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[Thai Economics Library | Archives| Currency Crisis 2007| Entrepreneurs]
August 18, 2010

The need to reform Thailand's shadow economy

By Jon Fernquest

shadow economyWithout a sufficient tax base an economy like Thailand's cannot become a welfare state as some advocate.

Thailand has one of the largest shadow economies in the world and part of this means that a huge fraction of Thai people and businesses do not pay taxes.

Until this shadow economy is reduced to a reasonable size and tax collection improved, an expanded government role in poverty reduction and alleviation would probably be difficult if not impossible (this is at least a good starting hypothesis to investigate).

Today's article by Thai economist Sawai Boonma takes as its starting point an article that compares shadow economies across the world (Read academic paper).

Today's article begins after the vocabulary.

shadow economy - market-based production of goods and services that conceals important information from the government and the public such as income and the taxes that need to be paid on the income and as part of doing business, unfair treatment of labour that does not meet labour standards   (See Wikipedia on black market but note the definition used in the paper is not quite the same)
reform - a change that is intended to correct a situation that is wrong or unfair การแก้ไข การปฏิรูป
tax base - tax collected by the government from an economy (that in turn supports government programs)  
welfare state - a government that takes of people with special needs (the poor, disabled, aged, long-term sickness) (See Wikipedia)
advocate - publicly support a policy
reasonable - sensible, reasonable, has good reasons for doing
role - purpose or function in a situation or activity
expanded role - has a greater function in a situation or activity
alleviation - reducing the negative effects of a problem
hypothesis - an idea that explains observed facts, that must be proven by testing (See Wikipedia)

Opinion
OUTSIDE THE BOX

The shadow economy and reform agenda

18/08/2010
Sawai Boonma

Recent research on shadow economies raises some issues that need to be addressed by the two reform committees. In June, Friedrich Schneider, Andreas Buehn and Claudio Montenegro published a paper titled Shadow Economies all over the World: New Estimates for 162 Countries from 1999 to 2007. The researchers define a shadow economy as all market-based production of goods and services that are deliberately concealed from public authorities to avoid any of the following.

1. Paying income, value-added or other taxes, and social security contributions.

2. Meeting labour market standards such as minimum wages, maximum working hours, safety requirements; and

3. Complying with administrative procedures, such as completing statistical questionnaires. 

agenda - list of goals to achieve in the future วาระ
issue - a subject that needs to be considered ประเด็น
raise issue - start talking about an issue in a meeting (urging other people to talk or think about it)
deliberately - done intentionally; done on purpose, do it knowing full well you that you are doing it จงใจ ตั้งใจ
deliberately concealed - hide and know you are hiding
authorities - the government, the people who control and govern some activity ผู้มีอำนาจ เจ้าหน้าที่
public authorities - government agencies and departments เจ้าหน้าที่ของรัฐ
income - money that people receive from work or some other source, used for household consumption and savings
security - the need to provide safety from attack, harm or damage ความปลอดภัย
social security - money that the government pays regularly to people who are poor, sick, disabled, or unemployed
contributions - the amount given by each member to the shared fund
standards - an acceptable level of quality or achievement มาตรฐาน
wage - an amount of money regularly paid to a worker for the work they do (per hour, per day) ค่าแรง
a minimum wage - the lowest pay rate that a company can legally pay workers, legally set by the governent to ensure that people can look after their families, economists claim that minimum wages can create unemployment (See Economist glossary) ค่าแรงขั้นต่ำ
maximum - the most possible ที่สูงสุด ที่มากที่สุด
complying - following a rule    
questionnaire - a written list of questions that many people answer to provide data for a survey or study (See Wikipedia)

These are some of their pertinent findings: The average size of the shadow economy relative to the officially recorded economy as measured by Gross Domestic Product (GDP) of the 162 countries has increased from 33.7% in 1999 to 35.5% in 2007. Switzerland has the lowest ratio, falling between 7.7% and 9.1%, while Georgia has the highest, between 64.8% and 72.5%. With the ratio standing between 51.8 and 57.2%, Thailand is among the countries having the largest shadow economies.

These results stand regardless of how the model is specified over seven different ways. For example, when 151 advanced and developing countries are grouped together, Thailand ranks No. 8, while Vietnam ranks number 136, Singapore 143 and China 144. Thailand also ranks No. 8 when only 98 developing countries are included, while others are way down the list. 

pertinent - relevant
findings - the results or conclusions of an investigation or research
relative - a member of your family ญาติพี่น้อง
measured - careful and limited อย่างไตร่ตรองและรอบคอบ
ratio - the relationship of two amounts X and Y, expressed as division (X / Y) or as a percentage (%)
ratio standing between 51.8 and 57.2%
results - what is produced in the end by an activity or task
X regardless of Y - X is true and it does not matter what Y is
model - a statistical model, some math and grouping of data used to describe an object of study (See Wikipedia on statistical model)
specify model - create a model

These numbers clearly show that we Thais are way ahead of our neighbours and trading partners when it comes to hiding economic activities. 

