#NationalAccounts #CriminalEconomies #GDP
Wrote by: Maria Alejandra Freire, Lawyer, Master in finances.
The money being made by criminal economies are those that allow them to continue operating, corrupting institutions, taking advantage of vulnerabilities and affecting the security of the State. Because this money not only flows in the criminal economy, but mixes with the legal and informal economy through money laundering manoeuvres and reinvestment in illegal activities, influencing the incomes and expenditures emerging data from the circular flow chart of the real economy.
Manuel Castells in his book The Information Age, mentions how criminal organizations in recent decades have taken advantage of globalization and technologies and have begun to operate more and more internationally. He also states that according to the International Monetary Fund report from 1999, it was estimated that the money laundering of criminal organizations was currently ranging from $500 million to $1.5 trillion, representing 5% of the world’s Gross National Product (GDP).[i]
There are several sources of information on estimates of illicit flows, so we can take data from Global Financial Integrity, ECLAC, or the United Nations among other data sources. In most cases it is possible to make a comparison between global GDP, or a country’s GDP, and the product of criminal economies. However, they cannot be compared with each other due to the existing differences in methodology, the time period of which taken to investigate, territories or phenomenon’s considered different in research. Furthermore, we may find a lot of very valuable data however it gets delayed over time, thus making it impossible to compare in terms of design and development of public policies.
GDP is the market value of total goods and services produced globally, or in a country, over a specified period. It measures the total expenditure of the economy. Mankiw Gregory (2008) in Principles of Economics says, a definition that is seemingly simple can no longer be so once it is analysed in depth. For example, there are some goods and services that are excluded because it is difficult to state their value. He includes in this category most of the items that are sold and produced illegally, as illegal drugs.[ii]
Still, those goods or services that are sold and purchased on the illegal market are no strangers to a country’s legal economy for two reasons. The first one being that they are market transactions; transactions in which there are two parties, one who offers goods or a service and another one who wants it. Of course, because they are illegal, they are not registered. Even so, they do have a price and the money resulting from those transactions is then embroiled in both a legal and an illegal economy through money laundering and reinvestment.
The second reason for why it is not alien to legal economics would be that the countries are concerned with the high amounts of these illegal economies distort the macroeconomic values, from different jurisdictions, ergo if this very data were taken to calculate GDP it would increase.
2. Use of the national account system to measure GDP considering illegal activities.
The National Accounts System is used for countries to obtain data on economic activity. This system includes the international standards for the measurement of items such as GDP, being this the most frequent indicator of economic performance. Also, this economic data is analysed to make decisions and to develop public economic policies.[iii]
Larrain and Sachs (2002) in Macroeconomics in the Global Economy, state that data from national accounts is the most important component for calculating both GDP and National Gross Product and key of the macroeconomic analysis is a good understanding of the national accounts.[iv]
Mankiw Gregory (2008) would argue that it is difficult to measure, but he mentions that illegal activities such as smuggling and drug trafficking are in line with the characteristics of legal activity transactions. Also, if household expenses on illegal goods or services are not taken into account, household savings would be overestimated and this will be reflected in the fact that accounts, as a whole, could be distorted with reality, thus errors in account balances would be observed.[v]
It is important to note that since 1995 the National Accounts System states that measurements should include data for illegal activities, but not all countries comply with this recommendation.
To the same degree that the European Account System 2010 (SEC 2010), a reform from 2013 which also applies to members of the European Union, goes a step further and establishes the obligation to estimate the income of at least part of the illegal economy. With this rule it is expected to improve the possibilities of comparison data on an international level, since there exist activities which are legal in some countries and illegal in others.
Spain, the United Kingdom and Sweden began in 2013 to make some estimates about illegal activities and in America we found a case started in Mexico in 2014. However, although it is possible to find news about these practices, it is very difficult to access official data.
The Spanish National Statistical Institute published information available in its website, in which it refers that they “have made estimates of the most significant illegal activities in Spain: prostitution, drug trafficking, tobacco smuggling and illegal gambling, following the methodologies and procedures established by Eurostat, for the purposes of making the figures of the various named countries homogeneous and comparable to each other. In all illegal activities academic and scientific studies have been consulted, both private and public, national and international […] In total, illegal activities account for 0.87% of GDP”[vi], equivalent to more than EUR 9 billion per year.[vii]
Subsequently, Raquel del Río Paramio, Head of the Department of National Accounts of the Spanish National Statistics Institute, said in 2015 that the main problems they found amongst the researchers involved was the availability of reliable sources of information. Also, the need to use appropriate methods of calculation in order to achieve accurate estimates and finally the risk of a doubled accountancy of production.
If macroeconomics focuses on global economic trends using GDP measurement as one of its key indicators, and given that there has been a significant increase in the operations of transnational criminal organizations, it is necessary to include this data in the measurement of GDP. This along with the purpose of understanding the growth by using methods which permit a comparison between data from different countries and also designing data-based public policies.
The use of measurement started in the European Union in 2013 and some Latin American countries are also implementing it. However, there is hardly any data that has been made public.
We cannot overlook, taking into consideration that the money being made by criminal economies are those that allow them to continue operating, corrupting institutions, taking advantage of vulnerabilities and affecting the security of the State. Because this money not only flows in the criminal economy, but mixes with the legal and informal economy through money laundering manoeuvres and reinvestment in illegal activities, influencing the incomes and expenditures emerging data from the circular flow chart of the real economy. That is, in the relationship between the market on which households buy goods and services and the market on which companies acquire means of production from households, such as workforce and capital goods.
In conclusion, it is necessary to have genuine public data regarding the flow of money from illegal activities and the methodology incorporated by the National Account System. While it is true that such information alone will not lead to eradication of criminal organizations, it will allow us to estimate and to compare data with other jurisdictions. Also, we can learn more about the boundaries of production possibilities between goods sold on a criminal market versus the production of the same goods sold on a legal market. Finally, it will allow for the development of public policies that discourage the production of the illegal goods or the provision of the illegal service as a form of market reduction, thus establishing money flow routes.
[i] Castells Manuel, The Information Age: Economy, Society and Culture. Volume III End of Millennium. Editorial Siglo XXI of Spain Editors SA. Fifth edition 2006. Pages 201 and next.
[ii] Mankiw Gregory, Economics Principles. Paraninfo Publishing House. Fourth Edition 2008. Pages 351 and below.
[iii]National Account System 2008, conducted and produced under the auspices of the United Nations, the European Commission, the Organisation for Economic Cooperation and Development, the International Monetary Fund and the World Bank, p. 1.
[iv] Larrain, Philip. Macroeconomics in the global economy / Felipe Larrain and Jeffry Sachs, second edition. Buenos Aires Pearson Education. Year 2002.
[v]National Account System 2008, op. cit., p. 55.
[vi]National Institute of Statistics (2014), “National Accounting of Spain. New base 2010”, Spain, communiqué dated September 25, 2014 (updated October 3), pp. 8-9. Available at http://www.ine.es/prensa/np862.pdf .
[vii]Note titled “Prostitution and illicit activities add more than 9 billion to GDP”, published on the website El Periódico, 25/9/2014. Available at