Underground Economy Accounts for 30% of GDP

By Park Hyong-ki

Staff Reporter

The country's business interest group has called on the incoming administration to make efforts to reduce underground economic activities through deregulation and tax cuts.

The Korea Chamber of Commerce and Industry (KCCI) estimated that the underground economy accounts for about 30 percent of the GDP with the size of the market reaching nearly 250 trillion won.

It said it is imperative for the government to reduce the black market size to that of developed countries, as underground economic activities are negatively affecting the growth and tax policies.

The underground economy, or black market, refers to businesses that are conducted illegally out of the government's radar to evade taxes through untraceable settlement methods such as money laundering or cash transactions.

The chamber said Korea's underground economy is one of the worst among OECD economies, ranking 43rd out of 145. The underground economy in the United States accounts for about 8.4 percent of its GDP; 10.8 percent for Japan; 13.1 percent for Singapore; 15.6 percent for China; and 16.6 percent for Hong Kong.

It noted that activity on the black market triggers a vicious cycle as it forces the government to raise taxes to cover losses and downgrades the value of both private and public products.

The chamber said that increasing black market activity is bound to decrease per capita income, while increasing the inequality of income or wealth distribution.

To this end, the KCCI advised the incoming government to further cut taxes and its expenditure as well as deregulate laws and regulations concerning enterprises.

``Tougher rules on corporations and taxes are bound to increase underground activities,'' it said.

For instance, the United States indicated that when the federal income tax is increased by 1 percentage point, it also spurs the black market by 1.4 percentage points.

The KCCI also said the incoming government should focus on boosting transparency and efficiency as such efforts are likely to decrease production in the black market.

It stressed that it is imperative to cut the underground economy at least by half to about 15 percent, should the country seek to become a developed economy.

phk@koreatimes.co.kr