Spain's Economy Surges—Off the Books

Not that Europe is lacking for economic basket cases, but Spain has been an especially fascinating train wreck to watch, with the unemployment rate hitting 27 percent last year. Official statistics are so dismal that they could be expected to produce riots in the streets; that they haven't is evidence that, somehow, Spaniards are finding ways to eat and pay the bills. If some sort of invisible economic activity were not under way, pointed out Victor Mallet and Guy Dinmore in a 2011 article in the Financial Times, "Spain would not be as peaceful as, barring a few demonstrations, it has so far been." Now comes confirmation from the country's government that the people of Spain have, in fact, retained their ability to work and create jobs and wealth—by staying as far under the state's radar as possible.

A new report from Spain's Finance Ministry reveals that the shadow economy—underground activity that would be legal, if subject to the usual tax and regulatory regime—has grown steadily every year from 2008 through 2012, the most recent year measured. In that time, the shadow economy increased from 17.8 percent of official GDP to 24.6 percent.

Spain's shadow economySpain's Finance Ministry

Perhaps unsurprisingly for a country troubled by state meddling with the economy, the shadow economy is smallest in Madrid, the seat of government, at 17.3 percent, and sharply larger in every other region, hitting 31.1 percent in Extremadura.

And Spain's economy is somewhat hobbled by government interference. On the 2014 Index of Economic Freedom, Spain ranks at 49, and 22nd out of 43 countries in Europe. "Its score is 0.8 point lower than last year due to declines in the management of government spending, business freedom, and labor freedom that outweigh small improvements in trade freedom and freedom from corruption."

For Spaniards looking to climb out of the country's economic doldrums, not only are taxes high, but "Incorporating a business takes 10 procedures and about three weeks, but completing licensing requirements takes over seven months and costs more than the level of average annual income. Labor regulations remain largely inflexible hindering job growth in the private sector."

The country has actually improved its overall economic freedom ranking a bit over the past 20 years, but unevenly and with decline in recent years, even as the Euro crisis made life difficult.

As they grapple with the growth of the shadow economy, Spanish officials, like officials everywhere, will have to deal with the fact that underground activity can develop its own inertia as people get accustomed to living that way.

Writes economist Friedrich Schneider (PDF):

But even major tax reforms with major tax rate deductions will not lead to a substantial decrease of the shadow economy. Such reforms will only be able to stabilize the size of the shadow economy and avoid a further increase. Social networks and personal relationships, the high profit from irregular activities and associated investments in real and human capital are strong ties which prevent people from transferring to the official economy.

Having given people ample reason to hide their activities and experience in doing just that, Spain's government may have a tough time getting those underground entrepreneurs back into the official economy.

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  • Mike M.||

    Spain has been an especially fascinating train wreck to watch, with the unemployment rate hitting 27 percent last year.

    The shining example of the "Green Economy" that hard core left wing dipshits think we should seek to emulate.

  • ||

    Oh yeah?

    The only reason Spain's economy is doing as badly as it is is because they didn't have the right people in charge, or they didn't hit it hard enough, or they didn't try real socialism. All they have to do is do the same things Venezuela has done and....oh fuck it.

  • some guy||

    "Green Economy"

    That's already been debunked big time. Like that poor bastard who put his life savings into solar panels and expected the government to keep its promise about guaranteeing payments for 25 years. "You fucked up. You trusted us."

  • Raston Bot||

    Link, please?! Sounds scoff-worthy.

  • some guy||

    http://www.nytimes.com/2014/01.....ience&_r=1

    I may have been paraphrasing the official Spanish position on this, but that poor bastard is equally screwed either way.

  • Mike M.||

    “It seemed so safe,” he said recently. “It was a government guarantee.”

    Yep, this poor bastard learned the hard way that a "government guarantee" isn't worth the paper it's written on. Just ask our military retirees.

  • some guy||

    Does anyone have any idea how much the black market is supporting Americans? Everyone talks about wage stagnation and whatnot, but maybe the wages are just moving under the table. Is there a reliable number for something like a "black" GDP?

    (I know... racist...)

