In world economies crime does pay!

A report I read this week made very disturbing reading. Thanks to a decision by the United States Statistical Commission that looked to standardise accounting for all countries, the EU did some reclassification. This has meant, amongst other things, that purchases of military weapons systems and purchase of R & D have been reclassified as investments. This increases their value add and hence improves GDP, which is how we measure the welfare in a country. The new

EU reclassification would mean: More weapons equals better GDP!

 

 

A shadow economy

But just when I thought that it couldn’t get any worse, I discovered two other aspects of the standardisation process for GDP. Firstly, there is allowance for an estimate of the ‘shadow economy’ in calculating GDP. Surprise, surprise, both southern Europe and Eastern Europe has the largest GDP contribution from this.

graph11

 

 

 

 

 

 

 

 

 

And if that were not bad enough, then a further step towards standardisation has been to include an estimate for prostitution, sale of illegal drugs, smuggling and illegal gambling within GDP.

This is great news for some of the struggling economies like Spain and Italy. Spain alone added 9 billion Euros to its GDP and was only beaten in percentage terms by Italy.

Is the world ruled by criminals?

There was plenty of disquiet when the economy collapsed, with people regarding those that caused it as crooks or criminals of the financial world. But now we discover that the wonderful recovery is being fuelled by a mixture of illegal activities and people working under the radar in the ‘shadow economy’!

size of shadow econcomy

 

 

 

 

 

 

 

 

Surely the time has come for problems of crime and illegal activity in society to be tackled rather than leaning on criminals to produce a mythical economic recovery for them.

It is also time to look towards other more ethical measures such as Genuine Progress Indicator or Gross National Happiness to measure the true worth of countries. These measures already exist. However, a change in measurement calculated retrospectively would show a different image: Little real progress over the last fifty years and certainly little or no improvement in happiness.

While this is a rather gloomy analysis, there is still time to change the future. Using the different methods to measure true welfare rather than financial gain we can turn thing around.