This, of course, is not a badge of honour. Rather, it is a shame. 

partners - the companies owning part of the joint venture หุ้นส่วน
trading partners - other countries that a country trades with (imports goods from, exports goods to)
honour - to do what you promised to do ทำตามสัญญา
badge of honour - something that you are proud of 
is a shame - is a sad situation or truth (better if it was not this way)

However, not all the blame should be placed on individual Thais. Apparently the system plays a significant role. This is because the researchers found that, in general, four factors contribute significantly to increases in shadow economic activities, including:

1. High tax and social security burden

2. Intensity of regulations, such as minimum wages, dismissal protections, maximum work hours, and work-place safety

3. High level of corruption, and

4. Recession in the official economy

individual - a person (considered separately from their society or community) บุคคล
significant - important สำคัญ
role - the function or purpose in a situation, organisation, society or relationship บทบาท
factors - one of the things that effects a situation or event ปัจจัย
contribute - be part of the cause of
significantly - in an important way อย่างสำคัญ
burden - a serious or difficult responsibility that you have to deal with ภาระ  (See glossary)
regulations - rules made by the government to control how some activity is done กฎระเบียบ
intensity of regulations - how much of an activity is controlled by regulations
dismissal - forcing someone to leave their job การไล่ออกจากตำแหน่ง
corruption - (See Wikipedia on bribery, corporate corruption, and political corruption)
official - approved by the government or some authority ที่เป็นทางการ

Many will question the accuracy of these estimates. But in the case of Thailand, the relative size of the shadow economy is so large that even if it is substantially over-estimated, it still raises troubling issues.

For example, GDP numbers may not reflect the true picture of the economic conditions. As it is unknown who generates most of the shadow economy, the distribution of income resulting from using official numbers may be meaningless. 

accuracy - the correctness of information (even in small details)
estimates - guesses of what the size, value, amount, cost, etc. of something might be การประมาณค่า
relative size - size compared to other similar or nearby things
substantially over-estimated - said it was much more than it is
troubling - makes upset and feel uncomfortable
raise issue - suggest that people should think about and discuss a problem
reflect - to show สะท้อน แสดงถึง
distribution of income - the portion of an economy's income received by different parts of society, how money is spread over different gourps in society 

So are the numbers on poverty. Policies based on such highly inaccurate readings of the economic conditions are likely to be wrong. There is also a high degree of injustice regarding the tax burden. As so much escapes taxation, those who play by the rules have to shoulder an additional burden. The sense of injustice, of course, tends to push more of them into hiding economic activities as well. The reform committees have often mentioned the need to address the issue of injustice. 

poverty - being poor ความจน
inaccurate - not completely correct or exact ซึ่งคลาดเคลื่อน,ซึ่งไม่ถูกต้อง
injustice - failure to treat someone fairly and to respect their rights ความไม่ยุติธรรม
burden - something difficult and unpleasant that you must do
shoulder - to deal with or accept something difficult แบกรับภาระ หรือสถานการณ์
shoulder a burden - do something difficult and unpleasant
sense of injustice - the feeling or perception that the situation is unjust
unjust (adjective) - adjective form of "injustice" above
issue - a problem that needs to be considered ประเด็น
issue - a subject that people discuss or argue about ประเด็น
address - to deal with a problem จัดการปัญหา

In the economic sphere, this research suggests that they need to focus particularly on the tax burden and corruption. The government already has recognised the injustice in the tax system and has been working on revamping taxes on land and improvements thereon.

In addition, they should recommend that the government revise other taxes with a view to putting much greater emphasis on taxing consumption, especially on goods and services falling outside of basic needs.

focus - think about and work on one thing (rather than waste time on many), concentrate time and attention on one thing ให้ความสำคัญ
revamping - changing and improving
recommend - to advise someone that they should do something แนะนำ
revise - improve, create again or recreate with improvements
emphasis - special importance or attention that is given to one thing in particular การเน้นย้ำ
put greater emphasis on Y - make Y more important, put more attention on Y  
consumption - money spent by households and families on goods and services การบริโภค (See Wikipedia)

...unless corruption is tackled effectively, it will cripple all other reform measures and the reform itself will fail miserably.

Sawai Boonma has worked as a development economist for more than two decades. He can be reached at <sboonma@msn.com>

tackle - solve a problem
effectively - working well and producing the results that they wanted
measures - actions that are intended to achieve or deal with something มาตราการ
development - the gradual growth of an economy (with people receiving higher and higher incomes) 
decades - periods of ten years เป็นสิบๆปี

(Source:   OUTSIDE THE BOX, The shadow economy and reform agenda, 18/08/2010, Sawai Boonma, link) 



Posted by Jon Fernquest at 07:32 PM | | Comments (0)


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