#12 - JRL 7258
Vedomosti
July 21, 2003
IT'S EASY TO DOUBLE THE GDP
Independent researchers say the shadow economy is underestimated
Author: Boris Grozovsky
[from WPS Monitoring Agency, www.wps.ru/e_index.html]

A DOUBLING OF THE GDP CAN BE ACHIEVED MUCH SOONER THAN THE DEADLINE SET BY PRESIDENT VLADIMIR PUTIN, ACCORDING TO THE INTERACTIVE RESEARCH GROUP. IN FACT, RUSSIA'S REAL GDP LAST YEAR WASN'T $347 BILLION, BUT AROUND $500 BILLION - AND IT COULD REACH $1 TRILLION WITHIN ONLY FIVE YEARS.

A doubling of the GDP can be achieved much sooner than the deadline set by President Vladimir Putin, according to the Interactive Research Group (IRG). All we need to do is cut taxes and calculate the GDP in dollars rather than rubles. According to the IRG, the State Statistics Committee is greatly underestimating the impact of the shadow economy. In fact, says the IRG, Russia's real GDP last year wasn't $347 billion, but around $500 billion - and it could reach $1 trillion within only five years.

Based on surveys of Russian companies and its own research into the consumer goods market (alcoholic beverages, domestic appliances and electronic appliances, tobacco products, mobile phone services, transport services, pharmaceuticals and cosmetics, etc.), the IRG argues that the State Statistics Committee is greatly underestimating real incomes and consumer spending in Russia.

According to official statistics, Russia's GDP in 2002 was around $347 billion: $175 billion as domestic spending, $60 billion as state spending, $74 billion as savings (investment), and $37 billion as net exports. But official statistics are only accurate for state spending, says IRG economist Alexander Utochkin. According to Utochkin's calculations, consumer spending (and the consumer goods market) amounted to $290-310 billion in 2002, and investment was around $100 billion. Meanwhile, net exports were actully somewhat lower than the State Statistics Committee's figures, due to hidden imports (around $25 billion). Therefore, says Utochkin, the real GDP last year was $490-500 billion.

The State Statistics Committee estimates that the shadow economy accounts for 20-25% of the GDP; the IRG puts it at 45-50%.

"These are feasible figures," says Aton Investment analyst Peter Westin. Westin has compared GDP dynamics with the rising consumption of electricity, transport services, and other indicators. He says the State Statistics Committee is fairly accurate on industry, but underestimates the services sector - and especially small business.

Utochkin notes: "Small business accounts for around 25% of the GDP, not 10%." Around 60% of the $150 billion the IRG is adding to the GDP comes from small business activity not recorded by the State Statistics Committee.

"Small business is almost 100% in the shadow economy," says Stanislav Voskresensky, deputy head of the taxation committee of the Russian Union of Industrialists and Entrepreneurs.

Utochkin says: "If the GDP grows at 7-8% a year in real ruble terms, and the real exchange rate sees the ruble rising against the dollar by 7-8% a year as well, the GDP could go over $1 trillion by as soon as 2007."

According to Utochkin, the real rate of income tax paid by Russian citizens in 2002 was 3.5%, and the real rate of social tax was 10.8%. Based on the State Statistics Committee's data on real incomes and wages, these taxes were paid at the rate of 5.4% and 18.3% respectively in 2002. "These figures are close to our own calculations," says Voskresensky. He notes that if we take the State Statistics Committee's figures on wages, including hidden wages, and social tax receipts as well as contributions to the Pension Fund and other funds, it turns out that the common social tax is being paid at a rate of 13%.

Utochkin points out: "By effectively evading tax, companies also lose access to external investment." He adds that by reducing taxes for those who are already paying them and making administration more efficient, the state could help tax-payers emerge from the shadows.

(Translated by Andrei Ryabochkin and Kirill Frolov)