Malaysia’s shadow economy still more than a fifth of GDP

Malaysia’s shadow economy has a value of about 300 billion ringgit ($73.8 billion) or 21 per cent of the country’s gross domestic product (GDP), Malaysia’s finance minister Lim Guan Eng reiterated on January 13 at a conference in Georgetown, Penang.

He made a similar statement back in November, noting that integrating just 20 per cent of the informal into the formal sector could bring Malaysia between $1.2 billion and $3.6 billion in additional revenue.

The shadow economy – also referred to as the “informal sector” – comprises mainly of illicit activities such as black market transactions, barter, undeclared work, untaxed trade and other underground engagements not monitored by any form of government or authority. It, however, also includes restricted or outright illegal activities such as child labour, prostitution, drug dealing, trade in stolen goods, smuggling, illegal gambling, informal money lending, corruption and tax avoidance.

Loss of tax revenue

“If not handled well, it will not only result in a big loss of revenue to the country but also reflect the inefficiency of the government agencies in implementing mechanisms to handle issues related to the shadow economy,” he said.

He added that the loss in tax revenue from the hidden economy could threaten the stability of the nation’s tax ecosystem particularly in the aspects of fair taxation and voluntary tax compliance.

He further urged tax authorities to constantly enhance their collaborative network and information sharing with other government agencies in order to increase tax collection and curtail the underground economy.

Informal sector also provides opportunities

However, Malaysia is in fact not so worse off with its shadow economy problem. Within Southeast Asia, Myanmar has the highest rate of the informal sector’s size in relation to GDP, namely 51 per cent, followed by Thailand with 43 per cent, according to data by the International Monetary Fund (IMF).

At the same, those countries have a very low official unemployment rate at 1.5 and 1.2 per cent, respectively, because the unemployed and low-skilled have no incentive to remain jobless since there are no unemployment benefits. They are looking for jobs or activities in the informal sector and the governments handle them as employed, whether in the grey economy or not.

Important policy challenge

That way, the informal sector provides critical economic opportunities for the poor and underprivileged and is actually an important sector in developing countries. However, for countries on the path to become developed, integrating the informal economy into the formal sector is an important policy challenge.

Cambodia has a share of the informal sector to GDP of around 34 per cent, Brunei 30 per cent, the Philippines 28 per cent, Laos 25 per cent and Indonesia 22 per cent.

Vietnam has the lowest share of developing countries in Southeast Asia of 14 per cent, while Singapore’s informal sector accounts for around nine per cent.

The average global share as per IMF data is 27.78 per cent, with the highest value of 67 per cent in Zimbabwe and the lowest in Switzerland with seven per cent.



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Malaysia’s shadow economy has a value of about 300 billion ringgit ($73.8 billion) or 21 per cent of the country's gross domestic product (GDP), Malaysia’s finance minister Lim Guan Eng reiterated on January 13 at a conference in Georgetown, Penang. He made a similar statement back in November, noting that integrating just 20 per cent of the informal into the formal sector could bring Malaysia between $1.2 billion and $3.6 billion in additional revenue. The shadow economy – also referred to as the “informal sector” – comprises mainly of illicit activities such as black market transactions, barter, undeclared work, untaxed...

Malaysia’s shadow economy has a value of about 300 billion ringgit ($73.8 billion) or 21 per cent of the country’s gross domestic product (GDP), Malaysia’s finance minister Lim Guan Eng reiterated on January 13 at a conference in Georgetown, Penang.

He made a similar statement back in November, noting that integrating just 20 per cent of the informal into the formal sector could bring Malaysia between $1.2 billion and $3.6 billion in additional revenue.

The shadow economy – also referred to as the “informal sector” – comprises mainly of illicit activities such as black market transactions, barter, undeclared work, untaxed trade and other underground engagements not monitored by any form of government or authority. It, however, also includes restricted or outright illegal activities such as child labour, prostitution, drug dealing, trade in stolen goods, smuggling, illegal gambling, informal money lending, corruption and tax avoidance.

Loss of tax revenue

“If not handled well, it will not only result in a big loss of revenue to the country but also reflect the inefficiency of the government agencies in implementing mechanisms to handle issues related to the shadow economy,” he said.

He added that the loss in tax revenue from the hidden economy could threaten the stability of the nation’s tax ecosystem particularly in the aspects of fair taxation and voluntary tax compliance.

He further urged tax authorities to constantly enhance their collaborative network and information sharing with other government agencies in order to increase tax collection and curtail the underground economy.

Informal sector also provides opportunities

However, Malaysia is in fact not so worse off with its shadow economy problem. Within Southeast Asia, Myanmar has the highest rate of the informal sector’s size in relation to GDP, namely 51 per cent, followed by Thailand with 43 per cent, according to data by the International Monetary Fund (IMF).

At the same, those countries have a very low official unemployment rate at 1.5 and 1.2 per cent, respectively, because the unemployed and low-skilled have no incentive to remain jobless since there are no unemployment benefits. They are looking for jobs or activities in the informal sector and the governments handle them as employed, whether in the grey economy or not.

Important policy challenge

That way, the informal sector provides critical economic opportunities for the poor and underprivileged and is actually an important sector in developing countries. However, for countries on the path to become developed, integrating the informal economy into the formal sector is an important policy challenge.

Cambodia has a share of the informal sector to GDP of around 34 per cent, Brunei 30 per cent, the Philippines 28 per cent, Laos 25 per cent and Indonesia 22 per cent.

Vietnam has the lowest share of developing countries in Southeast Asia of 14 per cent, while Singapore’s informal sector accounts for around nine per cent.

The average global share as per IMF data is 27.78 per cent, with the highest value of 67 per cent in Zimbabwe and the lowest in Switzerland with seven per cent.



Support ASEAN news

Investvine has been a consistent voice in ASEAN news for more than a decade. From breaking news to exclusive interviews with key ASEAN leaders, we have brought you factual and engaging reports – the stories that matter, free of charge.

Like many news organisations, we are striving to survive in an age of reduced advertising and biased journalism. Our mission is to rise above today’s challenges and chart tomorrow’s world with clear, dependable reporting.

Support us now with a donation of your choosing. Your contribution will help us shine a light on important ASEAN stories, reach more people and lift the manifold voices of this dynamic, influential region.

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Personal Info

Donation Total: $10.00

 

 

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