Drugs, prostitution and arms smuggling may not be legal, but it's all real economic activity, at least in Italy, which will now include illegal enterprises as part of its gross domestic product.
GDP is a measure of the goods and services a nation produces. Italy has decided to boost the size of its economy by including the value of black market activities.
This new accounting strategy is likely to be not only controversial, but may put the nation's credibility on the line because there is no adequate way to measure or value illegal activities,
Bloomberg TV's Trish Regan writes in an article for USA Today.
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She points to the illegal marijuana industry in the United States, saying it's estimated to be worth between $10 billion and $100 billion a year. It just depends which economist you ask.
"If you're an economist in Italy who needs to make the country's economy look bigger, no doubt you'll want to go with the liberal calculation," Regan writes. "The truth is, no one really knows."
That could backfire, she adds, because the creative accounting may be viewed as an effort to manipulate the nation's GDP and investors could start to dismiss or question Italy's statistics.
While the move may seem unorthodox it's apparently just what the European Union has ordered.
New rules require member nations to report all income-producing activities, including the black market sales of alcohol and cigarettes, says
Bloomberg Businessweek economics editor Peter Coy. No country is supposed to let their annual deficits exceed 3 percent of GDP or accumulated debt exceed 60 percent of GDP.
Countries that don't comply with the debt limits are to be penalized — 0.2 percent of GDP, plus a "variable component" that can range up to 0.5 percent of GDP annually as long as the breach continues.
Boosting GDP helps lower the debt ratio, but that's not the only incentive Italy has. Theoretically, having a bigger economy should allow the nation to borrow more money, Regan writes.
Italy may be the first nation to include illegal activities in its GDP, but countries inside and outside of the eurozone may want to follow suit, Coy suggests. Turkish researchers estimate the shadow economy averages just below 18 percent of GDP in Organization of Economic Co-operation and Development and EU countries and is as high as 42 percent in Latin America and 43 percent in sub-Saharan Africa.
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