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An unjustifiably high burden on personal and business incomes contributes to Ukraine’s high shadow economy

ort from a government think tank.

The experts of the State Scientific Research Institute of Informatization and Economic Modeling (DNDIIME) estimated on July 27 that Ukraine’s “shadow GDP” will amount to Hr 443 billion (nearly $89 billion) in 2007, while the country’s “official” gross domestic product will exceed Hr 692 billion ($138 billion). The institute that provides research services for the Economy Ministry estimates that Ukraine’s economy will exceed Hr 1 trillion ($200 billion) in value in 2007.

DNDIIME’s methodology is based on a complex calculation of macro-economic factors ranging from demand for cash in the economy and term deposit rates offered by banks to real income levels.

The shadowiness of the economy is caused by the “unjustifiably high burden on personal and business incomes. An inexplicable paradox exists: Labor is the most utilized factor in production and is the main source of budgetary revenues at the same time,” according to the report.

“It’s well-known that Ukraine currently occupies an unflattering position in the world ‘GDP per capita’ rating at a time when the country is very rich in natural and human resources,” said Yuri Kharazishvilli, deputy director of DNDIIME and one of the report’s authors.

“If we are so rich, then why are we so poor?”

“One of the primary indicators that provide the real picture of a country’s socio-economic development is the share of payments for labor in GDP,” Kharazishvilli said.

Wages in Ukraine account for slightly more than a quarter of the country’s GDP. By contrast, that number stands at nearly 60 percent in the United States, while wages account for half of GDP in countries like Germany and France.

According to experts, the shadow segment of average monthly wages in Ukraine amounts to Hr 2,700 ($540), more than double of the official average monthly wage of Hr 1,300. Combined, the average monthly wage in Ukraine is around Hr 4,000 the study found.

The experts noted that in 2006, the value of underground economic activity in the industrial sector stood at 132 percent. In other words, shadow industrial activity surpassed officially-reported industrial activity by nearly one-third.

The analogous figure stood at 73 percent in agriculture, 71 percent in construction and 32 percent in the services sector.

Another government report based on data from the State Statistics Committee painted a somewhat rosier picture of the shadow economy claiming that it stood at 27 percent of GDP in 2006, or 2 percent lower than in 2005.

The report, made public on the Ministry of Economy website on July 27, did note that underground economic activity is on the rise in real estate transactions, insurance and automotive sales and remains high in the construction and wood-processing sectors.

Economist and former cabinet minister Viktor Lysytskyi said that “we can argue about exact shadow economy statistics forever.”

“But it’s absolutely certain that the shadow sector is enormous,” he added.

According to Lysytskyi, large shadow economies are present in most post-Soviet states and Ukraine is not alone in this respect.

“I am sure that in Russia the shadow economy is the same in terms of its share in the economy.”

Nevertheless, the fact that such a large part of the economy is underground has its blessings, as the economy develops certain immunity to external factors.