank’s survey is left blank in the case of Georgia, perhaps due to a lack of relevant data. The fields about legally and illegally registered companies are also filled out incompletely. Ultimately, such types of shortcomings, irrespective of subjective or objective reasons, affect the accuracy of the final assessment.
The World Bank is not the only international financial institution that has a critical assessment of the size of Georgia’s shadow economy. According to the International Monetary Fund, the size of the informal economy in Georgia was 53% of the GDP in 2015 and the only other two countries with a worse performance were Zimbabwe and Haiti. The International Monetary Fund also noted some progress, particularly saying that the size of the shadow economy was 64.9% in Georgia in 2003 which dropped to 58.7% in 2012.
According to the World Bank’s survey in 2003-2012, although the size of the shadow economy decreased in Georgia, it dropped only to 60% which is much higher as compared to the 5% claimed by Giorgi Baramidze. The 5% level of the shadow economy is unrealistic, not only for Georgia but for any other country. Switzerland has the best performance in this regard where its shadow economy to the GDP ratio is 8% based on the same survey. Despite several obvious question marks, Mr. Baramidze has not doubted the reliability of the survey. However, even if the World Bank’s figures are accurate, it is wrong to claim that the size of Georgia’s shadow economy decreased from 70% to 5% in 2003-2012 because the World Bank confirms a reduction to only 60%. Therefore, FactCheck concludes that Giorgi Baramidze’s statement is MOSTLY FALSE.
By Giorgi Elizbarashvili , FactCheck