The Shadow Economy Index (SEI) Explained: Global Trends & Impact of Informal Economies

The Shadow Economy Index (SEI) is a critical metric that quantifies the size and impact of informal economic activities globally. This explainer delves into the SEI’s significance, methodologies and recent trends, backed by credible sources and real-world examples.

The shadow economy, often referred to as the informal or underground economy, encompasses all economic activities that are not regulated by the government or covered by formal labor laws. This includes transactions that are not reported for tax purposes, unregistered businesses and informal employment arrangements. According to the International Monetary Fund (IMF), the shadow economy can account for a significant portion of GDP in many countries, ranging from 10% to over 40% in developing nations (IMF).

• Unregulated Activities: Transactions occur outside government oversight, which can lead to tax evasion and lack of consumer protection.

• Employment: Many workers in the shadow economy lack formal contracts, benefits and job security.

• Sector Variation: The shadow economy varies significantly across sectors, with higher prevalence in agriculture, construction and services.

The Shadow Economy Index serves as a valuable tool for policymakers, economists and researchers. It provides insights into the extent of informal economic activities and their implications for economic policy and governance.

• Economic Policy: Understanding the size of the shadow economy helps governments formulate effective economic policies and tax strategies.

• Social Justice: It highlights disparities in income distribution and labor rights, prompting discussions on social protection measures.

• Business Environment: A large shadow economy can indicate a burdensome regulatory environment, discouraging formal business operations.

The SEI is typically calculated using a combination of survey data, economic indicators and statistical models. Here are the primary methodologies employed:

• Surveys: National surveys that assess public perception of the shadow economy and informal employment.

• National Accounts: Data from national economic accounts provides a baseline for estimating the shadow economy’s size.

• Statistical Models: Econometric models estimate the shadow economy’s contribution to GDP and employment.

1. Estimation of Informal Employment: This involves analyzing workforce participation rates in informal sectors.

2. GDP Contribution: Estimating the GDP contribution from shadow activities based on consumption, income and production data.

3. Comparative Analysis: Comparing findings across different countries and regions to understand global trends.

Recent data reveals that the global shadow economy is experiencing fluctuations due to various factors, including economic crises, regulatory changes and technological advancements. A study published by World Economics indicates that the shadow economy’s size has been increasing, particularly in developing nations, where it can represent up to 40% of GDP (World Economics).

• Sub-Saharan Africa: High levels of informality due to limited job opportunities and regulatory challenges.

• Europe: While some EU countries have lower shadow economy rates, Eastern Europe still sees significant informal activity, often linked to economic transition issues.

• Asia: Rapid urbanization and economic growth have led to an increase in informal employment, particularly in construction and services.

The Department of Trade, Industry and Competition (DTIC) in South Africa has recognized the shadow economy’s implications for the formal sector. Recent initiatives aim to integrate informal businesses into the formal economy, promoting entrepreneurship and job creation (DTIC).

A 2025 study indicated that Italy’s shadow economy accounts for approximately 27% of its GDP, highlighting the challenges posed by high taxation and regulatory burdens. Efforts to reduce the shadow economy include tax reforms and incentives for formalization.

Economists argue that the shadow economy can serve as a double-edged sword. While it provides a safety net for unemployed individuals, it can also undermine formal businesses and tax revenues. As noted by the National Bureau of Economic Research, understanding the dynamics of the shadow economy is crucial for effective economic governance (NBER).

The Shadow Economy Index is a vital tool for understanding the complexities of informal economic activities worldwide. By analyzing the SEI, policymakers can develop strategies to reduce informality, enhance governance and promote sustainable economic growth.

Understanding the Shadow Economy Index is essential for developing informed economic policies. By recognizing the scale and impact of the shadow economy, governments can better address the challenges of informality, enhance social justice and foster a more inclusive economic environment.