EU: Countries to Begin Counting Drugs, Prostitution in Economic Growth

A European Union (EU) policy mandating that member states take untaxed “shadow economies” into account when calculating economic output comes into effect this month.

The European System of Accounts 2010 states that, “Illegal economic actions shall be considered as transactions when all units involved enter the actions by mutual agreement,” meaning that black market dealings including prostitution, drug sales, and other smuggled goods should be calculated into a country’s gross domestic product (GDP).

Amsterdam's red light district. The policy change will create consistency between country data regardless of their policies on drugs and prostitution. (Photo: Tran Vinh Duong)The policy would also include untaxed transactions in the gray economy, which includes off-the-books employment and restaurants that operate without receipts.

The rationale behind the new rule is to make data more consistent between countries with different laws, reports Bloomberg. Countries such as the Netherlands, which permit prostitution and the sale of some drugs, already include these industries in their GDP, whereas nations which prohibit them generally do not, although some countries, including Italy and the United Kingdom (UK), already include some sectors of the shadow economy in GDP statistics.

The policy change may also serve as a quick boost to some EU countries’ GDPs. When Italy began calculating parts of its black market economy in 1987, its GDP increased by about 18 percent, moving it past the UK to become the world’s fifth-largest economy. The larger a country’s shadow economy is, the more its GDP stands to rise.

The average EU country was estimated to have a shadow economy equal to 18.8 percent of its GDP in 2013, according to the economist Friedrich Schneider. The EU country with the largest estimated shadow economy as a percentage of its GDP is Bulgaria, at 31.2 percent, followed by Romania and Croatia at 28.4 percent each. The United States, in comparison, is estimated to have a shadow economy equal to 6.6 percent of its GDP.

Due to their illicit nature, accurate estimates of the size of shadow economies can be hard to come by. Bulgaria’s National Statistical Institute says it will rely on existing official sources such as Interpol to estimate the value of smuggling and prostitution, and is not yet able to estimate the effect the new policy will have on the country’s GDP.

Adjustments for shadow economies are made by non-EU countries as well. The largest adjustment worldwide, according to the Institute of Economic Affairs, is a 24.3 percent adjustment made by Russia, whereas the smallest is that made by the United States, which only adjusts by 0.8 percent.