  • Zeb||

    I'm sure there is a lot of it. Not everyone dropping out of the officially counted labor force is going on disability and they are feeding and housing themselves somehow. I'm sure that even a lot of people on government support of one kind or another supplement their incomes with work for cash.

  • some guy||

    Oh yeah, that stuff happens all the time. I'm just wondering if the recession and "recovery" made it worse or if it stayed pretty constant.

  • Rasilio||

    I suspect it has grown, but I'll bet most of the growth was from a desire to earn money and still be eligible for benefits (primarily unemployment) rather than to be able to avoid taxes and regulations as it is in Spain.

    The upside is eventually the majority of those working under the table in the US will return to above the table incomes, downside is the under the table American workers are being far less productive

  • some guy||

    Under the table workers also don't have a record of employment, which hurts employability.

  • Paul.||

    Now comes confirmation from the country's government that the people of Spain have, in fact, retained their ability to work and create jobs and wealth—by staying as far under the state's radar as possible.

    But what of the social contract?

  • some guy||

    If a regulation is made, but no enforcement mechanism is funded, does it affect productivity?

  • KDN||

    Yes. Certain firms and people will comply with the regulation just to avoid being fucked with sometime in the future after the enforcement mechanism does get funded.

  • Paul.||

    In this country that's called a "government shutdown".

  • Sevo||

    A friend in Italy has mentioned that people there do 'favors' for each other at rates far lower than any 'legal' transaction, but still a long ways from free, and certainly is not shy at pointing out the tax rates.
    But he never uses the words 'black market' and is ambivalent about the amount of 'services' provided by the state. He just seems to see it as an example of how 'friendly' Italians are.
    I haven't yet pointed out the obvious connection between the taxes/services and the 'favors'.

  • OldMexican||

    Just in case you were wondering, here's the translation for the table above:

    Table 1. Evolution Of The Submerged Economy(*) Through The Crisis
    Submerged economy in millions of Euros
    Rate as % of GDP
    Increase in millions of Euros
    Increase as % of GDP

    Anyway, the Spaniards are living the Socialist paradise that Tony was touting so heavily yesterday.

    (*) Underground economy

  • Dweebston||

    Evolution Of The Submerged Economy

    It's not the black market that's underwater.

  • Zeb||

    From what I've seen and heard from family in Spain, a lot of their economy has always been informal or at least "grey market". There certainly was a lot going on under Franco.

  • Dweebston||

    Socialism works! Eventually it forces people to develop a total disregard for the sclerotic official channels, the metastasizing trade unions, the bureaucratic intuitions and ossified party politics, and rediscover their passions for serving the needs of others and enjoying the fruits of their labor.

    Shame about the purges, shortages, technological stasis and rock-bottom standard of living, but since humanity apparently cannot learn from its mistakes we're stuck reliving the same cycle of delusion and epiphany.

  • Rasilio||

    The funny thing is if their level of disregard for government institutions is high enough and the governments power to punish rule breakers is weak enough you end up with a defacto libertarian society

  • OldMexican||

    Having given people ample reason to hide their activities and experience in doing just that, Spain's government may have a tough time getting those underground entrepreneurs back into the official economy.


    Even if the whole government suddenly turned full libertarian, you would not convince most Spaniards to go back to the official economy. The level of butt-hurt is high enough to increase the opportunity cost of being fully regular.

  • R C Dean||

    This is what those of us heavily regulated biz call the "jello effect". Government regs, taxes, etc. are like a brick plopped onto a big blob of jello. The jello just oozes out from under the brick. As always, an Iron Law applies:

    You get more of what you reward, and less of what you punish.

  • Paul.||

    Huh, I always called the "My ass hurts effect".

  • ||

    The thing is, bringing the Shadow economy into the light is more of a legal issue than an economic one. It's about enforcing a strong culture of the rule of law and respect for Government. And by all appearances, this Shadow economy is not one dealing with black market criminal effects. So the incentives for the actors in the economy are quite small, since they are employed even if that fact isn't known by the Government.

    So I wonder what the real unemployment rate is?

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