Giorgi Baramidze,
Former interior
Minister, Minister of State for Euro-Atlantic
Integration of Georgia Under the rule of the United National Movement, the share of the informal economy fell from 70% to 5%
The informal economy does not have a simple definition, but generally includes any form of unofficial economic activity from criminal (drug dealing) to informal renting out a dwelling. These types of activities cannot be considered when measuring a country’s gross domestic product (GDP). Therefore, it can be said that the actual total income of a population in any country is always higher than GDP. The shadow economy is measured by a country’s GDP (ratio of shadow economy to official GDP). However, it is difficult to measure and value informal assets in monetary terms, and consequently reliable data in this case is not readily available.
The World Bank’s definition of the informal economy has a number of flaws and should not be accepted as an accurate measurement tool. Giorgi Baramidze also made a mistake when citing figures from the World Bank. In fact, the World Bank points out that the ratio of Georgia’s informal economy to GDP fell from 66% to 60% between 2003 and 2012 instead of 5%. There is a significant gap between the actual figure and that quoted by Mr Baramidze, and the only element of truth in the statement is that it points to the trend of the informal economy decreasing. Therefore, Giorgi Baramidze’s statement is MOSTLY FALSE.
Verdict: FactCheck concludes that Giorgi Baramidze’s statement is MOSTLY FALSE.
On 27 January 2023, on the TV Pirveli talk show Politikuri Ambebi, a member of the United National Movement, Giorgi Baramidze, spoke about the reforms carried out by Mikheil Saakashvili and discussed the informal economy aspect in this context. In particular, Mr. Baramidze stated: “Georgia… had a 70% informal economy. This is World Bank data and we have reduced the informal economy to 5%.”
The informal economy does not have a simple definition. This can be illegal/criminal activities such as smuggling, drug trafficking, trafficking in weapons and human organs, human trafficking, prostitution or harmless activities such as renting apartments, manual trades or working as a taxi driver or private tutor. All these activities have one thing in common: people who work in the informal economy do not pay taxes.
Another example of the informal economy would be a registered company that hides part of its income, that actually employs more than its official workforce and that pays less tax to the budget than it should.
It is very difficult to accurately determine the share of the informal economy, especially in developing countries, as its measurement is based on many assumptions, including trying to count the myriad where the likelihood of error is high.
This task becomes even more complicated when such a study is conducted worldwide. Soft drugs are legal in some countries while banned elsewhere. Some countries prohibit the sale of alcoholic beverages. In addition, countries differ in terms of tax burden, number of regulations, law enforcement and 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 making it subject to taxation. Therefore, the same approach may more or less accurately measure the size of the informal economy in one country, which may not be the case in another.
The World Bank uses 12 measurements to determine the informal economy, which in turn are mainly based on employment and perceptions.
According to the World Bank survey, Georgia’s shadow economy to GDP ratio was 65.8%, putting it at the top of the world rankings, followed by Panama and Bolivia in second and third place respectively, whose shadow economies accounted for over 60% of their GDP.
At the end of the rule of the United National Movement in 2012, the ratio of the informal economy to GDP in Georgia fell by 5.6 percentage points to 60.2% and the ranking improved by only one position. Zimbabwe ranked first with a shadow economy as a percentage of GDP of 64.7%. The latest figures are from 2018, where Georgia still ranks second, again after Zimbabwe, although the ratio of the informal economy to GDP is 56.6%. The World Bank data is less likely to be accurate – despite the rather large size of the informal economy, Georgia’s progress in 2003-2012 and its ranking in general could have been much better if proper measurement had been made.
Notably, there is a discrepancy between the World Bank and National Statistics Service of Georgia data on certain criteria. According to the World Bank, the proportion of the self-employed in the total number of employed persons was 65.9% in 2003, while the National Statistical Office of Georgia reported 62.4%. This discrepancy widened from 2010, which in turn was accelerated by changes in methodology, as the National Statistical Office of Georgia used a different methodology when measuring employment and unemployment statistics for 1998-2009 and for 2010-2021. When the World Bank said in 2012 that the proportion of self-employed in the total workforce was 52.6% (the old estimate from the Georgia National Bureau of Statistics), the Georgia National Bureau of Statistics reported that it was much lower at 36 .7% (updated methodology). The difference between the two figures is 19 percentage points in 2018, the last year of observation. As reported by the Georgia National Bureau of Statistics, the proportion of self-employed was 30.3%, while the World Bank put the figure at 49.2%.
Apart from the confusion about the proportion of self-employed, the section on informal employment as one of the items in the World Bank survey remains blank in the case of Georgia, possibly due to a lack of relevant data. The fields for legally and illegally registered companies are also incomplete. Ultimately, regardless of subjective or objective reasons, such imperfections affect the accuracy of the final assessment.
The World Bank is not the only international financial institution critical of the extent of Georgia’s informal economy. According to the International Monetary Fund, the size of the informal economy in Georgia was 53% of GDP in 2015, and the only other two countries that underperformed were Zimbabwe and Haiti. The International Monetary Fund also noted some progress, saying in particular that the size of the informal economy in Georgia was 64.9% in 2003 and decreased to 58.7% in 2012.
According to the World Bank survey in 2003-2012, the informal economy in Georgia declined, but only by 60%, which is much higher than the 5% claimed by Giorgi Baramidze. The 5% level of shadow economy is unrealistic, not only for Georgia but for any other country. Switzerland performs best in this regard, with its informal economy as a percentage of GDP at 8%, according to the same survey. Despite some obvious question marks, Mr. Baramidze did not doubt the poll’s reliability. However, even if the World Bank figures are correct, it is incorrect to claim that Georgia’s informal economy fell from 70% to 5% in 2003-2012, since the World Bank confirms a decline to only 60%. Therefore, FactCheck concludes that Giorgi Baramidze’s statement is MOSTLY FALSE.
By Giorgi Elizbarashvili , fact check
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